The cost of utility services will grow 2.5 times faster than inflation in 2010.
Over the weekend, Moscow's authorities announced a huge increase in utilities tariffs. We've done our best to figure out what's behind the 26%-rise in the cost of utilities services. It's grown 2.5 times faster than inflation, which is expected to stand at 10% next year.
Unpopular measures
"Housing and utilities tariffs in Moscow will increase by about 26% as of January 1, 2010, which is much less than the 44% originally planned. Part of the reason behind the growing tariffs is the financial and economic crisis, but inflation is a factor as well," First Deputy Mayor of Moscow Yury Roslyak said. But he was obviously trying to sugar-coat a bitter truth. "In Moscow, tariffs will be raised once a year. As part of implementing the budget for the next year, there will be no further tariff increases." In Mr Roslyak's opinion, "the increase of the gas price" is the main culprit behind the growth of utilities tariffs. As he pointed out, Moscow still subsidises housing and utilities tariffs paid by households: "Households pay for 80% of the cost of heating, with 20% subsidised by the city. It costs the city budget about 15 billion roubles."
It should also be noted that on October 28, the head of the Moscow Government's Economic Policy and Development Department, Marina Ogloblina, announced that "fares for the Moscow metro, as well as buses, trolleybuses and trams, will be increased as of January 1, 2010, though the exact amount of the increase is not yet known."
Interestingly enough, high-ranking federal officials are talking about low inflation. On December 2, Economic Development Minister Elvira Nabiullina reported to the Prime Minister that "inflation in 2009 is estimated to be about 9% and perhaps even less." At the end of 2008, inflation stood at 13.3%. In the first 11 months of 2009, inflation was at 8.4%, according to Rosstat (Federal Service for Statistics). In the period from July to October, Russia's inflation was close to zero, and August even saw negative inflation (deflation), meaning prices were falling instead of growing. The Economic Development Ministry's official inflation forecast for 2010 is 10%. This is the figure envisaged in the 2010 budget that President Dmitry Medvedev signed into law on December 2. But on November 6, Deputy Minister of Economic Development Andrei Klepach clearly stated: "We plan to cut inflation to 6% next year." This is clearly a bit fantastical.
Whatever the case, these are just forecasts. People who own and rent housing would like to know exactly why the utilities tariffs are going to shoot up 26%, 2.5 times higher than inflation (10%, according to the official forecast). How can it be? Either inflation forecasts have been greatly understated or utilities people are incredibly greedy.
Deferred rise of tariffs
Actually, it's both. Yet, the greed of the utilities sector and understated inflation are not the main factors behind the rise in tariffs. To truly understand the situation, one must first find out how much utilities services contribute to the annual inflation.
To avoid barraging our readers with numbers, let's just skip to the main conclusion: assuming, reasonably, that an average Russian family spends 15-20% of its monthly income on utilities services, a 25% growth of utilities tariffs bumps annual inflation up 3-4%. And keep in mind that utilities services contribute to the price of all goods. After all, heat and electricity are necessary even for things as simple as baking a loaf of bread.
In early 2009, the growth of tariffs of natural monopolies (and the related utilities services) was frozen. It was a political decision, not an economic one. At the peak of the financial crisis, amid massive layoffs, the authorities simply could not afford to burden both the economy and households by raising tariffs.
"We've come to an agreement and I want you to ensure that tariffs do not increase by more than 10% in 2010," Prime Minister Vladimir Putin told a meeting of the Government Presidium on November 5, 2008. His instructions were fulfilled: an emergency meeting lasting almost 24 hours was held on December 16-17, 2008 with President Dmitry Medvedev as chairman. The results were announced by Economic Development Minister Elvira Nabiullina: "Gas tariffs in Russia will grow on a quarter-by-quarter basis in 2009. They will increase by 5% as of January 1, by 7% as of April 1, by another 7% as of July, and 6.2% as of October." Before the crisis broke out, gas prices were to be raised once, by 27.7% as of January 1, 2009. The same thing happened to electricity rates: they increased by 10% in 2009 instead of the 15% target set prior to the crisis.
Either way, miracles don't happen. The rise of tariffs was simply pushed back. And now, the economy and households have to pay for it. Gas prices in 2010 will increase by at least 18%, and electricity prices by 16%. So, utilities tariffs will increase by 20-22%. Everything over and above it can be chalked up to greed.
One may, of course, recall the statement made by First Deputy Prime Minister Igor Shuvalov on July 1, 2009: "We will try to do everything possible to minimise tariff growth." And let's not forget the pledge made by Economic Development Minister Elvira Nabiullina on July 3, 2009: "Tariffs for the services of natural monopolies in Russia may grow less in 2010 than this year, and in some areas substantially less." There is an endless supply of such promises, but the reality is that miracles don't happen.
If the tariffs are frozen, transformers at substations will start burning from old age, just like they did in 2007. Or a shortage of gas might suddenly plague the gas producing country, just like in 2005-2006. Why? Because gas companies would stop selling gas to domestic consumers and "line up at the pipeline" in an attempt to sell their products abroad. We've seen it before. So, we'll just have to pay up. The good news is that the government's authorisation of a tariff increase means the economy is no longer in such a bad shape and the crisis really is on its way out.
Andrei Shchyotkin