Russia’s largest oil companies are expressing concerns about the heavy tax burden and domestic fuel price controls that are resulting in negative returns on production and retail trade. These complaints were raised in response to a request from Pavel Zavalny, the head of the energy committee in Russia’s lower house of parliament, who wanted to assess the impact of taxes on fuel prices.
The issue was brought to light after a spike in wholesale fuel prices in September, prompting the Russian government to take drastic measures. Initially, a temporary ban on diesel and gasoline exports was introduced, and although the restrictions on diesel were later lifted, the ban on gasoline shipments remains in effect.
According to Nail Maganov, the CEO of Russia’s Tatneft, the increase in taxes on production and refining, combined with state price controls, has severely impacted the profitability of the retail business. Maganov argues that these circumstances have made the industry unattractive for investment and development.
Maganov highlights that the current tax burden on gasoline amounts to 77.2%, while for diesel it is 77.3%. When transportation costs are factored in, the tax burden reaches 85.7%. Consequently, Tatneft is experiencing negative returns on the production and sale of fuel in the domestic market.
Surgutneftegaz, another major oil company, also reports that the tax take on gasoline amounts to 110% of the final disposal price, while diesel is at 102%. This leaves little money to cover rental taxes, excise duty, and value-added tax (VAT).
The Russian government has been implementing oil tax changes since 2018, with the aim of gradually reducing oil export duty and simultaneously increasing the mineral extraction tax. The export duty is set to be completely eliminated by 2024, as it serves as an indirect subsidy for refiners, reducing the price of oil on the domestic market. Local oil companies have been provided with a reverse oil excise tax and a fuel damper as partial compensation for the loss of this subsidy.
Initially, the government planned to cut the fuel damper in 2023, but it has decided to retain it for now. The Ministry of Finance and the Ministry of Energy are currently discussing ways to finance it. In the past, the government has frequently raised the mineral extraction tax on oil under similar circumstances.
These challenges in the oil industry have significant implications for the Russian economy. The heavy tax burden and price controls are discouraging investment and hindering the industry’s development. The negative returns on production and retail trade are likely to put a strain on the profitability of oil companies and potentially affect economic growth.
Overall, the concerns raised by Russia’s oil giants highlight the need for the government to reassess the tax burden and price controls in the industry. Finding a balance between supporting domestic consumption and maintaining the profitability of oil companies will be crucial for the long-term growth and stability of the Russian economy.
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