An assessment of optimal gas pricing in Russia: A CGE approach

Domestic gas prices in Russia are administratively regulated, and they are substantially lower than export netback prices. The administrative price regulation operates as an implicit subsidy on domestic gas consumption. The Russian government aims to liberalise domestic wholesale gas prices in the long term. While the “export netback parity” is defined as a political objective, it seems not to be a necessary target anymore. The export netback parity is not economically rational for Russia because the average export netback price of gas is higher than the marginal cost due to Gazprom's market power in export gas markets. An optimal domestic gas price is still not well-defined. This paper addresses this question by employing a comparative static, single-country, multi-sector Computable Generation Equilibrium model (CGE). The administrative regulation of domestic gas prices is explicitly modelled. The main findings are as follows. An increase in the domestic gas price provides economic efficiency gains: the more elastic the export and domestic demand for gas, the larger the welfare gains. The optimal domestic gas price should be approximately 55% of the export netback price. Increasing the domestic gas price provides additional government revenues, which can be used to reduce distortionary taxes. On sectoral effects, the structure of the Russian economy shifts from energy toward non-energy intensive sectors in response to an increase in the domestic gas price. There is an increase in the export supply of gas. Furthermore, an increase in the domestic gas price leads to a reduction in total CO2 emissions.