Unstable Russian Taxes

Mikhail Krutikhin: On Shaky Ground

A few days after Vladimir Putin declared in Hannover that the investment climate in Russia was improving his finance minister Anton Siluanov hastened to prove that the president’s words were, well, somewhat premature. 

One of the faults that plague investors in this country is an unpredictable tax regime. Stability of fiscal conditions for long-term costly projects is but a dream—and it is especially painful for oil and gas ventures with protracted periods of negative cash flows and distant payback prospects. Production sharing agreements, which could protect investors from fiscal fluctuations have been branded as treason of national interests and practically banned even though the first experiments with PSAs, Sakhalin I and Sakhalin II, are a spectacular success case. 

Siluanov said his ministry was suggesting a markup of the mineral extraction tax on oil and the excise tax on fuel, and the warning was not just rhetoric. The MET is already growing: by 6.4% in 2012 and by another 5.4% from January 1. The finance ministry wants to accelerate the upward movement—allegedly for increasing the budget of the national road construction and repairs program. 

To make the effect even more pronounced, the minister said he would like to have the excise tax on premium gasoline of Euro 4 and Euro 5 categories raised. It means that the governmental plan of encouraging the refiners’ switch to environment-friendly fuel will be scrapped. In addition, Siluanov is proposing to increase the export tax on heavy fuels from 66% to 75-80% of the tax rate for crude oil. 

Of course there was an outcry from both oil companies and the Ministry of Energy. ‘Many fields will become non-economical to develop if the new rate of the MET is enforced,’ CEO of Surgutneftegaz Vladimir Bogdanov said. ‘The higher excise tax will result in higher fuel prices,’ his colleague at Gazprom Neft Alexander Dyukov added. 

Increasing the influx of revenues is a vital necessity for the Russian budget. The costs of maintaining social stability by ratcheting up the salaries of the military and security personnel, as well as pensions, plus exorbitant costs of politicized projects (from the Olympic Games to redundant gas pipelines) are an onerous burden for the Russian economy. The petroleum industry will have to contribute heavily to the way the government spends money. 

The fiscal instability can hardly make Russia’s business environment friendlier. The trade mission of the USA (USTR) published a report last week stating it regarded the investment climate in Russia as adverse. The Russian authorities, the report says, do not take sufficient measures for situation improvement.

Published with the kind permission of RusEnergy. Mikhail Krutikhin is with RusEnergy, an independent privately-run company established in 2000 by a group of Russian experts with a long experience in consulting and publishing business. Based in Moscow, it specializes in monitoring, analysis and consulting on oil and gas industry of Russia, Central Asia, Azerbaijan and Ukraine.