''Nobody benefited from the petrol price freeze, including car owners''

Why collect 250bn rubles of excise on fuel is a wrong approach

The government is again unsure that prices for petrol in Russia won't grow, this is why it extended the agreement with oil companies to freeze them for another three months. Press Secretary of the Independent Fuel Union Sergey Boiko told Realnoe Vremya what's the foundation of a stable price for petrol and why the whole volume of the fuel available in the country should be sold on the exchange.

''60 per cent of petrol price per litre are used to pay taxes''

Sergey, let's start with the question how petrol price is created.

At the moment, about 60 per cent of petrol price per litre are used to pay taxes, first of all, mineral production tax (MPD), excise on fuel and VAT, which we pay when we purchase fuel. The other 40% are the prime cost of oil production, processing and the margin between the wholesale and retail price.

What role have taxes on fuel sale started to play for the Russian economy in the last years if they total the 60%?

If we remember talks about the ''tax manoeuvre'', which were 5-6 years ago, it was supposed the main burden would fall on oil producers will pay MDP, but export duties would gradually reduce, and the excise on motor fuel would reduce at the same time. But as the excise is collected easily, the government not only didn't reduce but even increased it: it's almost tripled in the last six years.

Now the excise provides the country with about 250 billion rubles a year. And it's hard to say how effective it is for the economy. Functionaries' logic is not always budget-oriented – it's important for them that money go to the budget but the impact on economic processes concerns them the least. Why? The excise always augmented petrol price and makes an impact on inflation rise. Moreover, it makes an impact on the whole chain – agriculture, wholesale and retail trade, logistics, transport.

What's the impact of ''petrol money'' on social articles of the budget? Because once President Putin said our petrol price wasn't very low because its taxes provide teachers, doctors with social payments, salaries.

It is still the favourite point of the Ministry of Finance – the ministry says that road funds, which then pay for road repairs and so on, are created thanks to the excises. But the share of excises in road funds reduces at the same time because another system of financing sources is introduced there, while the main part of excises goes to regions. From our point of view, we already see a wrong approach. These 250 billion are quite a big sum. But 600 billion rubles are spent to cushion, that's to say, compensate those losses oil refineries are suffering due to petrol price fixing. In a word, we take money from one pocket and put it into another. It's strange logic that contradicts itself.

''At the moment, about 60 per cent of petrol price per litre are used to pay taxes, first of all, mineral production tax (MPD), excise on fuel and VAT, which we pay when we purchase fuel.'' Photo: magcity74.ru

By the way, why are our oil refineries are loss-making if so much money is spent on them?

Our country didn't have oil quality requirements for long, that's to say, a lower quality oil was produced besides RON92 and RON95. In the last years, the country has switched to European oil standards, and the government has obliged big oil companies to seriously modernise oil refineries. And one of the terms of the modernisation was that the government would create a concessionary regime so that factories could pay their modernisation back – much money was invested there.

But, as usual, all agreements were violated, and in the current situation, oil refineries are, in fact, loss-making, which created a state when it's become profitable for oil companies to sell oil crude abroad, moreover, export duties in the tax manoeuvre are reducing, which means they won't have to spend resources on oil processing and sell the fuel in the domestic market. Our domestic market doesn't compete with each other – oil exports compete in Russia, and oil price plays a big role.

But there was no such thing previously when oil was $100-120 per barrel! Could not only last year's growth of oil prices but also the ruble rate, which isn't very favourable for oil companies, have played a role as well? Because our ruble is quite underrated, as experts admit.

Everything used to be different in the past, of course: duties were higher than now, and the ruble rate against dollar and euro was fixed, that's to say, there was a currency corridor, while now the ruble rate against the key currencies is free, and the problems accumulated in the last five years have come to the surface.

''Nobody benefited from the price freeze''

What has been the result of the decision on oil price freezing, which was first orally made between the government and oil companies in June 2018?

In June, the government considerably reduced excises (Editor's Note: almost by 20%), and this allowed to reduce petrol price growth paces. There was made a decision that oil companies were obliged to supply by 3% more of oil volumes to exchange than in last year's analogous period. Therefore the pressure on exchanges mitigated, and this also allowed to reduce petrol prices. Reducing oil prices in world markets also played a big role.

Was there any benefit of this decision? Did the same consumer, the car owner win?

Nobody won, oil companies had losses because this decision was at their expense, owners of independent petrol stations who had a fever throughout the summer also suffered billions of losses, and everything calmed down only in autumn.

But the excises were reduced!

How do economic entities function? So new excise rates are introduced from 1 July, so what, does it automatically make an impact on the same oil companies? In Russia, excises are paid some time later (Editor's Note: three months), moreover, the situation didn't stabilise quickly, only in September. This is why the government decided to freeze prices again in November 2018.

As you say, why did the consumer get nothing? Oil prices didn't grow by 9-10 rubles as it could have been.

