Russian petrochemical industry awaiting decision on ‘negative excise duties’

When Russia’s so-called tax manoeuvre in the oil and gas industry started last year, lower export duties on hydrocarbons spurred price growth in the domestic market, and the Kremlin resorted to negative excise on some products to make prices lower. Now the government is debating what to do about the compensatory measures that may have a big impact on the country’s petrochemical and oil and gas sectors.

The Russian government can’t reach agreement on “negative excise duties” aimed to constrain prices for domestic hydrocarbon raw materials, reports bneIntelliNews. When the prices rose due to Russia’s recent tax manoeuvre, the government introduced negative excise duty as compensation, but now governmental bodies can’t agree on how to expand the programme. Last week, the Ministry of Finance and Ministry of Energy were reportedly supposed to return to the discussion on extending the negative excise to liquefied petroleum gas (LPG) and ethane, which is, in effect, a subsidy for the production of these products.

The so-called tax manoeuvre launched in 2019 was aimed to change the way raw materials were taxed by shifting the burden from downstream production to upstream. However, a reduction in export duties on hydrocarbons led to price growth in the domestic market, as the duties on these products were acting as a form of protectionism making domestic prices lower. After the first tax changes were made last year, petrochemical producers complained and said they would go out of business. Thus, the government introduced negative excise duty on naphtha to compensate domestic producers for their losses. The duty was supposed to be broadened to cover a wider range of hydrocarbons by September, but the government can’t agree on how to fund the subsidy, says bneIntelliNews.

VTB Capital confirms that the two ministries disagree over the way this negative excise will be financed. “The Ministry of Finance has proposed deciding on the matter in July and insisted that the introduction of negative excise on LPG needs to entail the introduction of mineral extraction tax (MET) on associated gas in 2022 at a rate of 50 rubles per thousand cubic centimetres, growing to 150 rubles per thousand cubic centimetres by 2026. The Ministry of Energy calculates that the negative excise on ethane and LPG will result in additional investments in petrochemistry of $50 billion and exports of $7 billion over a ten-year period, and thus will not affect the tax base,” said the bank in a note.

The introduction of MET on associated gas may influence the margins of Russian oil producers, which bear no such expense now, or petrochemical companies, as the new duty can raise the price of feedstock for petrochemistry. At the end of February, CEO of Sibur Dmitry Konov said that the decision on the subsidy would be a key factor in deciding if the company went ahead with the construction of a new petrochemical facility in Amur Oblast in the Far East. The petrochemicals company is currently Russia’s largest consumer of associated gas.

By Anna Litvina

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