30 Jan.2019

Oil Industry Awaits a Manoeuvre: Analysis of a Major Sectoral Tax Reform / Interview Given by Ivan Khomutov to Neftyanka

Ivan Khomutov, General Director of the Petromarket Research Group, was the studio guest for the Neftyanka YouTube channel’s 41st screening of its “Utility” programme. Ivan Khomutov spoke about the completion of a tax manoeuvre in the oil industry, about duties, excise taxes, netback and about their impact on the industry and economies of Russia and the countries of the Eurasian Economic Union.

The interview began with a discussion of the main problems caused by the current system of export duties on oil and petroleum products in Russia; it was these, which dictated the need to reform the tax and customs tariff regulation of the oil industry. The Government of Russia has already made repeated attempts to reform, but finding solutions to some problems merely gave rise to others; it has not yet succeeded in putting together an “ideal” system of taxes, duties and tariffs.

The tax reform, which comes into force on January 1, 2019, is the completion of a tax manoeuvre launched in the oil industry in 2014. According to Ivan Khomutov, the plan is to phase in (by 2024) the introduction of a new mechanism for managing the country's investment income, which should make the subsidising (which essentially existed prior to the reform) of oil refining and of the consumers of petroleum products based in Russia much more effective, giving it a targeted, recipient-orientated character.

Having described the initial concept and the parameters of the reform, Ivan Khomutov went on to explain how, and in whose interest, these have now changed.

As Ivan Khomutov points out, the reform contains a number of undoubted advantages:

• the cutting off of subsidies paid to the country's most odious and backward refineries;
• the ending of uncontrolled subsidies to the economies of friendly countries, which existed due to the specifics of customs and tariff regulation of crude oil and petroleum products exported from Russia;
• stimulation of the modernisation of some Russian oil refineries by changing their subsidising mechanisms.

However, Ivan Khomutov believes that the reform also has significant shortcomings and risks associated thereto. Ivan Khomutov considers the obvious fiscal deviation of the manoeuvre – the lack of any specific reform which could stimulate the development of oil refining in a particular direction – to be the most significant drawback. The reform fails to give the industry any clear long-term investment signals. The unresolved nature of a number of problems in the development of the industry makes the prospects for the launch of a new reform very uncertain, making expectations of rapid adjustments to the tax system all the more likely.

You will learn more about this, and also about:

• whether the damping mechanism will be effective and, if so, under what conditions,
• what categories of consumers and refineries will be subsidized, and to what extent,
• whether the reform will be up to the task of forcing technologically-backward and unprofitable (at least for the Russian economy) refineries to leave the market,

by watching the interview.