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exchequer will gain an additional RUB1-1.6 trillion ($16.15bn-$25.85bn), depending on price fluctuations.
Crucially, this is cash the government will be able to spend. Under the current fiscal rule, when the oil price is above $40 the additional revenues generated must be used either to cover the deficit or be deposited in the National Welfare Fund. By expanding the number of barrels being taxed, the manoeuvre increases the revenues available for spending while maintaining the $40 fiscal rule.
Sweetening the deal
The tax manoeuvre main purpose is to encourage further modernisation of Russia’s refineries and increase the production and export of lighter fuel products. The assumption is that increases in MET will be borne primarily by refiners in the form of higher gate costs. The removal of export duty also eliminates tax incentives for exporting refined products over crude, placing pressure on domestic refining.
The risk is that this will make refineries servicing the domestic market unprofitable, forcing the Kremlin to subsidise them or face the prospect of gasoline imports. The government has proposed the imposition of a negative excise duty – essentially a cash subsidy – but proposals reported thus far have been highly complex and of questionable practicality.
Fuelling discontent
Even prior to the implementation of the manoeuvre, rising petrol prices have already become a political headache to the Kremlin. So far in 2018 the pump price for petrol has risen by around 6% year on year, and diesel has risen by 9%, and the topic was discussed at length during Putin’s annual “Direct Line” press conference. Increased prices at the pump are a highly visible sign of an increased cost of living, which combined with a decline in living standards since the 2014 crisis will fuel political discontent.
Russia’s recent improvement on Verisk Maplecroft’s Civil Unrest index, from a high-risk score of 4.80/10.00 in the forth quarter of 2017 to a medium risk score of 6.13/10.00 in the second quarter of 2018, is driven in part by a sustained fall in inflation. The index assumes that increases in the cost of living make people more likely to engage in protests and other acts of civil disobedience.
The upward pressure on prices will cause the score to deteriorate, significantly if accompanied by an increase in the frequency of protests. As regional protests have become increasingly economically motivated, this is a likely outcome if the Kremlin can’t keep petrol prices under control.
The higher you climb the harder the fall
That being said, the economic and industrial impacts of the manoeuvre may not be as important as the political impacts. Siluanov is the figure most associated with the reform, and Putin’s approval is a clear signal of his rising place in Russia’s political hierarchy. As Siluanov’s profile grows, he will increasingly become a target for those disadvantaged by, or ideologically opposed to, his economic liberalism.
RUSSIA Country Report July 2018 www.intellinews.com