To Raise or Not to Raise? Impact Assessment of Russia's Incremental Gas Price Reform

One of grand challenges which are faced by Russia today is to deregulate its gas market while favouring longer-term growth of economy. From the mid-2000s onwards, the key component of the reforms has become the introduction of a new pricing scheme for natural gas supply at the domestic markets. However, the growing momentum for gas price liberalization in Russia is currently constrained by fears of potentially strong adverse impact that market-based price setting principle will have on the economy. Based on a novel multi-regional, multi-sector and multi-household computable general equilibrium (CGE) model of the Russian Federation, this paper presents a simple yet a flexible framework for evaluating gas price reform. Specific model features include the regional disaggregation at the federal district level where each region has a special gas production and consumption structure, and the disaggregation of the household sector into income terciles. We found that the reform is feasible at low economic cost, without greater disparities in terms of increased inequity within and between country’s federal districts. Large redistributive impacts can arise from specific mechanisms to recycle revenues. In terms of global environmental credentials, gas price liberalization can bring Russia on a substantially more sustainable path. The potential to foster adoption of energy efficiency measures by exploiting the revenue-recycling effect is, however, limited.

Heyndrickx, Christophe, Victoria Alexeeva-Talebi and Natalia Tourdyeva (2012), To Raise or Not to Raise? Impact Assessment of Russia's Incremental Gas Price Reform, ZEW Discussion Paper No. 12-052, Mannheim.