U.S. Economists Say Kremlin Blocking Oil

The Russian government deliberately engineered the recent slowdown in oil production by imposing high taxes on the industry, two eminent U.S. economists contend in a new book.

The claim, by Clifford Gaddy and Barry Ickes in a book to be published by the London-based Center for European Reform this week, contradicts statements by the government that it is seeking to increase output.

Gaddy, of the Brookings Institution, and Ickes, of Pennsylvania State University, co-authored a chapter for the book, "Pipelines, Politics and Power: The Future of EU-Russia Energy Relations."

"We argue that the slowdown is neither inevitable nor the undesirable but necessary consequence of bad policy," they wrote, according to an advance copy of the book obtained by The Moscow Times. "Rather, it is the result of a conscious and rational but complex decision-making process at the top level of the state leadership."

Prime Minister Vladimir Putin and his successor as president, Dmitry Medvedev, want the output slowdown as a way of managing the Russian economy's addiction to the rent, or windfall oil export revenues and tax take from producers, Gaddy and Ickes said.

Russian leaders have learned that the Soviet Union's mismanagement of oil rents was a key cause of the country's downfall, the economists say.

"The Putin government cannot eliminate Russia's addiction to rents. Nor does it want to," Gaddy and Ickes said. "But Russia's leaders know that, unbridled, it can destroy."

The claims appear to be at odds with recent tax breaks to develop remote fields, a tax cut that will save oil companies $4.2 billion per year starting in 2009 and a one-off cut in oil export duty this fall.

Putin's spokesman Dmitry Peskov on Monday denied that the government had sought to curb output.

"A set of measures has been adopted to invigorate the oil production sector," Peskov said. "Thus, the conclusions of these experts don't take into account the real state of affairs and the real work by the Russian government."

Putin has repeatedly called for the development of a diversified, high-tech economy.

Oil company chiefs have said the current production decline is temporary, while state-controlled Rosneft is seeing its production growing.

Oil taxes and export duties have been hiked several times since Putin took office as president in 2000. They now suck in 85 percent of oil firms' profits, discouraging the large-scale investment needed to develop new fields.

The government's tax take was 62.5 percent of profits in 2004, up from 32 percent in 1999 when Russia reintroduced oil export duties, according to the Development Center, a think tank.

As a result of the heavier tax burden, quarterly oil output began falling year on year in the second half of 2007, Gaddy and Ickes said.

"Should there be a need for a marginal increase in output, the tax burden can be temporarily eased, as appears to be happening at the time of writing," they said.

Neither Gaddy nor Ickes could be reached for comment Monday.