Zeroing Mineral Resource Recovery Tax Is the Sale of National Capital at Zero Price

RF Ministry of Energy suggests zeroing of mineral resource recovery tax for 25 years for the new gas projects in Siberia and the Far East.


The principle of natural resource rent distribution, according to which all the people one way or the other co-own undersurface mineral resources, is implemented by application a special tax on mining industries. If a company mines some mineral resource, it has to pay the mineral resource recovery tax to the state, and if the resource is exported, the company should also pay the export duty.

In fact, the mining companies use these taxes "to buy" a certain amount of capital initially belonging to all people. Further on, payment for this capital goes to the federal budget and can be used either for financing the state expenses or for replenishment the state savings as reserve or stabilizing funds aimed to ensure the stability of state finance.

Zeroing mineral resource recovery tax for oil & gas companies means the sale of national capital at zero prices. The main argument in favour of such policy is that the primary cost of extracting this capital at some complicated areas (gas in Eastern Siberia or oil at shelf deposit) is so high that it does not compensate the expenses to deposit development. However, the high primary cost is conditioned by the fact that as of today, technology does not allow the resources to be extracted so cheaply for them to pay back. At the same time, if not touched, they will not disappear for the years of technology development, won't get spoiled, and they will be possible to extract after a while regarding the need to pay the natural rent.

From economic point of view, cancelling the mineral resource recovery tax for oil & gas sector at some deposits is similar to subsidizing the branch of industry incapable of manufacturing the product competitive at the world markets at existing costs. Such an approach is sometimes applied to the new industries which require 5-7 years to get to their feet, to build up their working capacities, and to start manufacturing the competitive products without governmental support. Naturally, whatever criteria could be, the oil & gas sector does not fall under the category "young developing branch", so applying such an approach to this sector does not seem practical. Reduction or zeroing the mineral resource recovery tax and /or export duties is necessary only in case of temporary oil prices slump, because only in this case the branch should be able to "survive" under the conditions (not depending on it) of high costs and low revenue.

Of course, Gazprom, Rosneft, and other oil & gas companies will benefit from easing the tax burden in the part of natural resource rent payment reduction. However, that will mean nothing else but the transfer from the future generations into the current non-effectiveness of the oil & gas industry. It is more reasonable to develop extracting technologies, make them cheaper and not touch this undersurface capital until its extraction becomes profitable without irrecoverable burying the natural resource rent belonging to all people.

A.Yu. Knobel – Candidate of Science (economics), Head of Foreign Trade Department