Moscow Times
March 19, 2007
Troubleshooting Starts As Energy Loses Steam
By Simon Shuster
Staff Writer
Oil and gas exports, the bread and butter of the national economy, look to have gone a bit stale.
The reasons are threefold: a strong ruble, a suffocating tax regime, and an oil price driven down by plenty of global supplies, analysts said.
As this sector represents some 65 percent of both exports and the total value of Russian companies, there is little room to doubt that the markets are going to suffer.
But many have been wondering whether the greater economy can take it and, if the slump continues, whether it can adapt.
Under tax laws introduced in 2004, oil firms give the state 90 percent of their marginal revenues for all the oil sold above $25 per barrel.
High taxes were one of the main reasons Alfa Bank said last week that greenfield developments would not be profitable and that the country's biggest oil firms were grossly overvalued.
A partial upside to the tax regime, however, is that oil companies are not very vulnerable to global oil prices. Because the taxman gets most of the profits, it is the government that takes the hardest hit.
Finance Minister Alexei Kudrin said earlier this month that the state's oil price assumption had been changed from $61 to $55 per barrel and that the federal budget would shrink by $6.5 billion as a result.
In an apparent response, officials have been talking about redistributing the tax burden. Economic Development and Trade Minister German Gref said Wednesday that he supported raising taxes on natural gas extraction, a move that would give the oil majors some slack.
This month, the tax and customs policy department also said they were prepared to drop the tax on crude by more than 7 percent if the oil price had sunk below $55 per barrel at the end of last month. They did not have to, but the intentions were clear.
A strong safety net already exists, moreover, after the tight fiscal policy of the past four years helped the state save up the windfalls.
It has allowed for the creation of the stabilization fund, the rainy day stash worth about $105 billion. It has brought Russia's sovereign debt to less than 10 percent of GDP, giving it plenty of room to borrow in case of trouble. And it has helped the Central Bank build up a cash hoard of more than $300 billion.
Peter Westin, chief economist at MDM Bank, said that even if the oil price bottoms out at $35 per barrel, the stabilization fund alone could hold up the economy for two or three years.
If the oil price does not recover in those two or three years, however, the economy would have to diversify or face nothing short of collapse.
A low oil price may prove the best medicine -- though bitter -- to boost value-added production and to kick-start the reform the tax regime.
"Going forward I believe that this tax regime will probably change when the oil price goes down and creates incentive to sell a higher quality product," said Alexander Burgansky, oil and gas analyst at Renaissance Capital.
Westin agreed. "In the long run, Russia will be better off with an oil price of $35 rather than $60. Policymakers will have to work much harder.
They will have no choice but to diversify the economy. ... There are countries that have managed to diversify, not in spite of natural resources, but on the basis of those resources."