Meeting of the Expert Groups “Budgetary and Monetary Policy, Macroeconomic Parameters of Development of Russia’s Economy” and “Tax Policy”

The Expert Group on development of proposals on urgent problems of Russia’s socio-economic strategy for the period through 2020 on directions “Budgetary and Monetary Policy, Macroeconomic Parameters of Development of Russia’s Economy” (Group № 2) and “Tax Policy” (Group № 6) held its meeting on 31 March 2011 at the Institute of Economic Policy named after Ye. T. Gaidar. At the meeting, experts discussed the problem of lowering export duty rates on oil and oil products and increasing prices of energy sources on the domestic market to the international level.

The experts believe that behind the need in completion of the reforms lie the following factors:
  • Preservation of  the underpricing for carbohydrates has recently failed to ensure a qualitative modernization of Russia’s economy, nor has it propelled its competitiveness;
  • From the perspective of global prices, it has already been for more than twenty years that the domestic economy has generated negative value added;
  • Modernization necessitates creation of relevant instruments, including pricing, in particular.

Given the above, the experts considered two proposals:
1)    To even domestic and international prices for energy sources by means of gradual abolition of the export duty on oil and oil products;
2)    To establish a system of price incentives to ensure a qualitative modernization of the economy. This could be done with the use of tax reform instruments, including export duties, the mineral tax, excise taxes, and other taxes.

The proposed measures are classified into three blocs:
Bloc 1. Abolition of export duties on oil and oil products. This should result in:
-    Oil producers reaping extra benefits in the form of additional revenues from the external market, with Russia’s budget losing some;
-     Oil producers having extra income on the domestic market due to the rise in the domestic prices;

Bloc 2. Extra revenues are withheld from oil producers by means of the mineral tax, while oil production stays in the black. This should result in:
-    On the external market, raising the mineral tax rate should compensate for the export duty, thus securing the budgetary neutrality;
-    On the domestic market, a higher mineral tax rate will allow withdrawing the resource rent from oil production, which previously was channeled directly to consumers through lower prices, and extra budget revenues should arise.

Bloc 3. Extra budget revenues (the resource rent) can be spent on:
-    Compensation for consumers of energy resources and the populace’s losses resulting from the price rises by means of lowering taxes or by transfers;
-    Covering current budget spending on development of the social sphere, in particular;
-    Investment in the domestic economy, including bolstering innovation, investment in infrastructure, fundamental research, and the social sphere;
-    Creation of a pool of financial reserves (a Reserve Fund).

According to quantitative estimates, the following results should be envisaged:
Bloc 1. In the event of abolition of the export duty on oil, the domestic price soars up to the international one (+130%, + Rb. 8,000/t. of oil)
Bloc 2: only for the sake of budgetary neutrality, the mineral tax rate should be raised no less than by 3.8 p. p. of GDP ( +Rb. 3,700/t.); meanwhile, to completely withdraw the producers’ extra revenues, the mineral tax rates should be raised by 3.8+ 4.3 p.p. of GDP (+3,700 + 4,300=8,000 Rb./t.)
Bloc 3: the budget surplus accounting for 4.3 p.p. of GDP will be redistributed.

The IEP experts’ calculations show that less the impact of Bloc 3 the proposed measures may result in a price rise for energy sources (specifically, for oil - +130%; petrol +80% or +40% (provided the domestic petrol will be supplanted on the domestic market by import one); diesel fuel -+ 60%; jet fuel - +40%, black fuel oil + 40%)), an aggregate price rise for different sectors’ output (ranging from +5% in trade and intermediary services to +40% in chemicals and petrochemicals), as well as in a 10-20% aggregate increase in CPI and housing and utilities prices. Whereas all the above possible consequences are dire ones from the social perspective, they necessitate a transitional period of 5 to 10 years.

The experts raised questions related to assessments of economic consequences of proposed measures. More specifically, they cited the necessity of assessing the consequences on the microlevel, as a comprehensive assessment on the macrolevel seems an extremely complex and practically inextricable exercise.

As a separate issue, the experts raised the issue of a strict formulation of ultimate objectives and tasks of equalizing domestic prices of oil and oil products with the global (European) ones. Some presenters noted that proposed measures, including those on oil production taxation reform, in particular, are viewed only from the perspective of equalization of prices for end-consumers, without tackling the issue of attractiveness of oil extraction in RF.

While making decisions on abolition of export duties and raising domestic prices of energy resources, it is critical to address the problem of a low level of competition and the existence of institutional barriers in the sector, which can potentially hurdle setting fair market prices on the domestic market for oil products in RF.

The experts accentuated that as far as the abrogation of the export duty is concerned, it is imperative to ensure a thorough approach to the problem of reforming taxation in the sector as a whole. The background papers for the session cite an example of the use of the mineral tax as a
source of compensation for budget revenue shortfalls, should the export duty be abolished; however, the model is a provisional one. Hence the need to further work out issues relating to the the mineral tax reform and the possibility for replacing it with royalty or the windfalls profits tax.

Having considered all the factors, the experts arrived at the conclusion of appropriateness of a stage-by-stage adjustment of the domestic prices for oil, oil products and natural gas to the international ones and an imperative implementation of institutional transformations in the respective sectors. Meanwhile, prior to making concrete decisions in this area, one should provide answers to such questions as the length of the transitional period; whether it is possible  to compensate for consequences of such reforms for the budget in the short-, medium- and longer run, and if so, how this can be done; what their effects on the populace and the industries would be; how long it will take to modernize loss-making domestic industries; what a mechanism of impact (smoothing down) of external short-term price shocks is going to be; what consequences for the Customs Union member nations would be, etc.