A Commentary on the Energy Ministry's Idea

On May 29, 2018, the portal of the Kazakhstan digital government published the draft of Energy Minister Kanat Bozumbayev’s order on prohibiting the import of gasoline from the Russian Federation via railroads for the duration of three months.

Since the document is relatively short, we will quote it in its entirety.

“In accordance with the EEU Agreement and the Agreement between the Government of the Republic of Kazakhstan and the Government of the Russian Federation on the trade-economic cooperation in the field of importing oil and the oil products to the Republic of Kazakhstan of December 9, 2010, as well as Article 18 of the Kazakhstan law “On Regulating the Trade Activity”, I order:

  1. to impose the 3-month ban on importing gasoline from the Russian Federation to the Republic of Kazakhstan via railroads;
  2. the Department of the Oil Industry Development at the Energy Ministry of the Republic of Kazakhstan is to ensure:
  • notification of the Border Security Force;
  • notification of Қазақстан темір жолы JCS NC on taking measures on the implementation of Article 1 of the current Order;
  • notification of the Ministry of the National Economy of the Republic of Kazakhstan on the necessity:
  • of informing the Eurasian Economic Commission on the ban imposing;
  • of introducing for the Eurasian Economic Commission’s consideration the suggestion by the other EEU members on the measures stipulated in Article 1 of the current Order;
  • the registration of the current Order at the Ministry of Justice of the Republic of Kazakhstan;
  • in ten days since the registration of the current Order, to send its paper and digital copies in the Kazakh and the Russian languages to the Republic Center for Legal Information for its official publication and inclusion into the Etalon Control Bank of the Normative Legal Acts of the Republic of Kazakhstan;
  • in ten days since the registration of the current Order, to send its copies to the periodical printed media for the official publication;
  • posting of the current Order on the Ministry of Energy of the Republic of Kazakhstan internet-resource after its official publication;
  • in ten working days after the official registration of the current Order at the Ministry of Justice of the Republic of Kazakhstan, to provide the data on the implementation of the items stipulated in sub-clauses 2), 3), and 4) of the current Article to the Department of the Legal Service of the Ministry of Energy of the Republic of Kazakhstan.
  1. To place the responsibility to control the implementation of the current Order on the supervisory Vice Minister of Energy of the Republic of Kazakhstan.
  2. The current Order to be put into action in ten calendar days after its first official publication”. 

The strange thing about this initiative lies in the fact that there is no economic necessity for imposing such restrictions at the current moment and it will not appear in the next 3-4 months. In his interview to Tengrinews.kz, Kanat Bozumbayev said that there was the oversupply of gasoline in the country and the gasoline producer prices in Russia had lately gone up.

Here is a quote (text in bold by kz.expert). 

“Two key factors may be influencing the gasoline price now. First is the growth of the retail and producer gasoline prices in the Russian Federation. Second, here in Kazakhstan, we have created the reserves that are 1.5 times surpass the needs of our country. Our plants and traders need to find a place to dispose of even our own gasoline. Therefore, there will always be a certain balance here. In other words, our oil refineries need to dispose of the gasoline but its accumulation is growing. As you know, two of the plants have already been modernized. This gives us the high-octane gasoline of the AI-92 and AI-95 brands. Following the results of 4-5 months, about 90% of the domestic market will be satisfied via the Kazakhstan gasoline, 10% - via the Russian gasoline”.  

However, if the domestically produced gasoline resources have rapidly grown and the producer prices for the Russian gasoline (according to the Rosstat data and the publications in the Russian press) have dramatically increased and are unlikely to go down, imposing the restrictions on the import of the latter is nonsensical.

The only relatively rational explanation of the initiative is that Kanat Bozumbayev and his subordinates may have decided to cover all bases fearing that the summer supplies of the Russian gasoline at higher producer prices will cause the retail prices in Kazakhstan to grow.

Theoretically, it is possible since there is an opinion that the Russian product is of a better quality than the Kazakhstan one. Besides, it already has an established pool of consumers. Nonetheless, considering that the Russian gasoline covers only one tenth of the domestic highly competitive retail sales, according to the Energy Minister, such a turn of events seems unlikely. Therefore, perhaps there is another explanation of the Energy Minister’s sudden concern about the non-tariff defense of the domestic market from the Russian gasoline.

We offer two possible scenarios.

According to the first one, the agency is afraid that the Kazakhstan refineries and wholesale integrator companies will increase the export of the Kazakhstan gasoline to Russia and the neighboring countries. As a result, the situation at the domestic market will change dramatically and the demand for the Russian gasoline will grow. This scenario is quite possible since the Kazakhstan market is notably segmented and the oversupply of gasoline in one region may coincide with its deficit in the other. And the import from Russia at higher prices is indeed capable of negatively influencing the level of the retail prices in Kazakhstan.

According to the second scenario, the draft of the Order is Kanat Bozumbayev’s populist action on the eve of his reporting to the citizens on June 12, 2018. Sure, the constant problems at the domestic gasoline market including the frequent deficits and the price growth are the most painful in the country. And here the criticism of the event’s participants may be covered by the trump card of how much he cares for the country, the drivers, and their expenditures.

If the draft of the Order will be signed after the public discussion, registered at the Ministry of Justice and put into action (in other words, turns out not to be a PR-stunt), then we will get to the most interesting part of putting the agency’s idea to test. Perhaps the ban to import the Russian gasoline via railroads for the duration of three months will make it possible to reduce the Kazakhstan producers’ surplus stock in the wholesale segment. Although something else is possible as well – the idea may turn out to be a complete failure.

The information taken from 365info.kz tells us that the latter may indeed happen. According to the media that is probably using the official data, the share of the Russian gasoline at the domestic Kazakhstan market is now constitutes about 25%. Here is a quote. “The growth of the domestic production has led to the import decrease. Following the results of the 1st quarter, the import of gasoline from abroad has decreased by 326 thousand to 286.6 tons. As a result, the share of the imported (Russian) gasoline at the gas stations has decreased from 30.1% in January-March 2017 to 24.4%. The trend is clear; however, the import indicator is still high – the Russian producers are supplying a quarter of the Kazakhstan market”.

In other words, if an accident happens at some Kazakhstan refinery which, considering the problems in the industry, is quite possible or the Kazakhstan gasoline starts flowing to Russia and the neighboring countries, we may be confronted by the issues of if not the national then the regional scale for sure. And given the elevated edginess of the society and the widespread distrust of the citizens to the authorities, it will immediately cause an outburst of emotions that, as the previous history teaches us, can be dangerous for the power.

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