Taxing the Golden Goose: Reforming Taxation of the Oil Sector in Putin’s Russia

Abstract

There has been one defining characteristic of Russia’s approach to taxing the oil sector during the Putin era. Successive governments have illustrated an inbuilt resistance to adopting a comprehensive tax regime that would take into account the sector’s costs and profitability. This has defied international trends among a growing number of oil-rich countries. This article centres on three explanations. The concentration of power around the executive branch, the organisational setup of the oil industry and ‘path dependence’ have all made Russia less likely to shift away from its adherence to more traditional means of taxation and ad hoc policy solutions.

Notes

1 Calculation based on two datasets from the Central Bank of the Russian Federation: ‘Eksport Rossiiskoi Federatsii Syroi Nefti’, Central Bank of the Russian Federation, 2020; ‘Eksport Rossiiskoi Federatsii Nefteproduktov’, Central Bank of the Russian Federation, 2020, available at: https://www.cbr.ru/statistics/?Prtid=svs, accessed 30 June 2020.

2 This constituted about one third of all the revenues going to the consolidated budget, and over two thirds of the federal government revenues (Easter 2006, p. 36).

3 Production dropped from 10.3 million barrels a day (mbd) in 1990 to 6.1 mbd in 1999 (BP 2019).

4 For simplicity, the definition of rents follows Gaddy and Ickes (2005), whereby rents represent the difference between the total revenues generated in the oil sector and the costs that are considered ‘normal’ for this sector.

5 According to one estimate, the Russian government was able to collect only 22% of the windfall from oil and gas exports in 2000 (Jones-Luong & Weinthal 2004, p. 141).

6 ‘Obshchestvo ravnykh vozmozhnostei—neftyaniki vystupayut za izmenenie aktsizov’, Finansovye Izvestiya, 4 March 1999.

7 As one of the first significant tax reform measures under Putin, the range was eliminated as of January 2000. Oil companies were required to pay the same amount irrespective of the quality of their deposits (Reznik 1999).

8 ‘Obshchestvo ravnykh vozmozhnostei—neftyaniki vystupayut za izmenenie aktsizov’, Finansovye Izvestiya, 4 March 1999.

9 Companies benefited from international or domestic tax havens and were also able to obtain various deductions from regional governments when operating within their jurisdiction (Bazina 2003).

10 Such duties had been introduced in January 1992 but were phased out in 1996 following IMF pressure to liberalise Russia’s export regime (Bardin 1996).

11 Export duties on crude oil were raised from €5/tonne to €7.5/tonne in mid-September 1999 (‘Poshlina na neft’ budet uvelichena do 7.5 evro za tonnu’, Segodnya, 9 September 1999). Before the end of 1999, the export duty was raised once again—from €7.5/tonne to €15/tonne (‘Russia Raises Oil Export Duty to 15 Euros per Tonnes’, Interfax Petroleum Report, 10–16 December 1999).

12 In the case of export duties for petroleum products, the rules remained less straightforward and were subject to frequent fluctuations that were not always directly related to oil prices.

13 The oil sector’s revenues during this period rose from US$26.9bn to US$143.6bn. The government’s tax receipts from the sector jumped from merely US$5.6bn to US$83.2bn (Berezinskaya & Mironov 2006, p. 143).

14 In 1999, oil rents were split in favour of the oil sector: while the government collected US$5.6bn worth of taxes, the oil sector received US$6.8bn as after-tax profits. By 2005, industry’s after-tax profits stood at US$16.1bn, whereas the state’s tax receipts rose to US$83.2bn (Berezinskaya & Mironov 2006).

15 In 2005, export duties and the NDPI accounted for 50% and 33.5% of the oil sector’s tax payments, respectively. Oil companies also had to pay a relatively small amount of VAT, property and other taxes (‘Rossiiskaya ekonomika v 2005 godu—tendentsii i pespektivy’, Institute for the Economy in Transition, 27 March 2006, pp. 210–25).

16 ZATOs had been created during the Soviet period. In 1992, a federal law was enacted defining a special tax regime for such localities. The administrators of ZATOs were allowed to grant tax privileges to businesses registered in their territories (Samoylenko 2004).

