Russia’s Tax Revenue Roller Coaster

Taxes

Since its invasion of Ukraine on February 24, the Russian government has denied access to a lot of financial statistics, but the data we can see show that Russia’s tax revenue in the first five months of 2022 was sky-high.

Calendar year 2021 was a year of strong revenue collections for the Russian government. Still, Russian tax revenue at all levels of government was 31% higher in April 2022 than in April 2021. And federal government cash from operating activities (most of which is tax revenue) was 32% higher in May 2022 than it was one year earlier.

Roughly one-half of federal revenue and one-fifth of consolidated revenue come from taxes levied on oil and gas. As shown in Figure 2, Russian oil and gas revenues are historically correlated with the price of oil. Figure 2 also shows that over time, the amount of revenue relative to the price of oil has increased significantly.

Two factors contributed to this trend. First, because under Russian law revenue collected is a function of the price of oil in dollars, the seismic depreciation of the ruble in 2015 greatly increased the yield of oil and gas taxes.

Second, since he first ascended to the presidency in 2001, Vladimir Putin has been highly successful in extracting more revenue from Russian oil and gas producers. Partly, he and his finance ministry have made numerous complicated revenue-raising adjustments to tax law. Also, compliance has become a higher priority.

The case of Mikhail Khodorkovsky is a great example. Once Russia’s richest man, he was arrested in 2003 and spent the next 10 years in custody for evasion of taxes by his company, the onetime but now-defunct oil giant Yukos.

In his 2021 book Oil in Putin’s Russia, Adnan Vatansever observes that this imprisonment resulted in oil companies changing their priorities when hiring tax advisers: “Instead of benefiting from their advice on how to optimize their tax payments, the priority had shifted to ensuring that their records were in line with existing tax law.”

Production and Exports

In 2021 Russia produced 11.6% of the world’s crude oil (10.9 million barrels per day, including oil condensate). It ranks third behind the United States (20.2% of the world’s supply) and Saudi Arabia (12.1%). Largely because of advances in drilling technology, U.S. production nearly doubled between 2010 and 2021 — from 9.7 to 18.8 million barrels per day.

Russia exported 4.7 million barrels of crude oil per day in 2021. Of this total about half went to Europe, with the Netherlands, Germany, and Poland being the largest recipients. China receives about one-third of Russian exports.

For Table 1 overview of Russian consolidated government tax revenue, visit here.

Russia is the world’s second largest producer of natural gas, with 16.8% of the total (24 trillion cubic feet) in 2019. The United States is the world leader with 23.8% of the total.

Russia accounted for 20.8% of world natural gas exports (9.1 trillion cubic feet) in 2019. Nearly 90% was transported by pipeline, and the rest in liquified natural gas tankers. Europe received nearly three-quarters of Russia’s natural gas exports. The United States is the second largest exporter with 10.8% of the world’s total.

Russian Tax Revenue

Table 1 provides an overview of Russia’s combined federal, regional, and local tax collections for 2006 through 2021. That period is divided into seven subperiods, which may be characterized as alternating economic upswings and downturns.

The three downturns were the 2009 worldwide financial crisis, the 2015-2016 Russian financial crisis, and the 2020 pandemic recession. Unsurprisingly, oil and gas revenue is by all measures more volatile than non-oil and gas revenue.

At least three other features are particularly noteworthy. First, revenue in 2021 is generally much larger compared with prior years. Second, Russia has a much more conservative fiscal policy than the United States. It is even able to generate large surpluses when the economy is strong.

Third, the 2015-2016 economic collapse — attributable to both economic sanctions imposed on Russia in response to the takeover of Crimea and to the collapse of oil prices (in part because of increasing U.S. supply) — decimated government revenue. The Russian treasury has been through a lot of turmoil in recent years.

Even if revenue does begin to decline in 2022 — of which there is no evidence yet — it is likely to be something that public finances and public opinion can handle.

For Table 2 Russia’s mineral extraction tax revenue and related statistics, 2006-2021, visit here.

The Russian Ministry of Finance’s category of oil and gas revenue has two major components: (1) the mineral extraction tax and (2) excise duties on exported oil.

Other revenue related to the oil and gas industry (not discussed in this article) includes excise taxes on motor fuels; corporate profit taxes on businesses that produce, refine, and transport hydrocarbons; and dividends paid to the government from its ownership share in oil and gas businesses.

In 2021 oil and gas tax revenue included RUB 7.1 trillion of mineral resource tax and RUB 2.2 trillion of export duty revenue. (The official oil and gas revenue total of RUB 9.1 trillion includes negative entries of approximately RUB 200 billion for excise tax rebates that subsidize Russian refineries.)

About 79% of oil and gas revenue was from crude oil and petroleum products. The remaining 21% was from natural gas.

