The Ministry of Finance proposed a new way to increase export revenues

Russia’s export policy, which until recently provided a third of budget revenues, is ready to change dramatically. Western countries, which have been buying raw materials in our country for many decades, are switching to other sources of energy resources. Russia also has to maneuver. The Ministry of Finance offered domestic oil producers to calculate foreign transactions based on the cost of the Middle East grade Dubai instead of the quotations of the North Sea brand Brent, which have been used for half a century to determine the fair price of “black gold”.

The cost of “black gold” on the eve of the start of the military operation in Ukraine on the world market reached its maximum levels for the last 14 years: a barrel of the North Sea Brent grade in January – early February 2022 was estimated at about $105, the quotes of the Middle East brand Dubai exceeded $77, and the “barrel The Russian brand Urals cost a little more than $70. It is not difficult to calculate that already then the average discount of hydrocarbons produced by our country to the European standard was more than 30%.

True, then such a situation did not upset anyone. The West steadily bought huge consignments of our energy resources, the Russian treasury was in surplus and was literally bursting with petrodollars coming in the form of taxes. The Russian hydrocarbon mixture, since it was inferior in quality to foreign analogues, continued to focus on the generally accepted Western standard. But our companies were not offended, barely managing to count the profits.

But further followed the SVO, sanctions and Europe’s refusal to purchase Urals. All this forced Russia to reorient its export flows to the east and concentrate on Chinese and Indian buyers. New Asian clients took advantage of the situation and also demanded significant discounts from Moscow. However, taking into account the decline in production (by 1 million barrels per day) and the overall loss of fuel exports (according to the International Energy Agency, in May alone, the daily shipment of Russian “black gold” abroad fell by 260 thousand “barrels”), our budget revenues from commodity industry began to decline rapidly. In the first five months of this year, revenues to the treasury from the sale of gas and oil abroad fell by half.

The government has taken several administrative measures to reduce discounts – now the Urals discount to Brent, according to stock players, is less than $20 per barrel. However, such a reassessment is not sufficient to make up for the financial losses of the budget. In this regard, another combination was invented to strengthen the achieved result. Russia is going to attach Urals quotes to the Middle East grade Dubai, which looks logical from the point of view of reorienting our export interests to the east. MK experts assessed the pros and cons of such an initiative.

Vladislav ANTONOV, financial analyst at BitRiver:

“Dubai Crude has been used since the mid-1980s as a benchmark for calculating oil prices in the Persian Gulf. A link to Dubai may be preferable for Russia, given the redirection of our supplies to Asia. Using this variety as a reference can more accurately reflect the market situation for raw materials from our country. It is important to take into account that the markets of “black gold” in different regions of the planet have their own characteristics, including in price dynamics.

In the first five months of 2023, Russian budget revenues from the oil and gas industry decreased by 50% compared to the same period in 2022. The Ministry of Finance predicts a recovery in the volume of tax revenues from the commodity sector in the second half of the year due to the determination of the oil tax base and the limitation of the discount on “black gold”. So far, the prospects for such a turn of events are unimportant – the average cost of Urals in May 2023 was $53, which is significantly lower than last year’s levels.

The link to Dubai promises to increase the profits of domestic exporters, as it reflects the prices and directions of Russian oil sales in Asian markets. As Dubai sells for less than Brent, the discount cap may decrease after the peg.

In April, the Ministry of Finance proposed to halve the fuel damper (a tax deduction for oil companies selling petroleum products on the domestic market, aimed at stopping retail prices at gas stations) from July 2023 to July 2024. The department believes that this will save up to 30 billion rubles a month, which will also lead to some reduction in the export discount.”

Artem DEEV, head of the analytical department at AMarkets:

“It is clear that today the Brent base quote does not reflect the market price of Russian oil. This became especially noticeable after the redistribution of exported raw materials in favor of Asia. The market of the eastern region focuses on Dubai. Accordingly, if we accept the Asian rules of the game, it will be easier to calculate the current tax, and the replenishment of the country’s budget will be more efficient.

True, linking to Dubai is just one of the options that the Ministry of Finance is currently working on. Nevertheless, the size of the marginal discount remains a very important factor (in June it was $28 per barrel, and from July it should drop to $25). The discount for Dubai will definitely be less than for Brent. Switching to the Middle East grade without changing the discount will be meaningless, as it will again lead to a decrease in treasury revenues. According to existing data, Anton Siluanov’s office has not yet received proposals from oil companies on the size of the discount to Dubai, so it is premature to talk about its level.

Another option that the Ministry of Finance is also considering is to reduce the marginal discount to Brent by another $5. Again, no final decision has been made, which means the measure is in limbo. It is likely that reducing the discount to Brent will be easier than linking Urals to Dubai. True, this option is fraught with constant revisions of the final amount of the discount. However, the reference to Dubai will cause less controversy in the future – the Middle Eastern variety is closer in terms of characteristics and sales markets to the Russian mixture.”

Spartak SOBOLEV, Head of Investment Strategies Research at Alfa-Forex:

“Without defining a discount, whether it is a Urals discount to Brent or to Dubai, that is, without a new agreement between the oil industry and the government, there is a risk of rising fuel prices for

domestic market. The cost of gasoline for the main types of fuel, such as AI-92, AI-95 and diesel fuel, has already reached record levels. The retail value of these brands has already exceeded the highs of 2022 and continues to increase. Unfortunately, gas station prices may continue to grow and may rise up to 10% by the end of the year.”