Russian Official Suggests Oil Companies Should Pay 'Rent' To Government

by Tatiana Smolenska, Tax-News.com, Moscow

26 February 2003

The Chairman of the Accounting Chamber of Russia, Sergei Stepashin has suggested that Russia's oil companies, awash with cash as world energy prices remain in the stratosphere during the Iraq crisis, should contribute to a national budgetary support fund.

Saying that the companies' use of offshore and international mechanisms to reduce taxable profits in Russia means that the country loses out on the gains from its national patrimony, Stepashin points to hydrocarbon-rich countries such as Norway which have benefited from oil wealth.

Stepashin says that Russia's oil companies could pay a 'rent' to the Government for their access to mineral resources, and calculates that the federal budget could benefit to the tune of US$5bn or more annually.

The Accounting Chairman was speaking on Saturday in Nalchik at a meeting with deputies of the parliament of the Kabardino-Balkarskoy region, but the news of his proposal didn't seem to dent oil and gas company share prices in Moscow on Monday; and on Tuesday Gazprom's board voted to increase last week's highly successful 10-year eurobond to US$1.75bn.

Indeed analysts have uprated Gazprom in recent days, saying that the company should benefit from new accelerated depreciation rules to the tune of several billion dollars.

"In 2003, we will have some tax savings . . . We plan to reduce our taxation base due to accelerated depreciation in the next 10 years. This money will go mainly for debt repayment," chief financial officer Boris Yurlov said during a conference call with brokers last week.

Brunswick UBS Warburg said Gazprom could save up to $1.4 billion in taxes in 2003, $1.1 billion in 2004 and $900 million in 2005 due to the new Tax Code, which became effective as of January 2002. Gazprom decided to use the accelerated depreciation method only in the third quarter of last year.

Under the new tax law, Gazprom's 150,000 kilometers of pipeline, valued at $19.86 billion, can be depreciated by an average of $2.65 billion a year through 2011, as opposed to the $1.2 billion originally planned.

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