Russia has announced a sharp hike in export taxes on gasoline, and a complete ban of refined petroleum exports for May. The reason: shortages of gasoline, leading to “panic buying” in numerous regions.
Now, shortages result from price controls–almost always. But the Russian government has no authority to set prices--officially, anyways. But unofficially–that’s a different story. And that’s exactly what’s happening. Bigfoot–Putin, that is–is interfering in the market:
Government officials, and in particular Prime Minister Vladimir Putin, have strongly warned gasoline producers and retailers to maintain cheap prices for gas. “I don’t want to think that the reason for the jump in prices is as trite as the wish to crudely extract an unreasonable, maximum gain,” said Putin in mid-February.
Such statements from government officials are often recognized as a kind of informal regulation by oil and gas companies, said Elena Anankina, a senior director at the Standard & Poor’s rating agency, and the companies may be willing to make some concessions on gasoline prices in order to maintain favorable terms for negotiation on crude oil and other products. Nonetheless, price caps will produce an expected, negative effect in any market.
“Officially, the government has no authority to regulate gas prices, but in a country like Russia where the government is an important factor in doing business, even if there is no legally binding power to that statement, oil companies need to listen to what the government is saying. At the same time, as anybody who lived in the Soviet Union will tell you, if prices are artificially low by government decree, it creates a shortage,” said Anankina.
I especially like that part about “the wish to crudely extract an unreasonable, maximum gain.” Translated: That’s my (Putin’s) job; well, me and my judo buddies’.*
Or, as this AFP story put it:
“Putin ordered (oil companies) to control wholesale and retail prices and they complied,” the Vedomosti business daily remarked.
“But world oil prices continued to grow and the companies quietly stepped up their exports, leaving only enough for the domestic market to keep their own (gas station) chains going,” Vedomosti observed.
Jonathan Muir, chief financial officer of Russia’s No.3 producer TNK-BP, said on Wednesday that “regulatory pressure” on domestic fuel prices prices had cost the company $54 million in the first quarter.
In February, Prime Minister Vladimir Putin issued a stern warning over fuel prices and vowed increased oversight of the fuel business.
“This may be one of the kinds of cartel agreement for which the antimonopoly legislation includes criminal responsibility as a measure of last resort,” Federal Antimonopoly Service head Igor Artemyev said in a statement after a Monday meeting with fuel unions.
. . . .
The Altai branch of the FAS launched a suit against Rosneft and Gazprom Neft on Tuesday on suspicion of price collusion.
Uhm, no, actually. Cartel agreements that jack up prices do not cause shortages. Shortages occur not because prices are too high, but because they are too low.
In sum, for populist political reasons Putin pressures companies to keep down prices in Russia despite rising prices for crude and refined products abroad. So, not surprisingly–well, maybe to Putin, who’s no economic swiftie–Russian refiners sell less in Russia and more abroad. Moreover, the inability to charge a market clearing price in Russia leads to shortages domestically and a shifting of supplies from Russia to other markets. It’s not that complicated.
Russia–and Putin personally–like to preen about how reliable they are as energy suppliers. Oh, they’re reliable, all right. You can rely on them to cut off supplies in a trice for a political or geopolitical reason. Someone at Gazprom Neft is quoted as saying “export contracts are holy.” Thanks for that! I needed a laugh.
More evidence of Russia’s obvious readiness for WTO membership. As we’ve witnessed over and over again in recent months, on things from cars to grain to energy Putin uses tariffs, export taxes, and trade bans to achieve political objectives. Not that he’s alone in this, mind you, but he is distinctively aggressive–and unrepentent–in his use of trade restrictions to shift around rents and put out political fires in the natural state.
There’s also a potentially bigger issue looming in the background. Inflation is picking up in Russia, and to the surprise of some analysts, Russia’s central bank is taking aggressive action (unexpectedly raising interest rates) to combat it. Putin has made fighting inflation his top priority. His remarks on US monetary “hooliganism” must be read in that context. This is a politically sensitive issue, and Putin is pulling out all the stops to deal with it.
The thing is, there are some stops that are good to pull, others not. Attempting to control inflation through export bans and price controls–official or unofficial–leads to huge real distortions. The grain export ban is evidently leading to sharp cut backs in planting, and imposing hardships on farmers. The gas export ban and associated information price controls will also lead to distortions.
But politicians everywhere–especially those likely seeking reelection–have a tendency to overlook those distortions and seek short term palliatives. But in the end the costs have to be paid.
Russia is just one country coping with inflationary pressures. What hath Ben wrought? More on that subject as time permits.
* For a great illustration of how judo makes you really, really smart–and hence rich–check out this story about the shenanigans involving the Novorossiysk port, in which Putin’s judo buddies raked off a cool billion, no risk, no work.