MOSCOW - Russia, entering its first recession in a decade, can ill afford to grant major new tax breaks to its oil industry, which has avoided a freefall in production with support from the ruble currency's devaluation.
As budget revenues dwindle and the economy shrinks, analysts and officials say the government has made social and macroeconomic stability -- which rely as much as ever on energy export revenues -- its top priorities.
Sacrificing oil output growth for another year would be a painful but almost unavoidable move, and the government can only hope oil prices recover when demand growth resumes, thus boosting oil firms' revenues.
"Cutting taxes would be a brave move in the crisis, given the mineral extraction tax and export duties constitute around a third of budget revenues," Sobinbank analyst Alexander Razuvayev said.
"The main question is whether the government will want to put social stability and the budget at risk to support oil firms' profits."
Prime Minister Vladimir Putin's government will meet on Wednesday and Thursday in the northern town of Kirishi, home to one of Russia's largest refineries, to discuss measures to support oil processing and new tax incentives.
Anatoly Golomolzin, deputy head of Russia's anti-monopoly service, said participants could discuss ideas for changing the current system of export duties and the mineral extraction tax.
Russian media reported on Tuesday the oil lobby might ask to replace these taxes with an excess profit tax, which would allow companies to pay comparatively less tax overall in a low oil price environment.
"There are no pre-determined decisions. Companies will have a chance to express their wishes," a government source told Reuters on condition of anonymity because he is not allowed to talk to the press.
PROFITS RECOVER
Another government source said the Finance Ministry, run by fiscal hawk Alexei Kudrin, would oppose any move to ease the tax burden on an oil sector that already won about $5 billion in tax breaks last year.
The previous move was designed to encourage investment in reviving growth in Russian output, which last year fell by around 1 percent for the first time in a decade.
"The government is not really panicking about oil production declines. They know that, in order to restore the supply-demand balance, oil production should decline overall globally," said Chirvani Abdoullaev, senior oil and gas analyst at Alfa Bank.
This decision to cut taxes was made a few months before Russia felt the full impact of the global financial crisis. Its foreign currency reserves have tumbled by a third to $388 billion due to heavy support of the ruble and industry.
The oil sector was among the worst hit at the end of last year due to a mismatch between high export duties and tumbling prices, but the situation improved in January after oil prices stabilized and duties were adjusted on a more frequent basis.
Oleg Maximov from Troika Dialog brokerage estimated the Russian oil industry's average EBITDA (earnings before interest, taxation, depreciation and amortization) per barrel at $10.3 in January, compared with a loss of $0.5 in December.
Strong support also came from a 35 percent ruble devaluation, a clear reminder of how the previous currency collapse after the 1998 financial crisis made the oil industry the engine of a decade-long period of economic growth in Russia.
"We doubt the government's commitment to structural changes to the taxation system in the low oil price environment, as it threatens the sustainability of the budget," Irina Elinevskaya, analyst at Renaissance Capital, said.
The government will face a budget deficit of up to 8 percent this year and has pledged sharp cuts in infrastructure spending to be able to spend more on social measures to avoid job losses.
Putin in January ordered the 2009 budget be reworked at an oil price of $41 per barrel, less than half the $95 planned originally.
Elinevskaya said she believed the excess profit tax could be used as a one-off decision for some hard-to-develop fields, especially in East Siberia, rather than apply to all deposits.
Alfa Bank's Abdoullaev said another advantage of the current tax system was the relative ease with which it is administered.
"If you move to a profit-based system, you have to impose a more stringent system of monitoring oil companies, as there could be a tendency among the oil business to inflate costs so they can pay less profit tax," he said.
As budget revenues dwindle and the economy shrinks, analysts and officials say the government has made social and macroeconomic stability -- which rely as much as ever on energy export revenues -- its top priorities.
Sacrificing oil output growth for another year would be a painful but almost unavoidable move, and the government can only hope oil prices recover when demand growth resumes, thus boosting oil firms' revenues.
"Cutting taxes would be a brave move in the crisis, given the mineral extraction tax and export duties constitute around a third of budget revenues," Sobinbank analyst Alexander Razuvayev said.
"The main question is whether the government will want to put social stability and the budget at risk to support oil firms' profits."
Prime Minister Vladimir Putin's government will meet on Wednesday and Thursday in the northern town of Kirishi, home to one of Russia's largest refineries, to discuss measures to support oil processing and new tax incentives.
Anatoly Golomolzin, deputy head of Russia's anti-monopoly service, said participants could discuss ideas for changing the current system of export duties and the mineral extraction tax.
Russian media reported on Tuesday the oil lobby might ask to replace these taxes with an excess profit tax, which would allow companies to pay comparatively less tax overall in a low oil price environment.
"There are no pre-determined decisions. Companies will have a chance to express their wishes," a government source told Reuters on condition of anonymity because he is not allowed to talk to the press.
PROFITS RECOVER
Another government source said the Finance Ministry, run by fiscal hawk Alexei Kudrin, would oppose any move to ease the tax burden on an oil sector that already won about $5 billion in tax breaks last year.
The previous move was designed to encourage investment in reviving growth in Russian output, which last year fell by around 1 percent for the first time in a decade.
"The government is not really panicking about oil production declines. They know that, in order to restore the supply-demand balance, oil production should decline overall globally," said Chirvani Abdoullaev, senior oil and gas analyst at Alfa Bank.
This decision to cut taxes was made a few months before Russia felt the full impact of the global financial crisis. Its foreign currency reserves have tumbled by a third to $388 billion due to heavy support of the ruble and industry.
The oil sector was among the worst hit at the end of last year due to a mismatch between high export duties and tumbling prices, but the situation improved in January after oil prices stabilized and duties were adjusted on a more frequent basis.
Oleg Maximov from Troika Dialog brokerage estimated the Russian oil industry's average EBITDA (earnings before interest, taxation, depreciation and amortization) per barrel at $10.3 in January, compared with a loss of $0.5 in December.
Strong support also came from a 35 percent ruble devaluation, a clear reminder of how the previous currency collapse after the 1998 financial crisis made the oil industry the engine of a decade-long period of economic growth in Russia.
"We doubt the government's commitment to structural changes to the taxation system in the low oil price environment, as it threatens the sustainability of the budget," Irina Elinevskaya, analyst at Renaissance Capital, said.
The government will face a budget deficit of up to 8 percent this year and has pledged sharp cuts in infrastructure spending to be able to spend more on social measures to avoid job losses.
Putin in January ordered the 2009 budget be reworked at an oil price of $41 per barrel, less than half the $95 planned originally.
Elinevskaya said she believed the excess profit tax could be used as a one-off decision for some hard-to-develop fields, especially in East Siberia, rather than apply to all deposits.
Alfa Bank's Abdoullaev said another advantage of the current tax system was the relative ease with which it is administered.
"If you move to a profit-based system, you have to impose a more stringent system of monitoring oil companies, as there could be a tendency among the oil business to inflate costs so they can pay less profit tax," he said.
