Russia’s finance ministry said to eye tax on miners as lower oil revenues loom

Anastasia Bogdanova | March 3, 2020 | Views: 119 | Source: S&P Global

Russia’s Ministry of Finance is reportedly looking beyond the oil and gas industry to the country’s mining sector for funds to bankroll new social spending ordered by President Vladimir Putin at the start of the year, with the prospect of declining oil production and associated revenues on the horizon.

The Ministry of Energy told S&P Global Market Intelligence that its coal department had submitted proposals to the finance ministry but gave no further information, while the latter declined requests for comment.

In the next 10 years, the share of subsidized oil extraction could increase to 72%, from about 50% now, reducing tax income by as much as 1.8 trillion Russian rubles in 2030 compared to 2018, according to Dmitry Kasatkin, deputy head of socio-economic research at the Center for Strategic Research in Moscow. The finance ministry expects the share of subsidized oil extraction to reach 90.4% in 2033, according to official 2019 forecasts.

Meanwhile, the government is considering tax breaks for oil producers working in the Arctic Circle, on shale deposits and in parts of eastern Siberia. Arctic, deepwater and shale oil projects are subject to Western sanctions, and domestic producers have argued for additional incentives to shoulder the costs of developing such long-term projects, according to George Voloshin, head of consultancy Aperio Intelligence’s Paris branch.

The finance ministry prepared but then refused to introduce a new tax on associated petroleum gas from 2022 and is looking for other industries to pick up the tax bill, Kasatkin told Market Intelligence. Recently appointed Deputy Prime Minister Yuri Borisov has refused to support the ministry’s proposal to introduce a mineral extraction tax for associated petroleum gas amid sharp opposition from the industry, Moscow-headquartered RBC media group reported Feb. 19.

The ministry has already developed proposals to raise the mineral extraction tax during periods of high export prices, Kommersant reported Feb. 11, citing anonymous sources. One of the ministry’s deputies, however, countered the report Feb. 18. “This issue isn’t being discussed within the Finance Ministry. There was some working [correspondence], a couple of paragraphs were snatched out of it, I don’t know. But we aren’t elaborating any bills,” Interfax quoted Deputy Minister Alexey Sazanov as saying.

The ministry has its sights on coal in particular for about 40 billion rubles per annum, based on 2018 markets. It is also looking at gold, fertilizer and diamonds, despite objections from the ministries of Economic Development, Energy, and Industry and Trade, according to Kommersant‘s sources. The three ministries fear the levy could discourage investment, despite Putin specifying investment growth as a key priority in his address to the Federal Assembly in January.

Finance Minister Anton Siluanov said Russia plans to spend 4.13 trillion rubles by 2024 on new social priorities set by Putin in January, adding to a bill of 25.7 trillion rubles for 13 national projects the Russian president announced in 2018, Interfax reported Jan. 29. Putin emphasized Feb. 12 that all social and investment plans must be fully financed.

The coal industry’s revenues may rise 20% to 40% if Russia can increase its share of Asian and European markets from 18% in 2018 to between 23% and 26% by 2030, and the finance ministry has even more optimistic forecasts, according to Kasatkin. “But we also forecast a fall in the industry’s net income by 34% to 54% because of skyrocketing transportation costs,” he added. “Even if price becomes a trigger for applying the new tax, the industry could suffer a lot since coal companies have big social commitments and the new measures need to be well prepared, discussed and evaluated, taking into account all the side effects.”

A tax increase would endanger a third of the coal market, putting small and medium-sized companies at risk as well as thousands of miners, according to Kasatkin, who was previously head of research projects at AO Deloitte & Touche CIS in Moscow.

“There is a lot of talk about how to get away from the raw materials export model and decrease the budget’s reliance on income from raw materials, but when it comes down to it, everything stays as it was before,” Kasatkin said. “The solution should be to strengthen the market economy through stimulating business on the one hand, by reforming the legal system for example, and stimulating consumers on the other, by raising the quality of consumption via education.”

“While the oil lobby is certainly more powerful than the coal one, the coal sector — already struggling for years and haunted by memories of all kinds of labor incidents, including such deadly ones as the Raspadskaya mine explosion of 2010 — is vulnerable to social unrest,” Voloshin told Market Intelligence. “Alongside the well-known giants, there are smaller companies that may not survive a higher tax burden.”

The initiative is reminiscent of former presidential aide and now First Deputy Prime Minister Andrey Belousov’s abortive 2018 proposal to impose a US$7.5 billion tax on some of Russia’s largest metals, mining and chemical companies, Chris Tooke, associate director of political risk at consultancy GPW, told Market Intelligence.

“His proposal at the time was rejected but he remains a proponent of greater state spending to stimulate the economy and doesn’t shy away from calling on businesses to contribute to costly state initiatives such as the National Projects,” Tooke explained. “He may be using his position as second-in-command in the government to push through a watered-down version of this, especially now that he has more fertile ground given Putin’s instruction to the new government to boost social support.”

The potential levy could hurt the EBITDA of some of Russia’s largest steelmakers, to the tune of 2.8% for Evraz PLC, 0.5% for PAO Severstal and 0.3% for PJSC Magnitogorsk Iron & Steel Works, VTB Capital’s analysts wrote in a Feb. 11 note.

In January, production from Russia’s coal heartland, the Kuznetsk Basin, shrank 10.9% year over year to 18 million tonnes as output of thermal coal slumped 15.9% and coking coal held steady, Interfax reported, citing the local industry department. Evraz and Magnitogorsk have coal mining operations in the region, while Severstal relies on reserves in the Komi Republic in the north of European Russia. PJSC Novolipetsk Steel does not have any coal mining operations of its own.

“The data arrives amid further thermal coal export price weakness on western routes — namely to Europe, where at US$50/t CIF ARA, most Kuzbass miners are loss-making,” VTB Capital’s analysts wrote in a Feb. 19 note. “At the same time, Far East coal terminals are mostly operating at maximum capacity, which rule[s] out volume redirection.”

Russia’s coal output could grow to as much as 668 Mt by 2035, according to a draft program for developing the coal industry released on the energy ministry’s website at the end of 2019. The release updated a previous version outlining two possible target levels of 355 Mt and 490 Mt. The conservative scenario of the updated program targets 485 Mt of coal by 2035, much of which will be destined for Asian markets such as China and India.

As of Feb. 28, US$1 was equivalent to 67.18 Russian rubles.

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