17 There were three internal tax havens where most companies concentrated their tax minimisation activities: Chukotka, Mordavia and Kalmykia. Russia’s Accounts Chamber estimated the size of lost government revenues at about 100 bn rubles in 2002 (Sapsay 2004).

18 As a minor exception, regions were allowed to reduce their share of the profit tax up to four percentage points. This amendment ended all investment agreements formalised under regional laws between investors and local governments offering arrangements involving special tax treatment (Samoylenko 2004).

19 Personal interview with Igor Nikolaev, Partner and Director of Strategic Analysis, FBK, Moscow, 15 June 2007.

20 Limited exemptions were provided with respect to NDPI in new selected regions (Timan Pechora and Yamal) and for offshore fields (Zateychuk & Sterkin 2008).

21 The decline in the first four months of 2008 was 0.3% (Tutishkin 2008).

22 After the roll back, export duties for a handful of fields in east Siberia were raised. However, these fields were still allowed to pay less than those with no tax relief (‘Stavka na neft’’, Vedomosti, 18 June 2010).

23 The figures refer to all changes including tax rollbacks.

24 Known as the ‘60-66-90-100 reform’, the government calibrated the export duties by lowering them for crude oil and raising them for petroleum products (Kondrashov 2011).

25 Namely, oil companies were focusing excessively on fuel oil exports, which faced lower duties, and even selling the product abroad at a price lower than for crude oil. While a rational response to the tax regime, it represented value destruction (Vatansever 2010).

26 ‘Putin podpisal zakon o l’gotakh pri dobyche trudnoizvlekaemoi nefti’, Ria Novosti, 4 December 2012.

27 ‘Vstupayut v silu l’goty po NDPI na neft’ s malykh mestorozhdenii’, Ria Novosti, 1 January 2012.

28 Prior to this decree, the number of fields benefiting from export tax relief were 24 (22 projects in east Siberia and two in the Caspian). Their number was cut to 15 as of August 2011 (Gavshina 2011).

29 The two exceptions for the Putin era are 2008 and 2017. In the latter case, oil output witnessed a minor decline as Russia opted to voluntarily cut production following an agreement with the Organisation of the Petroleum Exporting Countries (OPEC).

30 On the relative tax rate on the oil sector across countries, see, ‘Taxation in the Russian Oil Sector: Learning from Global Fiscal Perspectives’, Presentation by Alexey Kondrashov, EY Consulting, July 2015, available at: http://www.ey.com/Publication/vwLUAssets/ey-taxation-in-the-russian-oil-sector-learning-from-global-fiscal-perspectives/$FILE/ey-taxation-in-the-russian-oil-sector-learning-from-global-fiscal-perspectives.pdf, accessed 21 May 2017. Russian oil companies have also continued to face a relatively higher tax burden compared to international majors in other countries (Zhavoronkova 2015).

31 ‘Dvorkovich: zakonoproekt o NDD v neftyanoi otrasli gotov k rassmotreniyu pravitel’stvom’, Tass, 21 April 2017, available at: http://tass.ru/ekonomika/4199942, accessed 21 May 2017.

32 Based on Tsebelis, one can define four institutional veto players in Russia: the executive branch, the lower chamber of the legislature (Duma), the upper chamber (Federation Council) and regional governments (Tsebelis 1995).

33 For instance, in 2001, there was an ‘energy faction’ within the Duma, which generally supported the oil sector’s proposals (Khamraev 2001).

34 The amendment set an upper limit on the export tax for petroleum products (Visloguzov 2003).

35 The executive branch used to be highly disunited during the administration of Putin’s predecessor Boris Yel’tsin (Sokolowski 2003, pp. 422–26).

36 Apart from the Ministry of Finance, the Ministry of Economic Development, the Ministry of Natural Resources and the Ministry of Energy all provided various proposals for reforming the oil tax regime during the 1999–2001 period.

