AZEBAIJAN: GOVERNMENT RAISES PRICES ON FUEL AND

C O N F I D E N T I A L BAKU 00039 SIPDIS SIPDIS DEPT FOR EUR/CARC AND EUR/IO/EX E.O. 12958: DECL: 01/10/2017 TAGS: ECON AMGT EID EFIN ETRD EPET ENRG AFIN AJ SUBJECT: AZEBAIJAN: GOVERNMENT RAISES PRICES ON FUEL AND KEYGOODS AND SERVICES BY MORE THAN FIFTY PERCENT Classified By: Charge D'Affaires Jason Hyland per reasons 1.4 (B, D) ¶1. (U) On January 7 the Government of Azerbaijan (GOAJ) increased prices for fuel (gasoline and diesel oil), electricity, water, sewage and industrial use of gas. The new fuel tariffs are on average 50 percent higher. The new prices are as follows (USD 1 equals 0.88 manats): -Gasoline 95 octane (one liter) costs 60 qapiks, an increase of 48 percent (USD 69 cents, up from 46.5 cents) -Gasoline 92 octane costs 55 qapiks, an increase of 50 percent (USD 63 cents, up from 41 cents) -Gasoline 80 octane costs 55 qapiks, an increase of 50 percent (USD 63 cents, up from 41 cents) -Diesel oil costs 45 qapiks, an increase of 27 percent (USD 52 cents, up from 41 cents) -Kerosene costs 45 qapiks (USD 55 cents, up from 31 cents) -The price of electricity was also raised to 6 qapiks, an increase of 200 percent (USD 6.9 cents per 1 kWh, up from 2.3 cents per 1 kWh) -The price of water increased to 1.32 qapik per six cubic meters (USD 2.6 cents, up from 2.2 cents per 12 cubic meters) ¶2. (U) Oqtay Akhverdiyev, the head of the Economic Department at the Cabinet of Ministers told the local press that by increasing the prices for utilities, the GOAJ made a very strategic decision trying to apply international standards in Azerbaijan. He also told the press that because the price hike will raise the CPI index, the GOAJ will most probably increase its average salary level at least 50 percent in the near future. ¶3. (U) Local think-tank economic analyst Ingilab Akhmedov considers that the GOAJ's decision to raise utility prices had a "price-shock" effect on population, since prices for all the basic and essential household components will increase as a result of the increased fuel and electricity costs. Akhemdov believes the increased fuel and electricity costs also will result in a hike in prices for other goods and services. He worried that the impact will be particularly difficult on the poor, especially people living on pensions. Akhmedov indicated that the GOAJ will probably introduce some compensation mechanisms through salary and social payments increases, in order to maintain some standard of living for the population. The price hikes are the number one topic of discussion among Azerbaijanis now. ¶4. (C) COMMENT: This recent price increase, a long pending policy recommendation by the International Monetary Fund, will ripple through the economy in the coming months as general prices increase for a variety of consumer goods and services. For other price-controlled goods, such as bread, that will now have higher input costs, producers will be forced to accept some of the costs, reducing profitability. In mid-2006 Minister of Economic Development Heydar Babayev began talking about improving collection of public utility fees from consumers. It is unsure whether the GOAJ has the means to collect the tariffs. In addition, some opposition politicians have called for public demonstrations protesting the price increase. To date, there has been no public protests. ¶5. (C) COMMENT CONTINUED: Possibly to deflect public criticism, government officials have already publicly linked the increase to Russia's decision to raise the price of natural gas sold to Azerbaijan to USD 235 per thousand meters. The increase in prices most likely occurred in early 2007 more for domestic political reasons than economic. Unlike 2006 (re-run Parliamentary and municipal elections) and 2008 (Presidential elections),2007 does not have any politically sensitive events that would make the GOAJ rethink any major policy changes. By blaming the recent natural gas increase by Gazprom for the gasoline and utility price increases, the GOAJ finds a generally acceptable and believable scapegoat. END COMMENT. HYLAND