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