You know, oil prices in the world market can grow and fall – last year, we saw almost $70 per barrel, $60, and $50 late last year. But fuel prices in Russia grow in any situation in the world market. Regulation of petrol prices is our natural habitat. The government said inflation is planned to be 4-6%, which means our petrol prices are planned to be in line with it. And an example is right around the corner – within the last price freeze, the government permitted both oil companies and independent petrol stations to raise fuel prices as much as VAT rises from November to 1 April, though due to economic conditions, they could have not raised them – it would be economically enough to keep them at the previous level.

In general, if we had free retail pricing and didn't have a burden like excises on fuel, by our estimates, petrol prices would fall by 5 rubles. But we have what we have, and, in this situation, the consumer loses.

''In the current situation, oil refineries are, in fact, loss-making, which created a state when it's become profitable for oil companies to sell oil crude abroad, moreover, export duties in the tax manoeuvre are reducing.'' Photo: amurmedia.ru

As I understand, now petrol price will still depend on oil price? If there is a rise to $100, is notable growth inevitable?

It depends on oil price, how the tax system will function, it depends on how many oil refineries out of 36 currently operating ones will stop for repair. What is bad is that petrol prices are regulated in Russia by hand, and the decision on damper are ineffective at the moment. The cushion worked with a low diesel price – it reduced, while petrol didn't.

''All fuels must be sold via an open exchange. Then price will be lower''

What should then be done so that everyone will be happy – oil companies, the government, consumers and independent petrol stations?

Our country doesn't have a deficit in fuel. For this reason, I think all fuel volumes should be sold via the Saint Petersburg Mercantile Exchange. The sale of just 13% of Russian petrol and 5% of diesel fuel via the exchange nowadays leads to a non-market wholesale price, which creates the retail price. If fuel is sold via an open exchange, the price will be lower. It benefits both the consumer and oil companies because it will be a market price, a price without risks. Moreover, companies won't need to ask for some tax benefits and so on.

It is important to lift excises on fuel and attempts to regulate the retail price. The price competition in our country has been almost eliminated ''thanks to'' the Federal Anti-Monopoly Agency, which considers competition as price fixing or something else. If this all had been done, petrol prices would have fallen by 5 rubles. Yes, it would be a market that would fall and rise depending on world oil prices. But it would be understandable and clear to everyone, and the consumers and the country would win in this situation.

Does it resemble European practice?

These ideas resemble American politics. And if you have a look at fuel prices in the USA, you will see they are lower than in Russia, though they have a completely different level of income and completely different levels of petrol consumption, as it's one of the countries with the highest level of automobilisation in the world.

What is likely to happen in three months when the March petrol price freeze deal expires?

Why did the government decide to extend this deal for another three months? Because those patterns they included in the decision beforehand didn't work, and now the Ministry of Energy and other interested departments are trying to create different ways and mechanisms of state regulation, which will allow the fuel market to function without sudden rises. This is why we see an attempt to get the time to create some new measures.

We ourselves participate in this work, create different proposals and we shouldn't say that the government allegedly understands nothing. It perfectly understands everything, and key ministries are putting effort to make a correct decision in those currently existing frameworks. The government just took timeout to correct the mistakes.

Why is it three months?

It was a desire of oil companies. Of course, social responsibility is important, but they know about their losses, too.

US sanctions against Iranian oil will come into force in May. Will prices go up?

I don't think it will be fluctuating growth because these sanctions were claimed a long time ago, and the market already won it back, that's to say, included it in its petrol, oil, diesel fuel futures and so on. It's more dangerous if there is a coup in an oil country, and oil refining falls there, which will lead to a sudden and fluctuating rise in prices for black gold or vice versa, there will be a new technology breakthrough in oil production, which will make prices fall.

''Socialistic experiments ruined oil production, and now the authorities of the country have to ask Russia to process and produce oil.'' Photo: tsn.ua

Can the events in Venezuela affect the growth of price for black gold?

Venezuelan authorities have reduced oil processing in the last several years due to low oil prices and reduced oil production due to relations with the USA. Socialistic experiments ruined oil production, and now the authorities of the country have to ask Russia to process and produce oil. Venezuelans aren't able to carry out these processes on their own, and these factors are also included in current oil prices.

You said that excises must be cancelled so that the market of oil products would feel good and petrol price would be low. It's hard to believe that Russian authorities will do it in the next years and maybe decades because we aren't a rich country. But Premier Medvedev has recently promised taxes won't be raised in the next six years. Will you comment on it? Can excises go down?

If there is no critical situation in the fuel market, that's to say, if the government isn't able to keep the situation under control with intermittent growth of prices, then it will lower excises again. The reduction in the excise rate is the last magic wand of the government in this situation. As for the rest… The budget for our functionaries is something sacral, and laws on shortfalls in the budget's income, in fact, can't be approved given the current configuration of our power. This is why we can't be speaking about any reduction. As for Mr Medvedev's promises not to raise taxes, I can only say that functionaries have already raised taxes (VAT, excises). In addition, Vladimir Putin once promised not to raise taxes. Instead, we faced a rise in different fines and duties. I think functionaries will act in the same way in the future.

By Sergey Kochnev

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