Russia’s energy industry is hit by Kremlin tax hikes

Putin increases levies on oil groups after G7 sets price cap for Russian crude.The G7-led price cap on Russian oil exports has forced the Kremlin to raise the tax burden on producers, dealing a fresh blow to an energy sector already struggling with western sanctions, according to officials from the western coalition.

A member of the G7 led coalition shared an analysis of the tax changes, and found that it was likely to backfire, as the move would sacrifice the industry’s long-term investment ability in order to fill a financial gap for the government.

A coalition official stated that “it is certainly destructive to their industry”.

“Russia’s change will. . . “The Russian oil and gas industry’s future production capacity is being undermined by the removal of revenues that would otherwise have been used to invest into equipment, exploration, and existing fields.”

Vladimir Putin changed Russia’s method for taxing oil companies in April by establishing levies that are based on Brent crude’s international benchmark price, minus a set discount, instead of the price of Urals crude, the main export crude of the country, which had been trading at lower prices over the past months.

This move was made by Moscow in order to increase oil export revenues and fill the gap caused by Western sanctions that were aimed at cutting off funding for the Ukraine War.

The Russian tax revenues on oil and gas products fell by 45 percent in the first quarter 2023 compared to the same period the previous year. In March, the decline was 85 per cent. According to the official, 45 percent of Russia’s budget is derived from these revenues.

The official stated that “the tax changes they make is prima fac evidence that their revenue has suffered significantly.”

After months of discussions, the G7 price cap was set at $60 per barrel in order to maintain Russian oil’s flow to the global market and minimise disruptions to markets while reducing Moscow’s revenue. Western officials claim that the G7 price cap, set at $60 per barrel for crude oil, is achieving both of these goals in their strategy to make the Kremlin face “hard economic choices” if they want to continue financing the war. The official of the G7 coalition that oversees price caps said that Russia had stolen from its future to pay for this “present” war.

OilX, an Energy Aspects division, says that the drop in Russian oil production last month was 10.4mn barrels per day. This could be due to the Kremlin threatening a reduction of output as a reaction to the price caps, OilX said. OilX reports that exports, mainly to Asia, were at 4.7mn B/d. This is below the five-year average. Customs data suggest that Russian oil producers achieved higher prices at least for some exports, even though G7 countries think their price cap works as intended. Last month, the International Energy Agency calculated that the weighted-average price of Russian crude exports was above the $60/b price cap in April. One crude stream in the Far East sold in recent weeks at up to $74/b.

Brent crude traded this week at $71.40/b – down almost 30 per cent from a year earlier

G7 central bank governors and finance ministers will meet in Japan in this week, ahead of the leaders summit in late month. The focus of the talks is expected to be on Russian sanctions. The coalition official stated that the focus would be on how the price cap worked.

Officials said that members of the G7 led price cap coalition will also “intensify their efforts to combat evasion” including using deceptive tactics to gain access to coalition services when oil is traded above the cap in the future.

Officials said that the G7 Price Cap Coalition would help oil service providers to comply by pointing out “red flags”, such as “manipulation in the tracking of ships or failure to separate shipping, freight and customs costs from the oil itself”.

Moscow’s recognition that Russian oil is likely to trade at a lower price than world markets in the near future can be seen by taxing oil sales on the basis of a discount from Brent prices instead of the Urals price. Officials from the coalition for a price cap said that it was “a sea change” in Kremlin policy. Even if the tax system was designed to increase revenue, the Kremlin would still have been viewed as unfavourable before the conflict.

According to the analysis of the coalition member, if Russian oil was taxed on Brent prices less a fixed discount, rather than Urals, before the Ukraine War, the Kremlin would have had lower monthly oil revenues between $5bn-$6bn.