Planned tax hike leads to dire predictions

02 November 2016, Week 43, Issue 905

The Russian government has introduced amendments to the Tax Code in the State Duma that will see the mineral extraction tax (MET) rate increased for the oil companies and Gazprom.

The move is aimed at raising another 200 billion rubles (US$3.2 billion) from the industry in 2017, along with an extra 250 billion rubles (US$4 billion) in 2018 and 300 billion rubles (US$4.7 billion) in 2019.

Producers’ reactions to the proposal have been predictably negative. LUKoil president Vagit Alekperov stated that his company would reduce its investment programme for 2017 by an “insignificant” 45-50 billion rubles (US$711-790 million), according to Vedomosti. That is a reduction of 9-10% from figures Alekperov cited to Kommersant a month ago. “The growth of taxes is always tied to the investment activity we are capable of,” Alekperov said.

Last week, Gazprom Neft CEO Alexander Dyukov said: “We planned to increase investments in production, exploration and processing. But Finance Ministry plans have forced us to re-examine our investment plans.” Instead, the company will hold investments steady at the 2016 level of 362 billion rubles (US$5.7 billion), TASS reported. The company declined to say how much it had intended to increase investment by. 

The tax burden on the oil industry ballooned by 150 billion rubles (US$2.4 billion) in 2016 when the US$42 per barrel export duty was retained. As a result, investment this year remained at the level of 2015, according to data from New York-based Fitch Ratings. The agency estimated that investment in the Russian oil industry would fall by 5% in 2017-2018.

Raiffeisenbank analyst Andrei Polischuk commented to Vedomosti that the stated reasons for changes in investment plans might be somewhat disingenuous, however. According to Polischuk, most of the spending cuts will occur in the refining sector, but this will partly be because of the recent completion of sweeping upgrades at facilities. 

Changes in investment levels make themselves felt with a lag of several years, noted the deputy director of the Institute of Energy and Finance, Alexei Belogoriev. Companies may be holding off on investing until the introduction of the windfall tax that is planned to replace MET, he told Vedomosti. The new tax will create more advantageous investment conditions.

The timeline for the introduction of that tax will be one of the topics discussed at the next meeting of the presidential commission on the fuel and energy complex. Unresolved tax issues led to the postponement of that meeting last month. It is now scheduled for November 9. While the windfall tax was originally slated to go into effect next year, the Finance Ministry missed a deadline to prepare documents for it, and industry representatives at the commission meeting are expected to press for “tax stability” rather than more reform.

Joseph Murphy

Edited by

Joseph Murphy


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