The Mineral Extraction Tax

The mineral extraction tax applies to all (not just exported) oil and gas production in Russia. Table 2 shows the quantities of Russian production of oil and natural gas, a market price expressed in dollars for each, and a conversion of that price into rubles. Quantity is then multiplied by price to estimate the total value of Russian production of oil and natural gas. And then actual revenue from the tax is divided by estimated value to arrive at an effective tax rate on sales revenue.

Let’s walk through the calculations relating to crude oil in 2021. A common unit of measurement of crude oil production is barrels per day, which for Russa was 10.8 million. That is about 3.9 billion barrels per year.

The Brent price of oil, commonly referenced as a benchmark for oil sold into Europe, was about $71 per barrel. Using the average exchange rate in 2021, that turns out to RUB 5,219 per barrel. Multiplying annual production times price in rubles yields an estimated value of oil production in Russia of approximately RUB 20.5 trillion.

Mineral resource tax revenue from crude oil production was approximately RUB 6.3 trillion. Dividing mineral extraction tax revenue by estimated value yields an effective tax rate of 30.7% (shown in the last column).

This 2021 percentage is about twice as large as the percentages in the mid-teens estimated for years before 2015. This stark increase undoubtedly is attributable to the sudden and large depreciation of the ruble (appreciation of the dollar) in 2015.

Similar calculations for natural gas show rising tax revenue as a percentage of the estimated value of natural gas production — for example, from 1.2% in 2009 to 13.1% in 2020. The huge exception to this trend occurs in 2021, when the percentage drops to 4.8%.

Even though mineral resource tax revenue had a healthy increase from RUB 621 billion in 2020 to RUB 815 billion in 2021 — a 31% increase — it paled in significance compared with the increase in the estimated value of natural gas production from RUB 4.7 trillion in 2020 to RUB 17 trillion in 2021.

It is unclear why value and tax revenue have diverged so significantly. Perhaps that may be attributable to the violent intra-year swings in price during those years and lags between production and tax collection.

Oil and Gas Export Duties

Export duties apply to foreign sales of crude oil, natural gas, and petroleum products (refined from crude oil). Calculations with mechanics similar to those in Table 2 (for the mineral extraction tax) are shown in Table 3 for export duties.

While export duties as a percentage of value have remained steady for natural gas, they have declined significantly for crude oil and petroleum products. This is consistent with the ruble depreciation and the planned six-year phaseout of export duties on crude oil and refined products that began in 2019.

For Table 3 Russia’s mineral export duty revenue and related statistics, 2006-2021, visit here.

2022 and After

Before the invasion of Ukraine, the spread between the Urals price of oil and the Brent price was small. But because of official restrictions and self-sanctioning, Russian crude oil since February 24 has sold at a significant discount to crude oil from the rest of the world. (This has been a windfall to China and India, which continue to import from Russia.)

Figure 3 shows that the discount in May was approximately 32%. Thus, the oft-cited Brent and West Texas Intermediate crude prices are no longer good indicators of the strength of Russian oil tax revenue. The much lower Urals price is the best guide.

Since the invasion, the ruble-dollar exchange rate has gone through some wild gyrations. First, as should be expected, the ruble depreciated greatly. Then because the Bank of Russia raised interest rates and imposed currency conversion restrictions, the currency appreciated. Before the invasion, one dollar cost about RUB 75.

Now, after the corrective action taken by the Bank of Russia, the ruble is valued between RUB 50 and RUB 60 per dollar. So the ruble is stronger than before the invasion. If this level is maintained — all other things being equal — Russian oil and gas tax revenue over the rest of the year will decline relative to pre-invasion levels.

Nobody is sure if, when, and by how much Russia may further reduce its supply of oil and gas to Europe. Nobody is sure if, when, and by how much Western nations can reduce their demand or the price they pay for Russian oil and gas.

Recessions around the world caused by either a resurgence of COVID-19 or tighter monetary policy could reduce demand and energy prices. On the other hand, natural disasters, abnormally high summer temperatures, or abnormally low winter temperatures could raise prices.

Over the short term, the outlook for Russian oil and tax revenue is highly uncertain. Over the medium term — say, beginning in the spring of 2023, as Western nations increase their investment in alternative energy, increase energy transportation capacity and storage, and nurture alternative sources of conventional energy — demand and prices for Russian oil and gas can be expected to trend downward.

Over the long term, the future is bleaker for Russian oil and gas revenue and the Russian economy — caused by a lack of investment in the oil and gas sector, sanctions that deny access to (or at least make more difficult to access) Western technology and capital, the further maturation of alternative energy sources, and a declining and aging Russian population.

In the meantime, to give us insight about Russian oil and gas tax revenue, based on the facts and trends discussed in this article, we can suggest keeping an eye on the Brent crude oil price, the differential between the Urals and Brent price of oil, the ruble-dollar exchange rate, and movement in the price of natural gas that might not correlate with the price of oil.

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