World Economy

Russia Studying Oil-Tax Increase to Narrow Budget Gap

Russia Studying Oil-Tax Increase to Narrow Budget GapRussia Studying Oil-Tax Increase to Narrow Budget Gap

Russian may raise taxes on its main source of revenue–crude producers–to narrow its budget deficit starting from next year, two people with knowledge of the matter said.

The authorities in Moscow have started discussions with companies about changing at least a crude-extraction tax formula, one of the people said. The modification, if approved, could bring the state about 609 billion rubles (around $9 billion) next year and 1.6 trillion rubles through 2018, he said, citing finance ministry estimates. Both people asked not to be identified because the information isn’t public yet, Bloomberg reported.

Russia’s oil producers haven’t been impacted much by the drop in prices thanks to a weakening ruble, while “the government take has fallen a great deal,” said Sarah Emerson, managing director of ESAI Energy Inc., a consulting company in Wakefield, Massachusetts. “We won’t know if there will be an impact on production until we get all the details.”

While different ministries are now suggesting various measures to increase budget revenue and reduce spending, there’s no final decision yet, Natalya Timakova, a spokeswoman for Prime Minister Dmitry Medvedev, said by phone Friday. Officials should agree on the measures to be included in next year’s budget, she said. The government is set to submit the draft budget to parliament by Oct. 25.

The world’s biggest energy exporter is struggling to shake off its first recession in six years after a slump in oil prices. Russia relies on oil and gas for about half of its budget earnings, with taxes on the extraction and export of crude accounting for about 32% of revenue. These earnings were 2.49 trillion rubles from January to July, 16% lower than a year ago, according to Bloomberg calculations based on Russia’s Treasury data.

 Financial Squeeze

Russia is facing an “unprecedented” financial squeeze from the selloff in oil, which is similar to the 1980s collapse in world crude prices that undermined the Soviet Union, Deputy Finance Minister Maxim Oreshkin said Thursday.

The nation’s budget deficit was 994 billion rubles through August this year, or 2.1% of gross domestic product, according to the finance ministry. It forecasts a 2016 deficit of no more than 3% of GDP if oil averages $50 a barrel, Oreshkin said. Brent crude, the international benchmark, traded at about $47 in London Friday.

Russia’s oil extraction tax formula implies a minimal crude price of up to $15 a barrel that is not subject to a levy. The sum is taken away from the tax in rubles using the Bank of Russia’s exchange rate. The finance ministry proposes to cut this deduction by using an exchange rate of 43.8 rubles per dollar, close to the rate in the fourth quarter of 2014, rather than a 63.5 ruble rate estimated for next year, one of the people said.