Tax Hikes in Russia May Be Passed on to Drivers

October 17, 2013

Russian oil companies will escape a blow from future tax hikes after getting a nod from the government to raise fuel prices for motorists, Reuters reported on October 16, citing analysts and officials.

The government will raise more than 170 billion roubles ($5 billion) over the next three years from increases in taxes on the domestic oil industry, helping to cover the cost of higher state spending ordered by President Vladimir Putin.

But with Putin now settling into a third Kremlin term and not due to face voters again until 2018, drivers - not the oil industry - will end up footing the bill.

"The consumer will pay out of his own pocket for the increase in the fiscal burden," said Vitaly Kryukov, an analyst at brokerage IFD Kapital.

"It looks like the Russian bureaucracy has already adjusted to the idea of more expensive fuel - domestic demand in Russia is growing, there are no elections in the near future, and they can see higher prices in Europe."

The oil and gas industries are an easy target, generating more than half of Russia's federal revenues. The government has quietly abandoned plans to balance the budget by mid-decade, but is still seeking new revenue sources.

The tax changes will shift the burden to oil production from exports. If passed on to drivers, that would narrow the gap between the amount they pay for fuel and the higher prices charged at filling stations in Europe.

Under the changes, the base rate for calculating mineral extraction tax (MET) will rise to 559 roubles per tonne in 2017 from 470 roubles now. The marginal rate of crude oil export duty would fall to 55 percent by 2016 from 60 percent.

Copyright: Reuters, 2013.