The Government plans to “freeze” fuel prices

RUSSIA ENERGY / FINANCE - In Brief 18 Jun 2021 by Marcel Salikhov

Vice PM Alexander Novak held a meeting with experts last week where yours truly has also participated. The main topic was a situation on domestic petroleum markets and price increase for fuel in particular. As an outcome, Alexander Novak proposed to repeat an experience of 2018 when the Government agreed with oil majors to ‘freeze’ domestic fuel prices.

The main instrument for the "stabilization" of prices for petroleum products in the domestic market is the damper mechanism. Within the damper legal framework of the damper, the federal budget began to compensate oil companies for supplies on the domestic market from February 2021. Amendments related to the change in the base price in the damper (from 56.3 to 52.3 thousand RUB/t) will increase this compensation and thus help limit inflationary pressure for domestic fuel prices.

However, one must understand that the damper mechanism compensates for the supply to the domestic market compared to the netback not wholly, but only by roughly 2/3. In the context of a substantial rise in global oil prices n the world market, this may lead to the fact that prices for petroleum products will grow faster than inflation, even with the current damper mechanism working.

Therefore, additional mechanisms are required if the task is to limit the growth of retail prices for gasoline and diesel “not higher than inflation.” Accordingly, the Government discussed several additional instruments - introducing a ban on the export of petrol and increasing the requirements for the sale of petroleum products on domestic commodity exchange (SPIMEX). All refineries have to sell 7.5% of diesel and 11% percent of gasoline...

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