Oil price spike: How does the Kremlin tax its oil industry?

Oil prices have spiked and that should produce a huge windfall for the Kremlin which has been desperately short of cash to fund its war machine in Ukraine since the start of this year.

For its part, Ukraine has been working very hard to make sure that Russian President Vladimir Putin can't get his hands on that money by bombing the crucial Baltic oil terminals of Primorsk and Ust-Luga in the last weeks, as well Russian refineries across the country, in the hope of cutting the Kremlin's revenue.

Reuters reported that Russia's oil exports are down 40%, although more recent reports show that the two Baltic ports have been less damaged than first believed and that limited loading has resumed. Moreover, Russia has plenty of other channels to get its oil to market. According to the Centre for Research on Energy and Clean Air (CREA) Russia’s Ministry of Finance (MinFin) pocketed €6bn in fossil fuel revenues in the first two weeks of the war alone and prices have only gone up since then.

The first quarter budget results are out and that windfall has not yet turned up in MinFin’s coffers, although economists say that it will arrive in the April results.

However, a key point that most have missed is that even if exports have fallen, the Kremlin changed the tax rules a couple of years ago and now taxes the oil companies when they take the oil out of the ground, the Mineral Extraction Tax, not when it's exported.

If exports have fallen significantly that is a company problem, not a Kremlin problem. Sanctions and Ukraine’s oil terminal bombings are not threatening budget revenues directly, they are threatening the long-term viability of Russia’s oil sector as companies are struggling to pay their taxes. The profits of Russia’s leading oil companies fell 45% y/y in the first quarter of this year alone, while oil and gas revenues fell 8.2% in the same period.

The price of Russia’s benchmark Urals blend has doubled since the start of the Gulf War from $62 per barrel in the week before Operation Epic Fury was launched to $122 today.

Oil revenues as a share of total budget income has fallen from around 40% of the total a few years ago to around 20% at the start of this year, but was still enough to generate RUB1.4 trillion of ($15.8bn) in the first quarter of this year – and that was down by 45% compared the first quarter of 2025, thanks to the lower prices and tougher US oil sanctions imposed in December.

Since then the oil prices have doubled and as part of its efforts to stabilise energy markets, the US has lifted sanctions on Russian oil sales with a 30-day waiver for India, one of the Kremlin’s biggest customers.

So that is going to have a huge impact on the budget, right?

Oil tax mechanism

At $122 per barrel, Russia’s oil tax system does exactly what it was designed to do: take the upside. Not all of it. But most of it.

The mechanics of how the tax works are dry, buried in tax code and coefficients. The outcome is not. Once Urals moves into three digits, the split between the state and the companies tilts hard towards the budget. The MinFin has always sought to balance the need to tax lightly enough when prices are low so companies can still afford to develop new, marginal, fields, but when prices rise, the state taxes away as much of the profit as it can.

Diving into the details: the simple version is the state captures 58.4% of revenue above $13.5 per barrel, the spine of today’s system, but as prices rise the slider moves towards a progressively biggest share of the profit going into state coffers.

“At the Urals price of $39.20/bbl recorded in December 2025—the lowest in recent years—oil companies retain approximately $24/bbl. If the upstream division does not encroach on the refinery subsidy, it retains $22.65,” Sergey Vakulenko, a fellow at Carnegie Endowment for International Peace said in a recent note. “How the Russian budget is doing with only $15/bbl—compared to the roughly $25/bbl assumed in the 2026 budget—is a separate discussion. The question being addressed here is whether Russian oil production is viable at this level of net revenue.”

With Urals at $39/bbl the Russian oil industry is close to its floor. At those prices companies stop developing new fields and will close older ones down as they cease to be economically viable. The cost of lifting a barrel of oil out of the ground varies widely in Russia from between $4 to $40, but many of the largest fields in Western Siberia have long since reached the end of their useful lives and investment in the last years has doubled simply to keep production flat. New fields in Eastern Siberia remain underdeveloped as massive investment into new infrastructure is still needed to hook them up to the distribution system.

Tax the barrel, not the profit

The Kremlin does not really trust oil companies to tell it what they earn. So, it doesn’t ask. Russia’s oil sector is unusual as many of the largest companies were privately-owned after the oligarch free-for-all in Yeltsin’s days. Usually, the big oil companies are owned by the state, but many of the best companies were captured by oligarchs in the infamous loans-for-shares deals in 1995-96.

After taking over in 2000 Russian President Vladimir Putin mounted a slow but steady campaign of renationalisation, starting with the arrest of oligarch Mikhail Khodorkovsky and an “auction” during a “bankruptcy process” of his Yukos oil company. It was bought by the state-owned oil giant Rosneft. From the four biggest oil companies in the sector, number two Lukoil and number four Surgutneftegas, are still privately-owned. The other big company, Gazprom Neft, was formed when the state-owned gas giant Gazprom bought Sibneft, the privately-owned oil company of oligarch Roman Abramovich, a close Yeltsin and Putin associate.

In the Yeltsin-era, the oil export business was riddled by “transfer pricing” schemes: oligarchs set up “trading companies” based in places like the BVI and “sold” their oil company’s oil for a nominal $1 per barrel to these entities before the trading company would then sell them on to the international market at full price. Billions of dollars accumulated in offshore havens and the Russian tax man didn’t see a penny.

