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Estimating Impact of Potential Gas Price Hike
/ 3 Nov.'06 / 13:30
Giorgi Sepashvili, Civil Georgia

The Russian gas price increase will slow down Georgia’s economic growth, but it will not have a disastrous impact, government officials and some experts say.

Russian energy giant Gazprom said it has an intention to more than double the gas price for Georgia up to USD 230 per 1000 cubic meters in 2007. Gas distribution companies in Georgia are now in talks with the Russian gas monopoly and final agreement about the price is expected by mid-December.

There are not yet precise numbers how the gas price increase will be reflected on the economic growth – whether it will be 2, or 3% slow down.

“Georgia’s economy and its fiscal condition are ready to endure this kind of economic shocks. Of course it will have an impact, but not serious enough to hinder development process. By the way, there is an estimation by Standard and Poor’s which says that it [gas price increase] will have only 1,1% impact on GDP growth,” Lexo Alexishvili, the Finance Minister, told reporters on November 3.

“It will slow down [economic] growth next year; there is no question about it. But it is important how the government will respond,” Robert Christiansen, IMF resident representative in Tbilisi, told Civil Georgia on November 3.

Scale of impact will mainly depend on 1) how much gas will be consumed; 2) how the government will respond on this economic shock and 3) how much gas Georgia will be able to purchase from the South Caucasus Gas Pipeline (SCP), also known as the Baku-Tbilisi-Erzrum, or Shah-Deniz, gas pipeline.

Russia will not be the only provider of gas to Georgia next year.

“We expect to receive first gas from Shah-Deniz from December, 2006,” Nika Gilauri, the Georgian Energy Minister told the cabinet session on November 3.

Georgia is expected to receive 200 million cubic meters of gas as a transit fee, plus 50 million cubic meters in a reduced price – USD 55 per 1000 cubic meters from SCP next year.

The total amount of SCP gas – 250 million cubic meters – will help to ease a burden of expensive Russian gas and an average price after combination of supplies from these two sources will amount about USD 191 per 1000 cubic meters.

But Georgia wants to receive more cheap SCP gas in 2007.

“Negotiations are underway with Azerbaijan and Turkey about this issue,” Energy Minister Gilauri said on November 3.

If Georgia succeeds in these talks and purchases more cheap Shah-Deniz gas, it will further reduce an  average price.

Robert Christiansen of the IMF says that the Georgian economy should adjust to the new conditions triggered by the Russian gas price increase.

“What we expect [from gas price increase] is consumers to conserve consumption of gas,” he said and added that for example some factories may switch to coal consumption rather than using expensive Russian gas.

Gas consumption is 2006 will reach up to 1,9 billion cubic meters, but projected amount of consumed gas after the price hike in 2007 is roughly 1,7 billion cubic meters or possibly less if the tariffs are increased.

Whether it will be possible to conserve gas consumption or not will largely depend on how the government will respond to this economic shock.

“IMF advises not to subsidize increased gas price, but to compensate this increase for the low-income households by giving them extra Lari,” Robert Christianson said.

Although government-subsidized gas tariff seems to be politically much popular move, it will have a negative impact on economy in a long term perspective.

Despite number of Russia’s economic sanctions already in place, Georgia enjoyed with roughly 8% economic growth in 2006, “which is not bad,” Christianson said.

“Lot of the measures imposed had no serious economic impact,” he added.

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