The Ministry of Finance has a stranglehold on oil and gas

The Russian Ministry of Finance is good at this – creating crises and collapses in the country’s economy. In August-September, the department caused a shortage of diesel fuel on the domestic market and a jump in prices for fuel and lubricants, when it cut damper payments to oil workers by half and almost disrupted the harvesting season. The first pancake turned out to be lumpy. The president and prime minister intervened in the matter, and the situation had to be reversed.

Last week, the Ministry of Finance decided to go to the second round, introducing a new destructive initiative – a bill to increase the mineral extraction tax on gas through an increase in the KKG coefficient from August 1, 2024 to the end of 2026. The essence of the initiative is to simultaneously increase gas prices and the tax burden on producers gas At the same time, the growth rate of the mineral extraction tax for independent producers will be twice as high as for Gazprom.

What does the new initiative of the Ministry of Finance actually mean? It means that gas prices will rise (and, according to formal logic, independent producers will pay higher prices), which will lead to increased costs for all Russian producers. That is, all prices in the country will go up. The initiative of the Ministry of Finance will be paid for by the consumer, the producer will be to blame for the increase in the general price index, and the Ministry of Finance will make a hole in its uniform for an order.

The “noble” motives of the Ministry of Finance are clear – to patch up budget holes. The logic is unclear. Why does the country’s oil and gas industry always act as a dredge for patching holes?

The tax burden in the oil industry today is the highest in the Russian economy – 78% at the end of 2022 (according to the Federal Tax Service of Russia for 2022). For comparison, I will give the tax burden for other industries.

Mineral fertilizers – 26%, coal miners – 29%, financial sector – 29%, electric power – 42%, mining metallurgy – 46%, pipeline transport – 46%, communications and the Internet – 48%, diamond and precious metals mining – 49%, gas industry – 69%. This is a clearing for the activities of the Ministry of Finance. This is where you can and should turn around!

According to experts, a simple equalization of the tax burden could bring 4 trillion rubles to the country’s budget last year alone. This is where the clearing for the activities of the Ministry of Finance is. Why nothing is being done in this direction, one can only guess cautiously. So many influential interests will be affected that no one will be harmed.

Perhaps this is why the Ministry of Finance has a stranglehold on the oil industry and is dragging it to the bottom. Over three years (from 2020 to 2023), a total of about two dozen legislative changes were adopted to patch budget holes (that is, increase the tax burden) that affected the oil industry. As a result – 1.5 trillion rubles. lost investment opportunities.

Under the current policy of the Ministry of Finance, the main problem of the oil industry is the lack of any stability and predictability of taxation, which as a result leads to the inability to plan investment processes.

From the latest examples. Currently, the Ministry of Finance and the Ministry of Energy are deciding from what sources to compensate for the expenses of the Russian budget for paying for the damper. The Ministry of Finance proposes to use a damper for these purposes, which oil workers will not receive in September. It should be noted that they will not receive it due to the fault of the Ministry of Finance, which, with its earlier decision to reduce the damper from September 1, caused an imbalance in the fuel market and a jump in exchange prices.

And so as not to get up twice, I’ll remind you. Payments for the damper initially come from the funds of oil workers, which they pay in the form of mineral extraction tax to the country’s budget. Thus, a vicious circle is formed: the Ministry of Finance is patching up holes in the budget by reducing damper payments to oil workers, which these funds were previously transferred to the Ministry of Finance, and which the Ministry of Finance now wants to use to compensate for budget expenses on paying the damper to oil workers, which was again returned by decision of the Russian government.

The house that Jack built. The devil will break his leg!

Meanwhile, oil companies have problems with taxation not only in production. The retail business is also in a deplorable state, with profitability currently negative. “Surgutneftegaz» recently stated that the tax burden on its oil refining is 110% of the selling price of AI-92 gasoline and 102% of the price of diesel fuel. In retail, this load for gasoline exceeds 103% of the selling price, and for diesel fuel – 91%.

At Rosneft, the share of all taxes in the structure of the retail price of gasoline is about 74%. And the total losses, taking into account operating and logistics costs, amounted to Rosneft in September about 2 rubles. per liter of AI-92 gasoline.

And now I propose to pay attention to our pipeline monopoly, “Transneft”, which the Ministry of Finance’s initiatives rarely touch upon. The tax burden on the company is 46%, which is 1.7 times lower than the same figure for the oil industry. At the end of September 2021 (the last date of Transneft’s public reporting), total cash receipts to the company amounted to 593 billion rubles. Slightly less than half of this amount (265 billion) has nothing to do with operating activities, but is income from the sale of securities and the closing of deposits. “Transneft» is consistent in its financial and industrial policies. The company’s capital investments reached 128 billion rubles, and 310 billion rubles were used to purchase securities and place funds on deposits. That is, the company does not invest large amounts of money in infrastructure development, does not create new jobs, and in fact does not contribute to the growth of the Russian economy.

At the same time, it is important to understand that oil transportation tariffs are indexed regularly, but no one in the Ministry of Finance would think of increasing the tax burden in order to remove indexation under the guise of supposedly “additional income,” as in the case of the oil industry.

From 2020 to 2022 pumping tariffs increased by 11.7%, 2.5 times higher than the decrease in transportation volumes (4.6%). Simply put, “Transneft» doubled profitability at the expense of mining companies. This year, according to the forecast of Deputy Prime Minister Alexander Novak, oil production (meaning pumping) will decrease by 5-6%, and the indexation of Transneft tariffs for 2020-2023. will be 18.4%, exceeding approximately 1.7 times the decrease in transportation volumes (about 11% compared to 2019).

