The increase of mineral extraction tax by 5% will not compensate the shortfall of federal budget revenues

On April 10, the Ministry of Finance of Russia suggested to raise by 5% the mineral extraction tax on oil, according to the statement made for journalists by the Head of the Ministry Anton Siluanov.

The natural resource rent principle under which proceeds from sale of natural resources must be distributed between all nationals of Russia is realized in two ways: first, all oil produced on the territory of the country is subject to mineral extraction tax, а second, if any part of such oil is exported, each ton of such oil is subject to additional export duty. Such a distribution is used to maintain domestic prices of crude oil and oil products lower than world prices, thereby subsidizing indirectly the entire domestic industrial production sector.

Values of the mineral extraction tax and export duty depend on world prices of the resource. According a Russian Government order, given the current value of world oil prices, the ceiling for export duty on a ton of oil is equal to 65% of world price per ton less $89. A bottle neck here is that it is the ‘ceiling’ for oil sector taxation. Until Q4 2011, it was this ceiling that was used for calculation, but in October 2011 the following calculation formula was forced by the oil lobby: 60% of world price per ton less $80. 

Given the current oil price (approx. $780 per ton), it means that the federal budget would be short of approx. $30 from a ton of exported oil. Given that in 2012 Russia exported approx. 240 million tons of crude oil, the federal budget was short of a total of approx. $7.2bn.  

A proposal of the Ministry of Finance of Russia to raise the mineral extraction tax on oil на 5% is an attempt to compensate for the shortfall in federal budget revenues. However, even if this proposal was approved, it would be impracticable: given that in 2012 Russia produced 518 million tons of crude oil, and with current prices the mineral extraction tax is about $160–180 per ton, budget revenues would gain no more than $4-5bn, which is not sufficient to cover losses incidental to actual reduction in the export duty in 2011. 

Knobel A.Yu. – Ph.D. in Economics, Head of Foreign Trade Department