Wrong Time for Maneuvers
This week the State Duma will review the budget for 2016 submitted by the government in late October. The project assumes a small nominal increase in receipts compared to 2015 (+487 bln RUB; +3.7%) and similar increase in expenditures (+681 bln RUB; +4.2%). The deficit is said to stay at 3% GDP as in 2015. But the Ministry of Finance warned recently that about 1 trln RUB of revenues are “under risk” due to a potential short-fall of oil and gas revenues.
At the end of 2014 the law of the oil industry “tax maneuver” was signed in Russia. The maneuver provided a number of important innovations – the taxable basis grew due to a mineral extraction tax (MET) increase and a decrease in the export duty. The volume of consumer subsidies and oil refining margins fell. There was a fundamental flaw in the approved system – it was developed based on the fact that oil prices would remain high, but due to the drop in oil prices the tax burden increased in comparison with the previously expected fiscal conditions.
Furthermore, for the 2016 budget it was decided to reject the compensatory decrease in the oil export duty and to keep it at the same level as in 2015. This leads to a budget increase of 200 billion RUB. The “frozen” decision about the decrease in the export duty will lead to a tax burden increase of $1.7 per barrel (at an oil price of $50/barrel), a drop in the “net price” on the oil obtained by a company of 7.8%, from $21.4 to $19.6, and the export profit level will rise from 57% to 60%. This decrease is equal to an oil price drop of $9, to $41 per barrel, under 2015 fiscal conditions.
The considerable volume of the tax burden will be shared among Russia’s top oil companies – Rosneft is to pay 90 billion RUB, Russia’s second-largest oil producer, LUKOIL, will pay nearly 28.5 billion RUB, and another oil major, Gazpromneft – nearly 19 million RUB.
The Government Commission on the Fuel and Energy Complex meeting in late October was likely the main event for the industry. During the meeting, oil companies and the Ministry of Energy intended to convince Vladimir Putin of the necessity of the introduction of the new taxation system based on the financial efficiency of projects.
As expected, the results of the meeting turned out to be quite meager– on the threshold of 2018 elections Vladimir Putin did not approve any important, urgent fiscal innovations but suggested they “think it over again thoroughly”. Moreover, oil companies did not get any clear instructions in another area – the liberalization of gas exports. There will not be a rapid reorganization of the gas market at this time.
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