Moscow Mulls Ways to Protect Budget Income

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Moscow is looking for ways to mitigate the damage to the state budget from lower oil and gas revenues caused by sanctions against Russia for its war in Ukraine.

In response to a call from President Vladimir Putin earlier this month, a number of options have emerged.

One under consideration would be to change the mechanism of assessing the price for Russia's Urals crude oil export blend, which has important implications for the calculation of Russia's mineral extraction tax (MET) and other oil industry levies that form the bedrock of the country’s oil and gas revenues.

Russian oil companies have also proposed wider tax changes to protect themselves from sanctions imposed because of Moscow's war in Ukraine. This could start a discussion on finding a new balance between the interests of the producers and the state budget.

The decision on whether the government would be ready for significant changes to the taxation system is expected in the second quarter of this year.

Urals Pricing Options

The issue of changing the assessment of the Urals price has been on the agenda since March last year, when Western pricing agencies like Platts left Russia. Discussions intensified later in the year after Argus, which Russia’s finance ministry uses to calculate taxes, altered the way Urals is assessed from the previous Urals NWE c.i.f. Rotterdam and Urals Med Aframax c.i.f. Augusta to free on board (f.o.b.) pricing at Russia's Baltic Sea ports of Primorsk or Ust-Luga and its Black Sea outlet at Novorossiysk.

Russia’s finance ministry was quick to react, saying that the changes could result in a loss of 1 trillion rubles ($14.4 billion) for the budget. That's because a shift to f.o.b. would automatically lower the price of crude that would be used for tax calculations because it wouldn't include freight, insurance and ice/towage fees.

With the Argus assessment becoming more irrelevant recently after the Dec. 5 embargo kicked in, various options have emerged on how to change the way Urals is assessed to support budgetary revenues.

One of the offers made recently, according to the Vedomosti business daily, is to link the price of Urals to a monthly average of the Brent and Dubai crude benchmarks and apply a discount of $10-$15/bbl. The move could automatically raise the average Urals price used for tax calculations to over $70/bbl — a threshold for Russia's budget for 2023. However, that would inevitably raise the tax burden on the oil sector, which Russian companies strongly oppose.

Experts also point out that a link to Brent, a benchmark for Europe, is equally pointless, given the loss of the European market for Russia as a result of sanctions and the EU oil embargo.

Another option being promoted by St. Petersburg International Mercantile Exchange (Spimex) would use the exchange's own price index based on the data on real deals that it receives in line with Russian legislation.

Finally, the energy ministry should by April start keeping track of crude export prices on the basis of actual sales data provided by companies. This could be used later to put together an average export price for Urals, some experts suggest.

Industry View

Representing the views of the country's oil industry, the founder and former major shareholder of mid-sized producer Russneft, Mikhail Gutseriyev, has written a letter to the government supporting the switch to an f.o.b. basis for the Urals assessment and the creation of a national benchmark.

But he also proposed that any considerations of the Urals price and the US dollar exchange rate should be excluded completely from MET calculations. Instead, he believes that MET should be valued at 50% of the oil sales price on the domestic market, Russian news service Interfax reported.

In case international sale prices exceed domestic prices, the difference could be paid in the form of the export duty, according to Gutseriyev's initiative.

Gutseriyev also proposed canceling the excess profit tax, a special tax regime that has been applied to a number of already producing fields and greenfields in West and East Siberia, as well as in the Arctic onshore, as part of a new tax regime experiment.

He believes that sanctions against the Russian oil industry would lead to greater expenses and cash shortfalls which could create delays in tax payments by producers.

Ready or Not?

The government will not make any hasty moves. Referring to the jump in pricing discounts for Russia's crude exports, Economic Development Minister Maxim Reshetnikov said last week that it would be "senseless" for Moscow to make policy adjustments based on short-term market developments.

He said the government would look at "the medium-term trend" in March-April and adjust its plans accordingly, if necessary.

For more coverage of the Ukraine crisis, visit Ukraine Crisis: Energy Impact

Ukraine Crisis, Sanctions, Fiscal Terms, Policy and Regulation
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