UPDATE 2-Russia may order price freeze as growth worries pile up

Fri Sep 6, 2013 8:38am EDT

* Prime minister Medvedev orders government to consider regulated price freeze

* Reflects growing political concern over economy

* Plan would affect major gas, railways, power companies

* Would help lower inflation but negative for investors

By Jason Bush

MOSCOW, Sept 6 (Reuters) - Russia may prevent regulated prices from rising next year for the first time since 1999 as President Vladimir Putin's government seeks to ease pressure on household budgets in an economy that is barely growing.

A directive from Prime Minister Dmitry Medvedev published on Friday asked ministries to look into the impact on the economy and companies of a freeze in prices charged for state-regulated services including gas, electricity and railways in 2014.

The Russian government is used to using its control of such costs for political purposes. In a bid to boost electoral support before Putin's return to the presidency for a third term last year, it delayed rises in regulated costs for six months, shortly after the first major street protests against Putin.

But it now faces a more difficult equation of how to reheat an economy that has been battered by five years of financial turmoil in Europe and, more fundamentally, by Russia's failure to reduce its huge dependence on oil, gas and other commodities.

Opinion is divided on the impact of a tariff freeze.

Analysts at Uralsib said it "would result in significant pressure on the financials of companies in the utilities sector" and shares in power- and gas-related companies fell in Moscow on Friday.

Shares in gas monopoly Gazprom, once the world's most profitable company but now under pressure from smaller and more flexible competitors, fell 1 percent.

That will be of concern to the government, which owns a majority of the company and draws huge tax revenues from it. But any corporate fallout may take second place to the need to help consumers who look like Russia's best hope of arresting Russia's recent slide into economic stagnation.


Russia's population of 140 million, flooding into newly constructed supermarkets and shopping malls in recent years, is still more concerned with prices than anything else.

Polling shows more than half list household bills as a major concern, compared to just 9 percent who mention the country's patchy record on human rights and democracy.

Inflation, while coming down, will top six percent this year while growth is expected to be less than two percent and that risks at very least cooling consumer demand.

By quelling official price rises, Medvedev and Putin may also be giving themselves more room for manoeuvre on other types of stimulus for the economy.

The new head of the central bank underlined officials' concern earlier this week by saying she would have to tighten policy if the government did not show enough commitment to bringing inflation down.

A senior government official cited by the Vedomosti newspaper said that the proposed tariff freeze would enable the central bank to cut rates and support growth.

In comments reported by Russian news agencies on Friday, Finance Minister Anton Siluanov also swung behind the proposals.

He said that by lowering state procurement prices, a freeze in regulated tariffs would make it easier for the government to implement spending cuts proposed by the ministry. But he added that it could also be negative for investment by "natural monopolies", Russia's term for utilities chiefly including gas, electricity and railways.

Medvedev gave the ministries until September 9 - four days before the bank next meets - to draw up a new economic development forecast for the period 2014-2016 that incorporated maintaining tariffs at their 2013 levels, which the directive said was "being considered".

Bank of America Merril Lynch estimated that a tariff freeze would trim around one percentage point off inflation next year.

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