How will high oil prices help Tatarstan’s economy?

What Russia’s budget receives from oil sale

Russia’s budget in general is a sum of tax and non-tax incomes of the federal budget and budgets of the country’s regions (intergovernmental transfers and insurance premiums are excluded). Oil sale incomes of the country are those taxes oil producing and refining companies pay (excluding taxes and duties from the gas sector, VAT on fuel sale at petrol stations and small-scale wholesaling, dividends and incomes from the privatisation of state-led oil companies). So what taxes do our oil companies pay? Here it is standard VAT, income and property tax, personal income tax and so on. There are purely sectoral taxes — mineral tax, excises on oil products (including a mechanism that holds petrol prices in the Russian market: if petrol prices are high abroad, the budget compensates for the money oil companies lose, not by raising prices in the country if petrol prices in the country are above those abroad, oil companies themselves pay the budget; this mechanism allows avoiding outstripping growth of retail prices at petrol stations because of the volatility of wholesale fuel prices), incomes from production sharing agreement, additional income taxes, export duties on oil and oil products. Mineral tax and export duty on oil prevail in the chart of budget taxes and duties.

The share of oil incomes in the budget has varied from 22 to 35% in the last years. Budget incomes from the oil sector are much bigger than in the processing industry, banking and finance, transport and construction. This happens due to a higher market price for oils and oil products and additional taxation in the sector (it included the tax burden — the share of taxes and duties in revenue). So the tax burden on the oil sector is the highest in the country, 52% whereas the average in the economy is 11%.

What about Tatarstan’s budget?

It would be logical to assume that when oil prices in world markets go up, incomes in the country and regions’ budgets should increase. But let’s see if such regions that are rich in oil as Tatarstan benefit from exporting oil and oil products. It should be reminded that the share of oil and gas production in the pattern of industrial production of the republic totals 21%.

Income tax is the main tax in Tatarstan’s budget. Mineral tax and additional income tax go to the federal budget.

The share of oil and gas in the income tax chart is around 50-55%. It is noteworthy that the growth of prices for oil and higher production will positively influence the financial, economic and social spheres.

For instance, when the oil price fell in early 2020, production reduced within the OPEC+ deal, payments of core enterprises of the Fuel and Energy Complex in the budget reduced more than twice. The losses amounted to 8 billion rubles during the first quarter of the year. Tax and non-tax payments of Tatneft PJSC and small oil companies in 2019 reached 596 billion rubles. It should be reminded that all the payments made by Tatarstan to all budget levels and extrabudgetary funds in 2019 was equal to 1 trillion 89 billion rubles.

In 2021, we saw a completely different picture — companies’ financial figures are record high. By the middle of 2021, core enterprises of the gas and petrochemical complex ramped up the production by 2% compared to the same period in 2020. Tatneft increased its output by 8% in the second quarter of 2021. The annual production growth totalled 1,4%. TANECO oil refinery increased feedstock processing by 1,4%, the production of diesel fuel rose 1,6 times, petrol did by 8%.

By the end of the year, production volume grew by 3,5%, oil production jumped by 5,5% (because of easing the OPEC+ deal), the production of detergents by 24%, rubbers did by 23%, oil products augmented by 2,5%. The value of shipped commodities rose 1,6 times and reached 1,45 trillion rubles, it is an all-time high. A fall in production in oil refining, fertiliser and plastic output is registered. Backbone companies of the oil and petrochemical complex in 9 months of 2021 transferred 499 billion rubles to all budget levels, which is twice bigger than a year earlier. Transfers to Tatarstan’s budget rose by 61%, to 62 billion rubles.

Problems

Oil rates, production regulation within the OPEC+ deal and the tax policy of the Russian government influence oil companies’ financial performance.

For instance, in 2019, Tatneft’s profit fell by 8,9% reaching 192,8 billion rubles. In 2020, the world faced a pandemic and, as a consequence, a fall in oil demand, which led to the signing of the OPEC+ deal where Russia was to cut production by 25%. So Tatneft’s revenue in 9 months of 2020 reduced by 21%, to 484 billion rubles, while profit decreased to 52,4 billion rubles (threefold plunge). The fall in the revenue could have been bigger because oil prices also went down, OPEC+ production reduced too. The company refocused on refining feedstock and selling oil products.

The same situation was seen in all large and mid-sized oil companies of Russia, and the country’s budget started to suddenly lose income. The government decided to use its internal reserves to the maximum. The fiscal burden is the simplest decision in such decisions. There was launched a new tax manoeuvre that cancelled the benefit on hard-to-recover and exhausted oil fields. There was reconsidered the reform of additional income tax, mineral tax concessions for depleted oil fields and highly viscous oil were cancelled. Also, there were cancelled concessions on export duty on highly viscous oil. This provided additional 290 billion rubles in the federal budget.

For a better understanding, in 2019, Tatneft won 39 billion rubles because of the concessions, which is some two-thirds of the company’s payments made to Tatarstan’s budget. In the first quarter of 2020, the concessions helped to save 8,8 billion rubles. The concession in mineral tax was 20% of the net profit in 2019. The figures are serious.

According to the latest data, Tatarstan’s budget in 2021 lost 30 billion rubles of income because of the cancellation of concessions. The authorities of the republic complain that highly viscous oil, which is harder and more expensive to produce with steam) was put in line with classic oil, the budget of the republic was taken away income tax, while the oil company was divested of investment. Here it is hard to disagree because the tax policy must be constant, which provides a longer period of planning for companies.

The Russian Finance Minister promised to develop parameters of additional income tax for highly viscous tax by late 2021 to put them into operation from 2024, that’s to say, concessions on highly viscous oil taxes will return. Meanwhile, oil companies and regional authorities try to make sure the concessions are launched earlier to ramp up the production.

In conclusion, I would like to note that the growth of prices for oil and derivates will favourably influence payments made to Tatarstan’s budget. Income tax is the main source of replenishment of the regional budget. Amid imbalances in world markets, the financial figures of Tatarstan companies from this sector are record high. Imbalances haven’t yet ended. Moreover, a new twist of global inflation, which will entail the whole production chain, including Tatarstan petrochemistry, is expected. Exports in the next few years will remain positive.

As for the oil price, the consensus outlook for the oil price is $60-70 per barrel. Such a rate satisfies both producers and consumers. Analysts assume that world demand in 2022 will be higher than before the pandemic, and world reserves turned out to be 5% below the average in the last five years (but the number rapidly decreases because of the production of all market players).

Of course, prices can grow and fall. Everything depends on the combination of factors at a specific moment. The fact that despite the expected surplus of oil in the first quarter of 2022 (because of the opening of reserves in some countries) producers’ low reserves will level the possibility for a sudden price decrease backs the outlook up.

Also, high inflation in the world will support the feedstock price. The further opening of oil reserves on the dynamics of prices and decisions of OPEC+. The decision not to increase the production and price growth over $80 per barrel will cause additional sales from strategic reserves.

The risk of price rise in general can create low oil reserves, provide recovery of air travel, low free production capacities. The risk of price reduction comes from the possible appearance of new coronavirus variants (and new lockdowns as a consequence), the use of strategic reserves of some countries, easing sanctions on Iran (and only one country can bring the rates down, returning to its usual production rate). It will be interesting to see at what rate the oil market will strike a balance. There are a lot of different factors, and results can be diametrically opposite.