Page 6 - FSUOGM Week 24

FSUOGM COMMENTARY FSUOGM

Russian coffers take hit from

profit-based oil tax system

Russia’s deputy finance minister has described the system’s introduction as a “mistake”

RUSSIA THE trialling of an excess profit tax (EPT) sys- would save RUB1 trillion in tax payments in
tem for Russia’s oil industry cost the budget some 2020 if the EPT system had been introduced
RUB213bn ($3.05bn) last year, Russian Deputy across the sector last year, assuming Urals oil
Finance Minister Alexey Sazanov told Reuters sells at $37 per barrel. Gazprom Neft and Lukoil
this week. are the ones most benefitting from the system.
Russia, which currently taxes oil produc- Earlier the government had projected a much
ers using levies on extraction and exports, has smaller loss of RUB30-40bn from the EPT sys-
sought to introduce a profit-based system to tem, before revising its estimate to RUB140bn.
bring about greater uniformity and encourage On the upside, Sazanov said he expected Rus-
investment. It introduced an EPT system for a sia to collect up to $10bn more in revenue from
select group of fields in 2017 to see how it would oil companies this year because of the so-called
work in practice. “damper mechanism” in its tax code. This mech-
Sazanov said he viewed the EPT regime to anism compensates producers for selling fuel
be a mistake, not only because it led to fewer domestically when oil prices are high. But when
tax receipts but also because it did not spur prices are low, as they are now, producers must
investment as hoped. Instead, companies ben- pay extra tax on domestic sales, propping up
efitting from the system simply increased their prices. Its purpose is to prevent domestic pump
dividends. prices from rising too steeply.
“Rolling out the profit-based tax on the wider With oil at $40 per barrel, the mechanism
sector [for the budget] is equal to oil prices fall- will raise RUB500bn extra for the government
ing to $25 per barrel,” Sazanov told Reuters, esti- in 2020, rising to RUB700bn if the price is at $30
mating that such a move would lead to a RUB2 per barrel. Under the current macro conditions,
trillion budget shortfall. this would result in RUB3 trillion ($43bn) in
“The budget will dry out in ... 5-7 years at extra payments over the next five years, VTB
best,” he warned. Capital estimates.
The EPT system as it currently is will not be “When the budget especially needs cash to
cancelled, however, with Russia compensating meet its obligations ... this works well,” Sazanov
for losses by increasing mineral extraction tax said. “Under no circumstances we are going to
(MET) at the affected fields. The system applies abandon or revise it.”
to greenfield projects in Eastern and Western Russia’s government will have its work cut out
Siberia and the Caspian Sea, and brownfields in trying to balance the interests of its budget with
Western Siberia. the interests of its oil industry. The country’s top
“One of our arguments against the introduc- producers posted their first net losses in years in
tion of EPT was our concern that once the gov- the first quarter, on the back of lower oil prices.
ernment realised the inefficiency and inability to At the same time, though, Russia’s economy is
administrate it, it would find a way to compen- forecast to shrink by up to 6% this year as a result
sate for the shortfall in revenues, and that this of the oil price collapse and lockdowns put in
could happen in the most inconvenient way for place to slow the spread of the coronavirus.
oil companies at the most inconvenient time,” Sazanov noted that low oil prices alone would
VTB Capital (VTBC)’s Dmitry Loukashov said result in a RUB2 trillion loss in budget receipts
in a research report on June 16. “We see this hap- this year. At the same time, the government aims
pening right now, with the oil industry suffer- to spend RUB5 trillion by the end of 2021 to put
ing from the drastic deteriorating in macro, and the economy back on the right track. Sazanov
being aggravated by the tax regime and OPEC+ said his ministry was raising more debts and
restrictions.” withdrawing from the National Wealth Fund
VTBC estimates that Russian oil companies (NWF) to cover spending increases. ™

If the system was
applied across the
sector, Russia’s finance
ministry estimates that
the budget would run
out in 5-7 years.

P6 www. NEWSBASE .com Week 24 17•June•2020