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Superprofits Seized by Superconductivity
// Oil Company Profits Flow to the Budget in Three Short Readings
Expropriation
Kommersant already reported in the last issue, last Friday the State Duma carried out President Vladimir Putin's order to divest the oil industry of nearly $3 billion in excess profit. The lower chamber passed a draft bill that would sharply increase the size of oil export duties and the severance tax rate in three short readings. Oil companies, which had already resigned themselves to the idea of the inevitability of expropriation, did not oppose passage the bill, and as a result only 14 deputies voted against it.
The government began formulating the slogan/order “You need to share” right after the YUKOS affair. President Putin formulated the idea of an inevitable increase in the tax burden on the oil industry that had been hovering in the air at a meeting with businessmen at the Chamber of Commerce and Industry on December 23 last year. He declared then that, “excess oil industry profit can be impounded by simple instruments such as export duties and severance tax.” The minimum size of the possible seizure$3 billionwas also named at that time.
After such a direct call to action, the Ministry of Economic Development and Trade and the Ministry of Finance, which had been preparing tax reform, abandoned the search for methods of “equitable taxation” of oil companies by introducing a differentiated severance tax (setting of different tax rates for different fields) and decided to limit themselves to a plain old increase in already existing taxes. That is, they decided to fulfill the president's order verbatim.
The government bill passed on Friday introduces changes to the existing law “On the Customs Tariff” and to the chapter on “Severance Tax” in the Tax Code. Starting on January 1, 2005, the basic oil severance tax rate will be increased from 347 rubles to 400 rubles per ton and the existing three-step oil export duty will be replaced by a four-step duty.
The maximum fee if the price of Urals oil exceeds $25 a barrel will be $29.20 for each ton sold plus 65% of the amount in excess of this threshold (currently 40%). These measures will enable the government to take an additional amount ranging from $2 billion (at an average annual Urals oil price of $27 a barrel) to $3.3 billion (at the current price of $30 a barrel) annually from the oil industry.
The Duma's promptness in supporting the presented bill in three consecutive readings was motivated by the government's desire to introduce the new export duties as quickly as possible. The White House would like to start skimming off the oil industry's excess profit by August 1 of this year. In order to do this, the law must be passed, signed by the president, and published no later than June 1, since under current legislation, duties are set two months in advance. Deputy Minister of Finance Sergei Shatalov declared from the Duma rostrum that a one-month delay in introducing the new duties would cost the federal budget $170 million.
The government's explanation of the need for additional requisitions from oil companies is that the oil industry is overly profitable: its net profit ratio is 24% compared to an average of 14% for all other sectors. On converting the “surplus” percentages into dollars, the Ministry of Finance calculated that the oil industry's excess profit was about $5 billion. According to Sergei Shatalov, taking 40–60% of this amount will not hurt the investment possibilities and attractiveness of the oil industry as a business in the least. In an explanatory note to the adopted bill, dividends paid by the companies ($5.6 billion in 2003) are called excessive and therefore, in the bureaucrats' opinion, must be at least halved.
The Duma agreed nearly unanimously with these very impressive requisition figuresnot a single deputy sided publicly with the oil companies. Interestingly enough, both the progovernment United Russia (Edinaya Rossiya) faction and the opposition Communist Party of the RF (KPRF) alike voted for the seizure of “surpluses” from the industry. The once-powerful oil lobby, which in case of need could mobilize up to 300 votes (out of 450) in the lower house, no longer exists. Only 14 people voted against adoption of the bill (as opposed to 398 votes in favor) on Friday.
These voting results do not surprise Vladimir Reznik, chairman of the Duma's banking committee. “It's just that before there was no parliamentary majority in the Duma, and now there is,” the deputy told Kommersant. He called the Duma's decision entirely logical. Moreover, in Mr. Reznik's opinion, the government ought to think about increasing the tax load not only on the oil industry, but on the gas industry as well.
Valery Draganov, chairman of the Duma's economic policy committee, sees changes in the lawmaking process as the reason for the “superconductivity” of government legislation. “Now all of business's lobbying arguments are considered at the level of preliminary discussions,” he told Kommersant. “And oil companies have been forced to agree that the present foreign trade situation and profitability and profit in the oil business are such as to allow the government to collect additional rent. This is how business shows its social responsibility.”
Interestingly enough, oil company representatives visited Minister of Finance Aleksei Kudrin several times in February of this year, and the figures of the present increase were agreed upon based on the results of these meetings. Oil companies were resigned to the inevitability of an increase in the tax load, but after some haggling they managed to moderate the government's appetites. Specifically, a 65% export duty instead of the maximum 70% proposed by the Ministry of Finance was approved, and the bureaucrats agreed to increase the severance tax rate to only 400 rubles per ton instead of the previously planned 450–560 rubles.
In return, the oil companies pledged to refrain from criticizing the government's proposals and not to conduct a media PR campaign in their defense. In fact, while the draft bill was being prepared, the oil companies preferred not to comment on the bill's provisions. This was the position of the LUKOIL representative who told Kommersant yesterday that his company “considered it pointless to discuss the government's tax policy.”
Aleksei Firsov, the head of Sibneft's public relations department, noted that the adopted law was aimed at taking away revenues generated at a price above $25 a barrel. “Sibneft plans its investment projects based on an oil price of $16.50 a barrel, so this decision will not lead to a review of them,” he told Kommersant. “Obviously we're not happy about the Duma's decision, but it's not disastrous for the company.”
There was a somewhat different reaction to the innovation at YUKOS. In the opinion of a company representative, “the problem is not that taxes increase but the fact that this happens too frequently.” According to the source, this unpredictability of tax legislation impairs the industry's investment attractiveness. “If the government really wants to collect more taxes, it should not think about increasing tax rates but about expanding production, which is being constrained by the lack of new pipelines,” they told Kommersant at YUKOS.
Vadim Visloguzov
All the Article in Russian as of Apr. 26, 2004
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Photo: Alreksandr Chizenok