Why am I citing numbers and examples from seemingly different industries and companies? Because it is not just the budget that is unbalanced, but the entire monetary system of Russia, which, instead of increasing the investment and industrial potential of the country, serves the opposite purpose – its strangulation. In such conditions, any actions of the Ministry of Finance to balance the budget lead to even greater imbalance.

A simple example. The law of the Russian Federation will introduce a one-time tax on excess profits (above 1 billion rubles) from 2024. The tax rate will be 10% of the excess amount for 2021–2022. above the same indicator for 2018–2019. The Ministry of Finance has already “proudly” announced that the budget will receive an additional 300 billion rubles. To answer the question of whether this is a lot or a little, we present statistics for Sberbank.

On “Sberbank» accounts for more than 40% of the expected profit of the banking sector (3.5 trillion rubles for 2023), and the amount of excess profit tax that the bank will pay to the budget will be 3 billion rubles, which is equivalent to 0.3% of its profit for the first 8 months of the current year (RUB 1 trillion). In relation to the expected annual profit (RUB 1.5 trillion), the excess profit tax of Sberbank will be about 0.2%.

It should be recalled that the basis for Sberbank’s super-efficiency is the net interest margin (the difference between interest on loans and deposits). This Sberbank indicator for the first and second quarters of 2023 amounted to 5.8% (the level has been maintained since the third quarter of last year). The country’s second largest bank in terms of assets VTB this figure is at 3.3%, while for JP Morgan Chase it is 2.6%.

The net profit of the entire Russian banking sector at the end of 9 months of this year reached 2.7 trillion rubles, and the total volume of tax withdrawals from the banking sector under the law on excess profits will be about 27 billion rubles. That is, the volume of withdrawal will be 1% of the industry’s excess profit for 9 months, or 0.8% of the expected profit for the entire year.

It is fundamentally important that due to Western financial sanctions, Sberbank’s position in the domestic capital market has only strengthened. Through salary and pension schemes Sberbank has the largest holdings. In the domestic market, enterprises have no alternative when choosing a lender to implement large-scale projects. De facto, Sberbank is the main beneficiary of anti-Russian sanctions – it can set any lending rates using its monopoly position. Which is exactly what he does.

In order not to be unfounded, I will cite the data of the Central Bank. At the end of the third quarter of 2023, Russia’s external debt, including corporate debt, amounted to about $330 billion (decreased by $153 billion since the beginning of 2022). A significant portion of this amount was replaced by financing from the domestic capital market, which created additional demand for credit.

From March 1, 2022 to October 1, 2023 (19 months), the amount of the loan portfolio and investments in debt securities of the Russian banking sector increased by almost 26 trillion rubles. At the same time, over the 19 months preceding March 2022, the growth of the loan portfolio of the Russian banking sector amounted to 21 trillion rubles.

It is important to remember here that the cost of borrowing in the domestic financial market is much higher than in the external one. Why is a separate question. And this question should be addressed to the Central Bank of Russia, which, in the fight against inflation, has set a key interest rate that significantly exceeds the level of the very inflation that it is fighting.

Today the real rate (the difference between the Central Bank rate and inflation) in Russia is 7%. Here we are ahead of the rest. In Indonesia it is 3.7%, in China – 3.45%, in Saudi Arabia – 4.3%, in India – 1.2%. In developed credit systems this indicator is completely negative. In the European Union (-0.3%), in South Korea (-0.2%), in England (-1.55%), in Sweden (-2.5%), in Japan (-3.1%) . Türkiye, with its crazy inflation, keeps its real interest rate at -31.5%.

The fact is that a negative real interest rate accelerates the credit and investment process in the country and stimulates industrial and economic growth. Positive, on the contrary, slows down the economy through expensive credit and only works to fill the accounts of the banking industry. If this can be a consolation for anyone, then it must be said that in terms of real interest rates, only Brazil is higher than Russia (7.55%).

Of the above-mentioned amount ($330 billion) of Russia’s external debt, about 60% falls on the non-banking sector. This is comparable to 20% of assets and is almost 2.5 times the capacity of the country’s banking sector. In essence, this is growth potential, an opportunity to increase the internal volume of the credit market while providing proper guarantees. The potential that the Central Bank of the Russian Federation turned into a regulated outflow of money from the country (loans and interest on them must be repaid).

There are so many examples of the patchwork landscape of Russia’s monetary and budget policies, inconsistencies in actions, misunderstanding of consequences and frivolity in decision-making that it is impossible to list them all.

The problem of a comprehensive reconfiguration of the taxation system (in reality, the entire monetary system) of the country is long overdue. This is not about conditional justice. We are talking about the development of the country in new conditions (closed access to external borrowing). We are talking about the survival of the country as a subject of world politics and economics.

The “new” (sanctions) conditions are not temporary, they are permanent or, at least, long-term. It is necessary to build a strategy for the country’s development based on this understanding. Unless, of course, we are going to reduce geopolitical tensions by giving up sovereignty.

Everything here is according to the classification of President Vladimir Putin. Anyone who doesn’t understand this and lives the old fashioned way is an idiot. And whoever understands, but continues to act inertly, is a scoundrel. There is no other option.