Russia Future Bleak
World Economy

Russia Future Bleak

Things are getting bad in Russia, so bad that the country is weighing sacrificing its future in order to survive its present.
A conflict is simmering in Russia as the country’s finance ministry pushes for increased taxation of the country’s oil industry in order to support its budget. A contracting economy and a persistently low oil price have severely hurt the country’s budget, so officials are seeking to draw more revenue from domestic energy companies—instead of severely cutting costs, which Moscow fears could bring dire political consequences.
This plan likely makes short-term sense to the Kremlin, but it could cripple the oil industry—and by extension Russia’s long-term growth prospects—for years to come, experts told CNBC.
“This would have decades long effects,” Lauren Goodrich, a senior Eurasia analyst at geopolitical intelligence firm Stratfor, said of a strong tax on the oil industry. If Russia’s energy resources don’t see new investments in the next two years, she said, then the country could experience lengthy declines in oil production—old Soviet-era wells drying up, without new ones coming on.
With sanctions keeping western energy investments at bay, and with many Chinese investors likely tapped out, the domestic energy companies are Russia’s best hope for maintaining production levels in the fiercely competitive global market.
“They really have to have investment money coming in, whether it’s from foreign firms or Russian firms,” Goodrich said. “The Kremlin is really, really in a tough spot.”

  Economy Shrinking
Western sanctions, low oil prices, and high military and governmental costs have hurt the country: State statistics released Friday show that the economy contracted 3.7% in 2015 compared with the prior year. Meanwhile, the ruble has depreciated by about 55% since 2014.
Despite all that, Russian oil companies have been doing alright.
By virtue of earning profits in dollars and paying domestic costs in rubles, Russia’s energy giants have fared better than many of their international peers. The Russian government, however, has tied its progressive tax collection to the price of oil, so its receipts are much lower at the current sub-$40 price than when a barrel exceeded $100.
Oil-related taxes reportedly totaled nearly 50% of Russian tax revenue in 2014.
The progressive tax has allowed domestic firms to maintain a dollar or two of profit on each barrel of oil, Russian economic experts said, but that could dissipate with any new reforms.
“At the current oil prices, with the single-digit dollars-per-barrel profit, it raises the question of whether you’re going to eat your seed corn or not in terms of growth later,” said William Courtney, an adjunct senior fellow at the Rand Corp. and a former US ambassador to Georgia and Kazakhstan.
But not everyone believes Russian energy tax reform will cripple the country’s future prospects.

  Wishful Thinking
Ildar Davletshin, a London-based oil and gas analyst at Renaissance Capital, told CNBC he sees the government seeking to raise those taxes if oil remains below $50—as many analysts expect it to. If that happens, the production decline from lost investment will be only a few percentage points, he said, and that would not have drastic effects on the economy.
In fact, Davletshin said, the slight decrease in production from such a major global supplier could push prices higher—bringing even more revenue to Moscow. That money could, in turn, be used to diversify Russia’s economy away from oil dependence and into higher-value industries like technology.
But others said that scenario is only wishful thinking. “That argument doesn’t hold any water for me: Russia is an oil economy and has been even from the czarist days,” Goodrich said.
The politically powerful energy lobby is likely to fight against any and all tax increases in coming months, although the government may attempt to sweeten the deal by opening up resource monopolies or picking sides in acquisition competitions.
Either way, the real fireworks are likely to come in the fall, experts said, when negotiations over the 2017 budget come to a head.

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