Today MinFin doesn’t rely on trying to tax dodgy export deals. Instead, it taxes what it can see: price, volumes, geology. The new system taxes oil when it comes out of the ground, the mineral extraction tax (or MET in English but also abbreviated to NDPI from the Russian for “tax on the extraction of mineral resources”).

This tax is layered with adjustments to encourage the development of more difficult to develop or expensive fields, plus there is a secondary profits-based tax — the Additional Income Tax (NDD) — for selected fields.

On top of these taxes sits the “damper”, a mechanism that rebates or claws back money to keep domestic fuel prices in check so when the cost of a barrel spikes, the cost of gas at the pump doesn’t.

It is not an elegant system. But it is transparent and difficult to game.

“The NDPI formula became a battleground between industry lobbyists and Ministry of Finance officials seeking new revenue sources to plug budget deficits during low oil price periods, accumulating a dense thicket of coefficients, ‘slap-ons,’ deductions, and surcharges,” Vakulenko said. “The relevant chapter of the Tax Code started to resemble—in the words of one Finance Ministry official—a textbook on petroleum geology, oil drilling, and production engineering.”

The guiding principle is simple: capture the rent, don’t rely on reported profits. Which also means: when prices rise, the state gets paid first.

The old system was blunt, effective, and now gone

Through the early 2010s, the model was cruder but easier to follow.

·       Above $25 per barrel:

o   NDPI: $2.2 per barrel + 22% of price increase

o   Export duty: $4 per barrel + 60% of price increase

·       Effective marginal tax:

o   82% on crude exports

o   62% on refined products

It achieved two objectives: keep domestic fuel cheap (export duty creates a gap between domestic and global prices); and push companies to refine rather than export crude. And it worked as long as Soviet-era fields kept delivering cheap barrels.

They didn’t. By the early 2010s, depletion and rising costs meant new projects needed real investment. The system, designed to strip out rent, started to choke off production.

One former deputy finance minister described the adjustment process bluntly: “The tax system was tuned by ear. We’d raise taxes on various pretexts and by various means until the companies started screaming too loudly, then we’d ease it up a bit, then slowly raise them again until the next round of screaming,” Vakulenko related from his conversations with officials at the time.

That approach does not scale well when your resource base is getting harder to extract.

So, the system evolved. Export duties were phased out. NDPI moved to the centre stage. NDD was added to reintroduce some link to profitability without giving companies full discretion over reported costs. And the result is a new layered system:

·       NDPI: baseline extraction tax, formula-driven

·       NDD: additional income tax, field-specific

·       Damper: stabilises domestic fuel prices

·       Multiple coefficients were introduced to take account of depletion, geography, and field complexity

In theory, this allows the state to: capture windfalls when prices rise; avoid killing marginal projects; and maintain production over time

In practice, it creates something harder to model than to describe.

Sanctions a company problem first

Ironically, the new system not only secures MinFin’s revenues, but it also deflects oil sanctions on Russia, by putting a buffer in between the budget and the sanctions: Russia’s oil companies. Sanctions hit exports. The Kremlin taxes production. They are not the same thing.

When Russian crude trades at a discount, or flows are constrained, the first-order impact is on company revenues. The state’s take — calculated through formulas linked to benchmark prices — adjusts more slowly. Put differently: the pain shows up in corporate earnings before it shows up in the budget.

Russia’s oil and gas revenues have already fallen from around 50% of total budget revenues in 2011–2014 to roughly 23% in 2025 so oil and gas revenues are still critical, but no longer dominant. In the meantime the main tax earner is now VAT, which currently accounts for around 40% of all revenues and as it is a tax purely on domestic goods, it is impossible to sanction. This January, strapped for cash, the Kremlin finally decided to hike taxes to close the gap: it was VAT that saw a 2 percentage point rise to 22% that will earn an extra RUB1.3 trillion ($14.5bn) for the budget – the equivalent of the budget’s entire oil and gas revenues.

1Q26 budget results reality check

If $122 oil automatically fixed the budget, the numbers would already show it, but they don’t. The higher oil price needs time to feed through to the budget receipts and the company results buffer between the budget and exports also delays the feed through. The price of oil has moved. The cash hasn’t.

In the first quarter, oil and gas revenues fell 45.4% year-on-year to RUB1.44tn ($15.8bn), “primarily due to lower oil prices”. Total revenues dropped 8.2% to RUB8.31tn ($91.4bn), while spending rose 17% to RUB12.89tn ($141.8bn) – mostly on defence spending. The budget deficit hit RUB4.58tn ($50.4bn) or 1.9% of GDP — already beyond the full-year plan of 1.7%.

Before the Iran war started, the Kremlin was under growing pressure. MinFin announced it was going to cut spending by 10% to try and close the gap and Russia’s opponents cheered that the Kremlin was under growing pressure to end the war in Ukraine. Indeed, some have argued that Putin entered into the Moscow meeting discussions on December 3 with the US envoys that produced a 27-point peace plan (27PPP) because he needed to bring the war in Ukraine to an end for economic reasons.

That pressure might be off now. Russia accelerated spending into March, reportedly by as much as 44%, betting that higher oil prices linked to the Iran conflict would refill the coffers from April.

From this perspective, the two-week ceasefire deal agreed at the weekend could be bad news for Russia. If the Strait of Hormuz reopen then oil prices will come down again, reducing the windfall. However, oil experts argue that the Strait will remain a “risk zone” and Russian oil, which goes nowhere near the Straits, will retain much of its premium for the foreseeable future. However, the situation in the Gulf remains extremely fluid and the Kremlin is watching closely.