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Battling the Budget Bulge

Russia’s Natural Gas Companies Will Pay for Putin’s Campaign Promises Russian Finance Ministry building By Tai Adelaja Russia Profile 02/28/2012

The Russian government is set to put an extra tax burden on its natural gas companies as part of fiscal measures to deal with impending massive increases in social spending after the March 4 presidential elections. In addition to increasing excise duties on tobacco and hard liquor, the government said it would lift various federal tax breaks and concessions to the regions to generate more revenues. The measures, which were unveiled by Finance Minister Anton Siluanov on Monday, are part of the so-called “decisive tax maneuver” that Prime Minister and presidential candidate Vladimir Putin hopes would help restructure the country’s fiscal policy and make it amenable to solving Russia’s industrial development problems.

Russia’s need for fiscal prudence has become more urgent in recent weeks, as the government braces itself to deal with Putin's pre-election commitments, which Siluanov said will cost up to two percent of the nation’s gross domestic product. The Russian budget may require an extra one trillion rubles ($34 billion) to fulfill Putin's campaign promises, Siluanov told Reuters in an exclusive interview on Monday. Putin, who is all but certain to win Sunday's election, instructed the government in December to explore ways and means to improve the taxation system in order to channel oil and gas revenues into hi-tech and manufacturing sectors. But amid popular disaffection and middle-class protests against his rule, he has since piled on spending promises that have made the government's task even more difficult.

Siluanov said that while there is ongoing debate about raising taxes, “the position of the government's economic ‘bloc’ is that it's wrong to regard taxes as a source for a fiscal maneuver." Instead of putting an extra tax burden on people and businesses, tax hikes on the country's natural gas companies will be the main thrust of the Finance Ministry's efforts to finance campaign promises, Siluanov told journalists at the meeting of Group of 20 finance ministers and central bankers in Mexico City on Sunday, RBC Daily reported. The finance minister said he expects government-sponsored reforms to increase domestic gas prices to bring in more revenues to the budget. Raising the extraction taxes to 80 percent of the expected growth in domestic gas prices, for instance, could boost the budget by an equivalent of one percent of the gross domestic product by 2016, Siluanov said.

Analysts say, however, that the gas industry appears to have become a tempting target because the government does not want to risk undermining oil production by taxing oil producers more heavily. Natural gas companies, on the other hand, have been paying lower taxes, and analysts say there is still a lot of room for domestic gas prices to grow. Gas prices have to increase on average by 15 percent yearly before they reach the price level in Western nations, said Alexei Kokin, an analyst at UralSib Financial. “Siluanov’s idea is for Gazprom to receive only 20 percent from such increases, which leaves the company with only a two-percent growth in net profit,” Kokin said. “In order words, the government wants Gazprom to have the same price-profit ratio as oil companies, which get 20 to 30 cents on every dollar increase in oil prices.”

The Finance Ministry has been proposing to double what state-owned companies pay on mineral extraction since 2010. As the budget slid into the first deficit in a decade last year, the Finance Ministry pushed through the first increase in mineral-extraction tax for gas producers in five years, raising the rate by 61 percent last year. This year, the mineral-extraction tax rate for the Russian gas export monopoly Gazprom will more than double to 509 rubles ($17) for 1,000 square meters of gas from 237 rubles ($8) last year, according to the Kremlin’s Web site. The tax for the gas export monopoly will climb to 582 rubles ($20) in 2013 and 622 rubles ($21) in 2014. That may add 150 billion rubles ($5.1 billion) to Gazprom’s mineral extraction tax bill in 2012, according to the company’s estimates.

The giant gas monopoly, which will bear the brunt of the tax hikes, has also been resisting the move, arguing that it constrains its development projects. Last year it threatened to set up a special department to lobby the government on taxation. Gazprom has also said it will continue to seek tax breaks to develop offshore projects such as Shtokman and Prirazlomnoye in the Arctic, and gas developments in Russia's Far East. The company has appealed to the government to grant similar tax breaks to develop natural gas deposits off Russia’s Pacific coast and in the Yakutia Region, sources within the company told Russia Profile.

With huge tax receipts from Gazprom not quite guaranteed, the Finance Ministry said it is exploring additional options, such as lifting various regional tax concessions especially on land and property over the next three years, Siluanov said. The measure will first of all affect land and corporate property tax, he said, adding that lifting tax breaks on land alone could boost regional budgets by up to 200 billion rubles ($6.9 billion). "A lot of land is government-owned, especially by the Defense Ministry. Since there is no tax, there is not even any interest in the inventory of land property, so by introducing even a minimum tax rate we will stimulate work to analyze the land available," Siluanov said.

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