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Alexander Khurshudov: Subsidies for fuel production may result in Russia being heavily fined by WTO

April 01, 2019/ 07:11

Moscow. The government failed to decide on increasing the compensations given to oil companies for supplying fuel to the domestic market at the March 26 meeting. The Ministry of Finance representative ignored the meeting, where the participants opposed adjusting the damper component of the reverse excise duty that could bring oil companies an additional 120–190 billion rubles a year. Following the meeting’s results, the Ministry of Energy head Alexander Novak announced a change in the formula for the damping component of the reverse excise duty on oil.

The damper is supposed to protect the domestic fuel market from oil price fluctuations, so, when fuel export price is high, the government pays oil companies some of the difference between the export price and a conventional domestic price. The total amount of payments to oil companies is estimated at 340 billion rubles this year.

Alexander Khurshudov, the Oil and Gas Information Agency expert, comments on the news:

"... Adjusting the damper component of the reverse excise duty ..." Does everyone understand this? Our officials are great masters in inventing sophisticated terminology. I, on the contrary, will try to present the problem in simple words, so let me start for the beginning.

When joining the WTO, Russia pledged to limit export duties on oil and gas to 30% of their price. Previously, oil duties reached 50%; the WTO members felt that cheap petroleum products would become a competitive advantage for our industry. Duties were reduced, and in order to compensate for budget losses, MET was increased proportionally.

That would be fine if Belarus didn’t get 20-22 million tons/year of oil duty-free under the Customs Union, while our budget lost approximately $2 billion a year. The amount is not critical for the Russian Federation. However, freebie corrupts, the Ukraine being a good example to that. So, 5 years ago the Ministry of Finance came up with a draft of tax maneuver, which provided for eliminating export duty on oil and increasing mineral extraction tax and excise duty on petroleum products instead.

It doesn’t take a scientist to understand that with such "maneuvering" oil export was bound to rise sky high, so they would have to increase the prices for petrol and other petroleum products to keep the product in the country. However, this wasn’t that obvious to the people working in the Duma and the Cabinet, so they didn’t hesitate to pass the law.

The inevitable happened. In 2015, exports increased to 244.5 million tons (by 9.4%), while petrol prices went up by 8.3%. But then oil prices fell, a huge hole in the budget grew, so the tax maneuver was suspended for 3 years for the sake of saving the budget.

They returned to "maneuvering" last year. The moment was convenient - with the presidential elections coming oil companies were gently advised to keep fuel prices as firm as the President’s word until the inauguration. They restrained themselves until May and then petrol and diesel prices went up by 7-8.5%, and the price for liquefied petrol gas increased by a third over the year.

Excise duties on fuel were urgently reduced, which allowed to stabilize prices for a while. Earlier this year the law was changed again, a special “damping” mechanism and a negative excise duty were introduced to mitigate fluctuations in the global prices. The idea of the innovation is when oil is expensive, the government pays extra to refiners so that they do not lose revenue, and when the price is low, excise duty is applied.

There is nothing like this in the world. There is neither negative salary, nor negative benefits, nor negative taxes. There payments from the budget are called subsidies or dotation. The EU, for example, spends a third of its budget on subsidies to farmers.

Why did they have to invent such confusing terminology? Because subsidies for fuel production are not provided for by the WTO-Russia agreement. This may entail lawsuits and heavy fines. I think that now our sworn "partners" are eagerly awaiting for the subsidies’ volume to reach a significant amount to initiate a large lawsuit for their virtual losses.

How big may the fine be? With oil prices at $80 per barrel and 140 million tons/year processing the amount of "negative excise duties" could reach 780 billion rubles ($ 12.1 billion). It is 6 times more than the mentioned subsidies to Belarus. Though, money can’t buy happiness, can it? No, it can’t. Happiness is having the kind of government that does not sleep at night, worrying sick, bending over backwards for the fourth time with the ill-fated maneuver to please business and us, the citizens once again. So, we will thank them for their efforts with a negative support.


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