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The Merits of Dual Pricing of Russian Natural Gas

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  • David G. Tarr
  • Peter D. Thomson
Abstract
Our analysis reveals that, from Russia's perspective, there is no economic rationale to unify the price of natural gas it sells domestically and in Europe. We argue that pipelines allow Gazprom to segment the Russian market from the European (including Turkey) market and that Russia has market power in the European market. If Russia were to fail to exploit this market power in its European market, by selling its natural gas to Europe at only full long‐run marginal cost plus transportation costs, Russia would lose between $5 billion and $7.5 billion per year (almost two per cent of its GDP). If, instead, Russia were to raise its domestic prices to the prices it charges in Europe, Russian industry would incur very large investment adjustment and unemployment costs in the short run – adjustment costs that cannot be justified on the basis of comparative advantage. We estimate that the efficient world price would be achieved if Gazprom were to employ its optimal ‘two‐part tariff’. The optimal two‐part tariff would double Gazprom's annual profits in Europe, but it involves significant long‐term risks for Gazprom of lost market share.

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  • David G. Tarr & Peter D. Thomson, 2004. "The Merits of Dual Pricing of Russian Natural Gas," The World Economy, Wiley Blackwell, vol. 27(8), pages 1173-1194, August.
    • Handle: RePEc:bla:worlde:v:27:y:2004:i:8:p:1173-1194
    DOI: 10.1111/j.1467-9701.2004.00651.x
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    Cited by:

    1. Fatiha Talahite & Philippe Barbet & Saïd Souam, 2008. "Enjeux et impacts du processus d'adhésion de l'Algérie à l'OMC," Working Papers halshs-00607420, HAL.
    2. Anna Marhold, 2017. "Fossil Fuel Subsidy Reform In The WTO: Options For Constraining Dual Pricing In The Multilateral Trading System," Working Papers id:12335, eSocialSciences.
    3. Eirik Lund Sagen & Marina Tsygankova, 2006. "Russian Natural Gas Exports to Europe. Effects of Russian gas market reforms and the rising market power of Gazprom," Discussion Papers 445, Statistics Norway, Research Department.
    4. Edward J. Balistreri & Zoryana Olekseyuk & David G. Tarr, 2017. "Privatisation and the unusual case of Belarusian accession to the WTO," The World Economy, Wiley Blackwell, vol. 40(12), pages 2564-2591, December.
    5. Marina Tsygankova, 2007. "The Export of Russian Gas to Europe: Breaking Up the Monopoly of Gazprom," Energy and Environmental Modeling 2007 24000062, EcoMod.
    6. Lunden, Lars Petter & Fjaertoft, Daniel & Overland, Indra & Prachakova, Alesia, 2013. "Gazprom vs. other Russian gas producers: The evolution of the Russian gas sector," Energy Policy, Elsevier, vol. 61(C), pages 663-670.
    7. Orlov, Anton, 2015. "An assessment of optimal gas pricing in Russia: A CGE approach," Energy Economics, Elsevier, vol. 49(C), pages 492-506.
    8. Sergey Chernavsky & Oleg Eismont, 2009. "Is Gas Cartel's Profitable for Russia? (A Case of European Gas Market)," Journal of the New Economic Association, New Economic Association, issue 1-2, pages 127-149.
    9. Melikoglu, Mehmet, 2013. "Vision 2023: Forecasting Turkey's natural gas demand between 2013 and 2030," Renewable and Sustainable Energy Reviews, Elsevier, vol. 22(C), pages 393-400.
    10. Marina Tsygankova, 2007. "The export of Russian gas to Europe: breaking up the monopoly of Gazprom," Discussion Papers 494, Statistics Norway, Research Department.
    11. Tarr, David G., 2013. "Putting Services and Foreign Direct Investment with Endogenous Productivity Effects in Computable General Equilibrium Models," Handbook of Computable General Equilibrium Modeling, in: Peter B. Dixon & Dale Jorgenson (ed.), Handbook of Computable General Equilibrium Modeling, edition 1, volume 1, chapter 0, pages 303-377, Elsevier.
    12. Edward J. Balistreri & Zoryana Olekseyuk & David G. Tarr, 2017. "Privatisation and the unusual case of Belarusian accession to the WTO," The World Economy, Wiley Blackwell, vol. 40(12), pages 2564-2591, December.
    13. Spanjer, Aldo, 2007. "Russian gas price reform and the EU-Russia gas relationship: Incentives, consequences and European security of supply," Energy Policy, Elsevier, vol. 35(5), pages 2889-2898, May.
    14. Sagen, Eirik Lund & Tsygankova, Marina, 2008. "Russian natural gas exports--Will Russian gas price reforms improve the European security of supply," Energy Policy, Elsevier, vol. 36(2), pages 867-880, February.
    15. Sadek Boussena & Catherine Locatelli, 2011. "La sécurité, question clé des relations gazières entre l'UE et la Russie," Post-Print halshs-00625223, HAL.
    16. Tsygankova, Marina, 2010. "When is a break-up of Gazprom good for Russia?," Energy Economics, Elsevier, vol. 32(4), pages 908-917, July.
    17. Zhishuang Zhu & Huaming Zhang & Gege Tao & Feng Yu, 2016. "Effects of gas pricing reform on China’s price level and total output," Natural Hazards: Journal of the International Society for the Prevention and Mitigation of Natural Hazards, Springer;International Society for the Prevention and Mitigation of Natural Hazards, vol. 84(1), pages 167-178, November.
    18. Dominique Finon & Catherine Locatelli, 2008. "Russian and European gas interdependence. Can market forces balance out geopolitics?," Post-Print halshs-00129618, HAL.
    19. repec:zbw:bofitp:2017_002 is not listed on IDEAS
    20. Catherine Locatelli, 2007. "Les stratégies d'internationalisation de Gazprom, enjeu de la constitution d'une grande compagnie d'Etat russe," Post-Print halshs-00115377, HAL.
    21. Marina Tsygankova, 2007. "When is Mighty Gazprom Good for Russia?," Discussion Papers 526, Statistics Norway, Research Department.
    22. Chyong, Chi Kong & Hobbs, Benjamin F., 2014. "Strategic Eurasian natural gas market model for energy security and policy analysis: Formulation and application to South Stream," Energy Economics, Elsevier, vol. 44(C), pages 198-211.

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    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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