Russian govt said mulling super-tax on Gazprom to fund spending

By bne IntelliNews March 20, 2012

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Russian government ministers, looking for ways to finance newly elected president Vladimir Putin's enormous spending pledges, are mulling a special tax on gas giant Gazprom, write newswires. The tax would cream off the 80-100% of extra profits the gas giant has reaped from increases in the price of gas in Russia in 2012. Gazprom in response is demanding an additional price hike for domestic industrial customers later in the year, writes Vedomosti.

Gazprom has traditionally supplied gas below world market levels to Russian consumers, and been compensated for this by the government with lower taxes than those applied to the oil sector, as well as a monopoly on exports. But the government is now looking for extra revenue sources to cover election spending pledges totalling 3% of GDP - and Gazprom might be the first port of call, putting into question the traditional arrangement.

Gazprom has already seen its Mineral Extraction Tax rate for 2012 roughly doubled, bringing it closer to the tax applied to the oil sector. At the same time, its domestic tariffs for 2012 set by the state regulator are set to increase by 15% in July, and the government is apparently plotting how to get a share of the extra revenues that will result.

According to Interfax, Finance Ministry and Ministry of Economic Development are now mulling taking 80-100% of Gazprom's extra revenue resulting from this year's tariff increases. This follows reports that the government could boost the export tax on fuel oil to 90% of that levied on oil, at the expense of the oil companies.

Citigroup analysts are ringing the alarm bells over the government's intention to raid the goose that lays the golden eggs, with the bank downgrading Gazprom from 'buy' to 'neutral' on March 20. "Perhaps in response to the protests around the election, it appears that the government is going down a more populist route, electing to tax more and spend more... Faced with the desire to increase tax revenues by around $60bn a year, we believe that the easiest way to get the money is likely to be the gas sector in the first instance, followed by the oil sector, and then the metals sector and higher taxation on the rich," writes Citi's Kingsmill Bond in a research note.

"We expected neither for the debate to emerge before the new government was so much as named nor for the ministries to take such an aggressive position," Bond continues. "If enacted, these proposals would do significant damage to the investment case for the oil and gas industry." At the same time, "higher commodity taxation would only increase Russia's commodity price dependence, and we reiterate our call that the market is unlikely rapidly to restore its longstanding link to the oil price."

In response, according to sources quoted by business daily Vedomosti on March 20, Gazprom is calling for a further tariff increase as of October 2012 by 23.6%. Analysts are split on whether government is likely to approve this, considering the knock-on effects for inflation and electricity tariffs. According to Vedomosti, the resulting price of $137 per 1,000 cubic meters would be twice as high as the current price of natural gas in the US following the shale gas revolution there.

Conversely, if such a tariff hike did take place, while painful in the short run, it would be a whole step nearer to equalizing the profitability of Gazprom's operations abroad and at home, which is the key to finally liberalizing the gas export sector. With the EU's third energy charter demanding that Gazprom drop its export monopoly and open up export pipelines to third parties, this is a step Gazprom will probably need to take sooner or later.

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