What's with the gasoline prices in Kazakhstan?

The order of the Minister of Energy establishing the cap prices for retail sales of petroleum products subject to state price regulation has come into force on December 10. And today, Kazakhstanis are already buying gasoline at what the government calls “reduced” prices, Tengrinews reports.

The Ministry of Energy of Kazakhstan announced that the cap prices on diesel fuel were set to 107 tenge ($0.59) per liter, AI-80 gasoline to 89 tenge per liter and AI-92/93 at 115 tenge ($0.63) per liter.

First Vice-Minister of Energy Uzakbai Karabalin said that the price cutting in Kazakhstan was related to the significant depreciation of the Russian ruble and sliding global oil prices.

But in this case the Kazakh oil prices make one wonder. The most popular gasoline brand AI-92 was sold at 115 tenge ($0.63) per liter up until the price was raised to 128 tenge ($0.70) per liter in August by a decree of the Kazakhstan government. Back then, Brent oil was traded at 105 dollars per barrel at the international market.

Now the gasoline price in Kazakhstan is reduced back to 115 tenge per liter. But the current price on Brent oil stands at around 65 dollars per barrel and begs for a question of why the gasoline prices in Kazakhstan were not reduced by the same 35-40%.

Besides, the new government decree does not guarantee that the gasoline prices will stay at the set mark for even a medium term. On the contrary it prescribes for a monthly revision of prices and fuel excise taxes. First Vice-Minister of Energy Uzakbai Karabalin said so on December 9.

He informed that starting January 1, 2015 the caps will be set each month by the Ministry of Energy of Kazakhstan together with the Ministry of National Economy of Kazakhstan.

The new rules envision traders receiving mark-ups, while preventing windfall profits. "In addition to the monthly recalculations of ceiling prices for state regulated types of fuel, there will be a monthly revision of excise taxes," Karabalin said.

According to the Ministry's press-service this is done to stabilize the domestic fuel market of Kazakhstan and protect it from fluctuations of fuel prices in Russia. Russian prices have a strong influence on Kazakhstan because Kazakhstan imports a third of its fuel from Russia. 

"The said measures are called to protect fuel supplies to our domestic market from sharp fluctuations and shocks related to the changing global oil prices and Russia's tax manoeuvre," the press-service said.

Russia is introducing the "tax maneuver" in January 1, 2015. It will include an adjustment of excise duties and introduction of significant changes into the parts of its Tax Code that concern the oil sector. One proposal, for example, sees the reduction of export duties on oil and petroleum products paired with an increase of the mineral extraction tax (MET). Being a close neighbour consuming Russian gasoline, Kazakhstan has to consider the changes when developing its own fuel policies.  

Besides protecting the domestic market, the new Kazakhstani rules will serve to harmonize fuel prices in Kazakhstan and Russia. The two countries share a common border of over 7000 km so the countries' fuel traders tend to channel their sales to the country that offers higher prices unless a government regulation is in place to control the flows. To address the problem, “our prices will correlate with those in Russia that supplies one third of the gasoline we consume,” Karabalin said.

Managing fuel prices is a way to solve many problems, but as practice of raising the price of AI-92 to 128 tenge per liter shows, it has not been an effective way to eliminate the fuel deficit in Kazakhstan. What the price rise effectively did was raise the profits of large traders in Kazakhstan, since the excise duties in Kazakhstan were ten times smaller than those in Russia, where they made up a half of the gasoline price, according to Forbes Kazakhstan.

This factor does not stop the policy makers in Kazakhstan from being guided by Russia's pricing polices, however. The CEO of KazMunaiGas, the national oil and gas company in Kazakhstan, Sauat Mynbayev declared that the deficit of fuel in Kazakhstan would be eliminated only when adequate pricing was put in place.

He reminded that with the Single Economic Space coming into force in 2015 the cheaper Kazakhstan gasoline would be sold out in Russia, causing even more deficit at Kazakhstan's domestic market. And even increasing the output of Kazakhstan's oil refineries would not solve the problem.

This statement is contrary to what most of the market experts had been saying: in order to ensure Kazakhstan is self-sufficient in the fuel market it needs to produce enough of gasoline of its own.

There are three oil refineries in Kazakhstan and the government intends to modernise them all to increase their capacity.

But Mynbayev said that the big difference in fuel prices in Russia and Kazakhstan, which made 35 percent in August, would cause all of the fuel produced in Kazakhstan to be sold in Russia, leaving the domestic market bare.

Strange as it may seem from the Kazakh fuel prices adjustments cited in the beginning of the story, the policies of Kazakh Oil Ministry have served to do exactly just that. With the Russian ruble depreciating and global oil pricing avalanching the current Russian AI-92 gasoline price is between $0.56 and $0.62. This is even below the Kazakhstan's official ceiling of $0.63 per liter.  

However, not everyone believes that the pricing tool would work as well in the long term. Talgat Balkiyaev, an analyst of Kazakhstan Private-Public Partnership Center, said that the gasoline prices were kept low in Kazakhstan "artificially" and Kazakhstan had to increase the domestic production of fuel by at least 20 percent to keep the prices at that level in the long run.

"Low gasoline prices in Kazakhstan will hold until the gasoline purchased by KazMunaiGas, including from Russia, is over. The stocks are enough to last until February. After that, the ruble exchange rate will affect [the price]," Balkiyaev said.

Many experts doubt that there is any way to stop Kazakhstan fuel prices from climbing back up again. Independent expert Sergey Smirnov said that there was no transparency in fuel pricing in Kazakhstan. Besides, many of the market players were unhappy with low fuel prices. Keeping the gasoline prices low in Kazakhstan would negatively affect the process of reconstruction of the domestic oil refineries. "Even under the ordinary circumstances (when fuel prices are high) the modernization had been progressing very slowly. Now, with the gasoline becoming cheaper, it will simply stop," he said.

Writing by Dinara Urazova, editing by Tatyana Kuzmina