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Regulation of Energy Prices in Russia


  • Alho, Kari E.O.


Russia prices its energy commodities domestically much lower than the prices prevailing in the international market. Using a general equilibrium framework, we analyse reasons for why Russia should or should not use such a price regulation. First, being a major exporter of energy commodities and having considerable monopolistic market power, the country is able to use its supply in order to influence the international energy prices. A rational way to channel this rent to the domestic non-energy sector and to domestic consumers is through a lower, i.e., competitive, domestic price on energy than that in the world market. Second, we introduce the classic infant-industry argument with positive intertemporal spillovers through learning-by-doing linked to current production. These spill-overs are likely to be relevant for manufacturing in a transition economy, which argument creates a further reason for a deviation in the pricing of energy to domestic industrial producers from the world market prices. However, an empirical consideration of these results and the estimation of the learning-by-doing curve suggest that the first effect can in principle be sizeable, while the second is only marginal and that, overall, Russia is currently subsidising its domestic energy prices clearly too much. Further, we conclude that the country should not subsidise its domestic consumers more than its domestic industry, as it does in reality. We also derive the optimal domestic energy tax and show that it is modest in comparison to its current rate. The optimal pricing policy could therefore have a marked positive effect on the international supply of energy by Russia.

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  • Alho, Kari E.O., 2008. "Regulation of Energy Prices in Russia," Discussion Papers 1128, The Research Institute of the Finnish Economy.
  • Handle: RePEc:rif:dpaper:1128

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    References listed on IDEAS

    1. Bardhan, Pranab K, 1971. "On Optimum Subsidy to a Learning Industry: An Aspect of the Theory of Infant-Industry Protection," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 12(1), pages 54-70, February.
    2. Melitz, Marc J., 2005. "When and how should infant industries be protected?," Journal of International Economics, Elsevier, vol. 66(1), pages 177-196, May.
    3. Bruce Greenwald & Joseph E. Stiglitz, 2006. "Helping Infant Economies Grow: Foundations of Trade Policies for Developing Countries," American Economic Review, American Economic Association, vol. 96(2), pages 141-146, May.
    4. Suni, Paavo, 2007. "Oil Prices and the Russian Economy. Some Simulation Studies with NiGEM," Discussion Papers 1088, The Research Institute of the Finnish Economy.
    5. Kaitila, Ville & Alho, Kari E. O. & Nikula, Nuutti, 2007. "Growth Prospects of Emerging Market Economies in Europe - How Fast Will They Catch up with the Old West?," Discussion Papers 1115, The Research Institute of the Finnish Economy.
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    energy; Russia; international and domestic prices;

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