PRICE CONTROLS NEVER WORK: How Russia’s Playing Games With Gas Prices Became A Big Problem For Its War.

If fuel prices are higher abroad than in Russia, the government provides additional compensation to oil companies for supplying the domestic market. Conversely, if foreign prices are lower, oil companies contribute to the government’s budget. This mechanism guards against a scenario in which nearly all fuel is exported, creating a domestic shortage.

In their “quest to maintain control”, Vakulenko points out, the government has decided to “tether real fuel prices to strict inflation-based increments, regardless of how logical or reasonable market fluctuations might be”. This endeavor, Vakulenko explains, is akin to the authorities attempting to peg the exchange rate of the dollar at a fixed value, say 70 or 80 rubles, and compensating banks for the difference between this rate and the market rate.

However, this attempt to outsmart the market has planted a ticking time bomb. Oil companies have long been required to bear substantial costs to maintain price stability. In the previous year, when oil prices were particularly high, these compensations amounted to a staggering 2.2 trillion rubles ($23 billion), nearly a fifth of the total windfall generated from the oil and gas industry, which amounted to 11.6 trillion rubles ($120 billion).

While the government’s efforts to control fuel prices may yield short-term stability, they come at a considerable cost, potentially jeopardizing the long-term financial health of the oil and gas sector and the broader economy.

Russian oil production is already “among the most expensive in the world.”