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. Last Updated: 07/27/2016

Oil Industry Tips Chaos to Follow Decree

The decision to liberalize Russia's oil exports brought mixed reaction Wednesday from industry executives, who said they welcomed the move as a positive step for Russian reforms but predicted it could create chaos as enterprises rushed to cash in on lucrative exports. "Chaos is inescapable," said an official with one of Russia's half-private oil companies. "The question is how is this problem going to be solved?" President Boris Yeltsin signed a decree Monday eliminating oil export quotas and canceling tax breaks for exporters. The government is also expected this week to dramatically reduce export tariffs, including an order that would cut in half the oil export tax to 15 European currency units per ton from 30 ecus. Economics Minister Alexander Shokhin told a press conference this week that a new government policy towards the oil sector was to take away privileges while reducing taxes. Previously, the government used quotas and high taxes to maintain a price balance between domestic and international markets. Domestic prices are about one-third international levels. Shokhin said Tuesday, however, that with domestic demand down, and only limited capacity in the country's oil export network, there was no longer a need to maintain such barriers as export quotas. Industry officials, while welcoming the policy shift, said that the removal of export quotas could initially hold back foreign investment in Russia's oil sector because of uncertainty over how exactly the new laws will be implemented. One executive from a foreign oil company in Moscow, who asked not to be named, said that cancellation of quotas and reduction of export taxes would increase dramatically the number of exporters, creating a queue of enterprises rushing to use the limited pipeline capacity of about 2 million barrels per day. "Everyone will try to export, but no one knows who will regulate this mess," the executive said. Even government officials seemed uncertain about the immediate effects of the presidential decree. Sergei Kaverin, oil specialist at the Fuel and Energy Ministry's press center, said Wednesday that the ministry officials were not yet ready to comment on the new law. He said, however, that senior ministry officials decided at a meeting Tuesday to make the changes that would be necessary to the country's oil laws as a result of the decree. Interfax on Tuesday quoted Leonid Fedun, vice president of Lukoil, Russia's largest independent oil company, as saying that export quotas have served as a guarantee for foreign investors and creditors. The removal of the quotas would make it unclear whether foreign joint ventures would gain access to the pipelines and call into question the viability of the guarantees. Fedun said Yeltsin's decree could create additional difficulties for Lukoil's credit agreement with Japan's Mitsui company, in which Lukoil's export quotas serve as part of its guarantees for repayment of the loan. Lukoil was given special export privileges last year to help repay a $700 million Japanese loan that had been granted to purchase oil equipment and rehabilitate idle wells. Lukoil was also alloted additional export quotas to help it make timely repayment of the loan, and given exemptions from the usual compulsory exchange of half of its hard-currency earnings into rubles until the end of 1999.