Developing a Numerical Model of Russian Oil and Oil Products Market

In 2013–2014, the Government set a course for reforming the taxation of the oil industry, which the expert community conditionally called “tax maneuver.”

The essence of the reforms is to equalize the domestic and world oil prices (excluding transport costs): the reduction in export duties and excise taxes on oil products will be offset by a corresponding increase in the mineral extraction tax rate (in terms of revenues, the new mineral extraction tax should bring approximately twice more than the lost part of the export duty). As a result of the tax maneuver, domestic oil refining should get less subsidized, because in the world prices, it produces negative added value. In the process of leveling domestic and world prices for oil and oil products, the latter will significantly rise in price on the domestic market if we do not compensate it by reducing excise taxes. However, excises taxes on oil products are constantly rising, which can block the progress of the entire reform in the near future.

Besides, the fact that there is no export duty on oil supply to the countries belonging to the Eurasian Economic Union (EAEU) is another reason why the Government plans to conduct the tax maneuver. The absence of export duty on oil exported to the EAEU countries allows them to create their own refining capacities and export the refined product to third countries. As a result, Russian budget and economy receive less revenue, subsidizing other countries’ economies. Increasing the mineral extraction tax for oil as a replacement of the export duty will increase budget revenues by reducing the scale of subsidizing the economies of EAEU countries.
Reducing excise rates for oil products will help reduce the disparity of prices in the markets of the Russian Federation and the Republic of Belarus, arising from the difference in excise rates. The difference in prices for motor fuel in the Russian Federation and the Republic of Belarus leads to “gray” exports. In addition, Belarusian exporters of Russian oil products are exempt from paying both excise duties and export duties, which allows them to re-export oil products to third countries, resulting in the Russian economy subsidizing the Belarusian economy.

On 23 May, 2016, a law was passed, according to which, starting from 1 June, 2016, a new mechanism of distributing excise payments by budget levels came into effect. The excise payments in question are those collected from the sale of motor fuel, diesel fuel and motor oils produced on the territory of the Russian Federation. Previously, all excise payments were collected in favor of the federal budget and then fully redistributed to regional budgets – according to the standards published in Annex 3 to the Federal Law “On the Federal Budget for 2015 and the Planning Period of 2016 and 2017”. As a result of introducing the new mechanism, 88% of excise payments will be charged in favor of regional budgets, and the remaining 12% – in favor of the federal budget. Besides, in 2016, the excise tax rate on motor fuel and diesel fuel was raised twice in order to increase regional road funds.

Increasing the rates of excise taxes on motor fuel and diesel fuel has significantly increased revenues of regional budgets. While average consumer prices for oil products are increasing, no decline in their consumption is observed. Increasing the excise rate and using the new revenue distribution mechanism made it possible to fill the federal budget with additional 20 billion rubles in 2016.
Despite this, raising the excise rate is quite a controversial tool for replenishing the budget, as it runs counter to the policy of the tax maneuver. If the goal is to fill the federal budget with additional funds, it is more expedient to speed up the tax maneuver while gradually reducing excise payments and export duties, and to increase the mineral extraction tax, allowing for additional budget revenues. As a result, the market will see clear price signals in which there will be no contradictions between the balance sheets of the export duty rate and the excise rate, and filling of the budget will be determined by the rate of a single mineral extraction tax. Additionally, this will contribute to the modernization of domestic oil refineries which will increase their efficiency.

However, currently we see a reverse situation – the tax maneuver has been postponed for an indefinite period. Increasing the mineral extraction tax, maintaining the export duty on oil, increasing the excise tax on oil products contradict the logic of the tax maneuver. Besides, a strange situation develops in which the share of taxes in rubles per ton of oil products imposed by the Russian government is greater for domestic consumers than for foreign ones. For a country rich in oil, this is almost a paradoxical situation.
Scenario modeling has shown that one of the rational options for conducting the tax maneuver is to implement it in several stages.
In the short term (2017–2018), the rate of export duty on oil should be reduced by 4,250 rubles, while the mineral extraction tax rate should be raised by 2,020 rubles. According to calculations, implementing this scenario will allow to maintain total tax revenues at the level of 2015. A clear price signal and an increase in profits of oil companies will help to create the necessary incentives and opportunities for modernizing oil refineries (which are predominantly owned by vertically integrated companies). Reducing the excise tax rate by 2,000 rubles per ton of oil products will help to contain the growth of prices for motor fuels and diesel fuel.

In the medium term (2019–2020), the course taken to conduct the tax maneuver should be continued, which implies increasing the mineral extraction tax by 1,332 rubles and maintaining the specific export duty per ton of oil at the level of 40% of the value of 2015. This will help increase the revenues of the budget of the Russian Federation while maintaining domestic oil prices at the same level. Such a period is necessary to complete the modernization of oil refineries and maintain constant prices for oil products.

In the long term (2021–2023), the mineral extraction tax for oil should be increased by 3,960 rubles while the export duty on oil and the excise tax on oil products should be lifted. As a result, profits of oil companies will return to the level of 2015, budget revenues will increase up to 6,515 billion rubles, and the price for oil products will increase to 48,620 rubles per ton.

As a result of the tax maneuver, significantly increased efficiency of the oil sector should be expected, including:
- increased revenues of the budget of the Russian Federation;
- maintaining profits of the oil industry;
- modernized oil refining industry;
- increased added value in the oil industry due to reducing the re-export of Russian oil and oil products from the EAEU countries to third countries;
- increased export of oil and oil products from the Russian Federation to countries outside the EAEU.

Dmitry Gordeev – Senior Research Fellow