Russian fun – petrol seesaw

29.04.2010 — Analysis

The story with fuel price hikes repeats in Russia every year. All sorts of different reasons for the summer price jumps are given: excise duties indexation by the Russian Government, fuel shortages due to the reconstruction of refineries, monopoly conspiracy of oil companies, global "black gold" price rises.

Experts claim that excise duties do affect prices, although insignificantly. In 2010 the rate of the excise duty on high octane petrol amounts to 3,992 roubles per ton. In 2011 it will be differentiated - for one ton of petrol of class 2 and below 4,624 roubles will have to be paid, class 3 - 4,302 roubles, class 4 and 5 - 3,773 roubles. According to Mikhail Turukalov, the Chief Editor of the Department for Prices and Regional Markets of the Information and Analysis Centre KORTES, the top "fine" of 600 roubles for the production of "outdated" product and the "bonus" of 200 roubles for the production of environmentally clean fuel are too insignificant to radically change the price of a ton of high-octane petrol.

Nor does the global market determine the fuel pricing in Russia. Russia exports little of high-octane petrol which is why the domestic prices for petrol depend more on the demand and supply, seasonality, refineries being off line on maintenance etc. According to the data provided by IAC KORTES the demand for high-octane petrol has grown in 2009 by 6.3% while the volume of oil hydroskimming remained on the same level. Syzran and Omsk refineries, LUKOIL-Nizhegorodsintez, and Angarsk Petrochemical Company are building new capacities. They will be able to start producing no sooner than in 2011. Taking into account the fact that two Russian refineries are planning to shut down for maintenance this summer it is possible to predict certain shortages in petrol supplies in the third quarter.

Yelena Chernysheva, a divisional manager from VNIPIneft (The Research and Design Institute of Oil-Refining and Petrochemical Industry), however, does not see a reason for a rapid reduction of petrol supply to the domestic market. According to her data processes involved in refining will not affect the production indicators of the sector in terms of quality. The expert reckons that the hysteria around the impending petrol shortage is purposely blown up by the structures interested in fuel price rise.

The interested parties are well known to the State.The Federal Antimonopoly Service, having grown tired of fining oil companies for unfounded petrol price hikes decided to develop a universal pricing formula. In its basis, the officials believe, should be the correlation of domestic wholesale prices to global. So far the State and oil companies have failed to agree on a unified formula as the raw materials companies suggest the introduction of factors which would help adjusting the fuel price in Russia which in itself makes questionable the binding of Russian prices to global ones.

Oil companies are concerned that dependency on the global prices can lead to the reduction of light petroleum products production in the country and shutting down of some loss making refineries. Refining oil in Russia is rather costly and the work of refineries is optimised mainly through the price increases for petroleum products in the domestic market. Binding to global prices will reflect on the profitability of petrochemical business which at the moment is a part of the global division of labour. Russian suppliers would undoubtedly like to sell light products to foreign consumers but petrol made in Russia cannot compete with foreign one. This is why vertically integrated companies prefer exporting crude oil and diesel fractions which are then further refined at foreign refineries. According to Mikhail Turukalov the demand for diesel fuel in 2009 in Russia has dropped by 9.3% and export has grown by 5%.

Nikolay Kurilov, the CEO of CJSC Avangard says that the river navigation opening in spring will lead to the increase of raw materials exports causing petroleum product shortages within the country. Wholesale prices grow every spring as a result of this. According to the entrepreneur, the prices of petroleum products coming to the depot may change twice in a month. How much they would grow this summer Mr Kurilov does not dare predict as oil sector now is far too unpredictable.

Players of the fuel market assert that is the State wanted to hold petrol prices back it would have introduced high export duties thus inciting companies to sell petroleum products in the domestic market. Officials, for some reason or other, are not doing it thus promoting export of raw materials and growth of wholesale prices inside the country. Russian consumer pays for it all in the end - increasing petrol price, as is well known, turns into growth of prices for a ton of grain, square metre of housing etc.

Russians, of course, would prefer oil companies to make money in foreign markets and not domestically, but the State has for many years now been putting up with the fact that when selling petrol domestically oil companies follow global prices when they are going up, and keep independent prices, when global prices are going down. The discord between Russian and global trends can be clearly seen in the charts: when in 2009 petrol prices in global markets were going down, in Russia they grew helping oil companies get their profits even during the crisis.

Thanks to these revenues oil companies in 2009 had managed to reduce the export price for raw materials during the time of rapid oil price drop and kept their presence in foreign markets. Sales of crude oil abroad, undoubtedly, help filling the country's coffers somehow. The downside of this is that the domestic inflation provoked by the growth of petrol prices devalues wages of Russian people.

Vladimir Terletski