MOSCOW, June 20 (Reuters) - The Russian government approved lower-than-expected hikes in utility rates on Thursday, a move which analysts said was aimed at keeping inflation in check and avoiding public discontent ahead of parliamentary polls next year.
Russia is working on an overhaul of its power and gas industries, which completely dominate the economy. But domestic price rises, seen as inevitable if the industries are to become cost efficient, makes the issue politically sensitive.
"These are the increases that directly hit people in their pockets, and all they have done is the minimum they can get away with on both sides, and deferred a real solution for another year," said Chris Weafer at Troika Dialog.
The government authorised gas giant Gazprom to hike its domestic wholesale prices by 15 percent in July, while electricity wholesale prices will rise by 2.4 percent and prices for freight railway deliveries by 6.8 percent.
The government has already allowed gas and electricity prices to increase by
around 20 percent this year, setting a 35 percent ceiling for 2002 because of inflation fears.
Economic Development and Trade Minister German Gref told a news conference that the new rises would not have a serious impact on the double digit consumer price index target for 2002.
"According to the central bank and the economic and financial part of the government, we shall be able to adhere to the budgeted 12 to 14 percent inflation," he said.
UTILITIES NEED MORE
Analysts said the gas price hike, which was some five percentage points less
than expected, was not enough to pay for the restructuring of the industries.
"At this point the government seems to be much more concerned about keeping inflation low and limiting the damage to the growth of industrial base of Russia," Weafer said.
The gas, power and railway firms want to raise prices nearer to world levels
to reflect production costs and end what is effectively a subsidy of the rest of the economy.
But fears of inflation as well as counter-lobbying from big industrial users
of gas and electricity has created pressure to keep increases in check.
President Vladimir Putin has told powerful natural resource monopolies to put their houses in order and cut their costs instead of heaping price rises on hard-pressed consumers.
Local councils, which set communal charges, have been trying to raise prices
and get consumers to pay the full rate for utilities in a country where nearly one third of the population live below the poverty line.
That has led to public discontent and protest rallies in some regions, making price rises politically sensitive before parliamentary elections at the end of next year.
LITMUS TEST
Gazprom, in which the state is a major stakeholder, is upset about its annual loses of up to $1.5 billion on domestic gas sales, and had said that only exports allow it to survive and invest in new fields and projects.
The world's biggest gas producer sells gas at home at a tenth of what it fetches in its key export market -- Europe.
On news of the tariff rises, Gazprom shed 4.15 percent to 31.15 roubles at 1330 GMT, underperforming the declining Russian bourse as the lower-than-expected price rise soured investor sentiment.
UES-- the world's largest power company by installed capacity which is undergoing a complicated restructuring -- also dived by 5.23 percent to $0.1123.
"The reform of the natural monopolies is vital for keeping economy going and
is a litmus test for the government in the eyes of investors," said Aton senior economist Peter Westin.