37 This observation was consistently confirmed through multiple interviews conducted in Moscow in 2007 and 2017, and through personal experience as energy consultant advising the Russian government on oil tax reform in 2009 and 2010. Personal interviews with: Igor Nikolaev, Partner and Director of Strategic Analysis, FBK, Moscow, 15 June 2007; Jacob Nell, Commercial Adviser, TNK-BP, Moscow, 14 June 2007; Vladimir Milov, former Deputy Minister of Energy of the Russian Federation, Moscow, 12 April 2017; Vladimir Feigin, President, Institute for Energy and Finance, Moscow, 13 April 2017; Vladimir Drebentsov, Head of Russia and CIS Economics, British Petroleum, Moscow, 14 April 2017.

38 Personal interview with Igor Nikolaev, Partner and Director of Strategic Analysis, FBK, Moscow, 14 April 2017.

39 According to the Ministry of Finance, the share of oil and gas revenues in the federal budget rose from 17.9% in 2002 to 51.3% in 2014 (‘Kratkaya informatsiya ob ispolnenii federal’nogo byudzheta’, Ministry of Finance of the Russian Federation, 2020), available at: https://www.minfin.ru/ru/statistics/fedbud/execute/?id_65=80041-yezhegodnaya_informatsiya_ob_ispolnenii_federalnogo_byudzhetadannye_s_1_yanvarya_2006_g, accessed 30 June 2020.

40 Personal interviews with: Vladimir Drebentsov, Head of Russia and CIS Economics, British Petroleum, Moscow, 14 April 2017; Vladimir Milov, former Deputy Minister of Energy of the Russian Federation, Moscow, 12 April 2017.

41 Personal interview with Vladimir Feigin, President, Institute for Energy and Finance, Moscow, 13 April 2017.

42 Personal interview with Vladimir Feigin, President, Institute for Energy and Finance, Moscow, 13 April 2017.

43 What has really prompted them to lower their costs since the early 2000s has been the harsh nature of the tax regime that disregards costs altogether. Personal interview with Vladimir Milov, former Deputy Minister of Energy of the Russian Federation, Moscow, 12 April 2017.

44 Such a division of labour has often been a product of ministerial infighting rather than a careful planning to enhance effectiveness of taxation. While it reduces the potential for serious errors and collusion, it has also been accompanied by some disadvantages, such as lack of clarity about responsibilities and weakened accountability.

45 The role of the Ministry of Natural Resources, for instance, declined in line with the introduction of the NDPI. The royalty and the VSMB had been determined through licence agreements signed by the ministry.

46 Personal interview with Maria Belova, Head of Research, Vygon Consulting, Moscow, 13 April 2017.

47 ‘Osnovnye pokazateli raboty neftepererabotyvayuschchei otralsi’, Infotek, November 2000.

48 ‘Istoriya Kompanii’, Rosneft, 2020, available at: https://www.rosneft.ru/about/history/, accessed 29 March 2020.

49 Personal interview with Vladimir Drebentsov, Head of Russia and CIS Economics, British Petroleum, Moscow, 14 April 2017.

50 Personal interview with Maria Belova, Head of Research, Vygon Consulting, Moscow, 13 April 2017.

51 For instance, East Siberian oil fields and West Siberia’s unconventional oil fields face different investment challenges. Personal interview with Sergey Drobyshevsky, Academic Director, Gaidar Institute for Economic Policy, Moscow, 14 April 2017.

52 Personal interview with Vladimir Drebentsov, Head of Russia and CIS Economics, British Petroleum, Moscow, 14 April 2017.

53 Personal interview with Vladimir Milov, former Deputy Minister of Energy of the Russian Federation, Moscow, 12 April 2017.

54 Personal interview with a leading Russian adviser to the energy industry, London, 25 May 2017.

55 Rosneft has acquired the bulk of tax relief measures in part due to legislation that grants state-owned companies exclusive rights in a range of potential new fields. Personal interviews with: Igor Nikolaev, Partner and Director of Strategic Analysis, FBK, Moscow, 14 April 2017; Vladimir Drebentsov, Head of Russia and CIS Economics, British Petroleum, Moscow, 14 April 2017.

Additional information

Notes on contributors

Adnan Vatansever

Adnan Vatansever, Senior Lecturer, Russia Institute, King’s College London, London WC2B 4BG, UK. Email: [email protected]