Russian Ministry Of Finance Considers New Oil Tax Regime

by Tatiana Smolenskaya, Tax-News.com, Moscow

05 February 2010

Faced with a budget deficit rising from 5.9% to 6.8% of GDP in 2010, the Russian Ministry of Finance has set up a working group to report by March 1 on the affordability of zero export duties on oil from east Siberia and other means of incentivising development in the East.

The lifting of zero export duties in East Siberia to incentivise production in this remote and difficult region was announced in June 2009 and extended in December from 13 to 22 fields with certain other adjustments. The latest tax breaks became effective on January 19, days before the same benefits were brought into question.

Finance minister, Alexei Kudrin, has been sending mixed signals to the market about incentives to boost oil production by inferring that he wished to remove benefits from Rosneft's Vankor oil field to plug a short term gap in Russia's finances.

The ministry of finance's short term concerns hinge around the fact that the ministry was unable to revise downwards the deficit for 2010 despite rising oil prices; the oil price used as a basis for the budget was increased from USD58 to USD65 per barrel. 2009 fiscal stimulus measures arising from the crisis, especially the reduction of income tax from 24% to 20%, are cited as reasons for failure to make inroads on the deficit. The measures are proving difficult to reverse.

Although denying earlier reports that zero export duty benefits would be removed from East Siberian Oil in general at Davos, Kudrin had to admit that his working group needed to investigate 'windfall' gains on specific fields. The Vankor field in particular stands to lose the zero export duty benefit on the 60% portion of its production which is heavy oil.

Kudrin told reporters at Davos that they need to establish a special rate of export duty based on 'the economics of a particular field'. This is described as part of a wider object to move away from oil export duties and mineral extraction tax towards a uniform tax regime based on the excess profit. Peter O'Brien, chief financial officer at state-controlled oil company Rosneft, told the Wall Street Journal not to expect a change to profit-based oil taxation system before 2012.

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