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Why This Oil Rally Won’t Last

A combination of bullish factors…

Charles Kennedy

Charles Kennedy

Charles is a writer for Oilprice.com

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Russian Oil Industry Braces For Tax Hike

The Russian government is moving to plug a whole in its budget by raising more revenue from its oil and gas industry.

According to Reuters, the Russian finance ministry will tweak the Mineral Extraction Tax on oil companies, slapping on a “rouble deduction,” which could raise 1.6 trillion roubles ($24.1 billion) through 2018. In effect, oil companies pay a tax that is largely calculated based on the strength of the country’s currency, leading to a decline in revenues as the rouble has lost a significant amount of its value over the past year.

Instead of using a previous formula that used an exchange rate based on when the tax was paid, the government will instead use a rate close to what the rouble traded for in late 2014. That means, instead of a projected 63.5 roubles per dollar that the government expects for 2016, the tax will instead by based on 43.8 roubles per dollar. Related: Oil Prices Gain On Higher Investor Confidence In Tightening Markets

The effect will be much more tax paid by oil companies, since the rouble was dramatically stronger in 2014 compared to where the rouble has gone since then.

With the Russian budget dependent on oil revenues for about half of its overall revenues, the decline in oil prices has left government coffers much lower than expected. In fact, oil taxes account for about one-third of the entire budget, but for the first half of 2015, revenues collected from these taxes were 16 percent lower than they were for the same period in 2014. Related: Can The Saudi Economy Resist ‘Much Lower For Much Longer’?

The rouble has been battered by low oil prices over the past year, with several dives that have coincided with renewed downturns in the price of crude. The turmoil in the Chinese stock market, coupled with the surprise devaluation of China’s yuan have also put pressure on the rouble. The rouble hit a new low in August after emerging market currencies across the world suffered a sell off following a downturn in oil to new six-year lows.

On the other hand, losses from low oil prices are partially offset for Russian oil companies by the weakened currency, since costs tend to be in roubles and revenues are in dollars.

By Charles Kennedy of Oilprice.com

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