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. Last Updated: 07/27/2016

EDITORIAL: Russia Can't Afford Cuts In Oil Taxes




The collapse in the price of oil on world markets is likely to provide the first test of acting Prime Minister Sergei Kiriyenko's relations with Russia's all-powerful financial oligarchies.


Crude oil prices, now at less than $13 a barrel, have fallen as much as 40 percent since November when an increase in output and a drop in Asian demand caused a glut.


As prices fell, Russia's oil producers have run to the government asking for a reduction in taxes to cushion them from the effects of the collapse in the crucial export market. One option would be for the government to reduce the oil excise tax of $1.30 per barrel.


It will be hard for the government, especially the greenhorn Kiriyenko, to resist such requests. Behind the oil companies stand the patricians of Russia's financial oligarchy -- Boris Berezovsky of Sibneft, Vladimir Potanin of Sidanko, Mikhail Khodorkovsky of Yukos and Mikhail Fridman of the Tyumen Oil Company.


But the government should not be in a rush to give too much away. The country cannot afford to make major cuts in oil industry taxes, which account for 25 percent of the government's revenue.


Deciding whether the oil industry deserves tax relief requires the crunching of some sophisticated numbers.


A number of oil companies, including LUKoil, Russia's biggest, say that the combination of expensive pipeline tariffs, high taxes and high production costs mean that at the current world price they are losing money on exports.


But in this debate, the oil companies have a clear interest in crying poor. The government should take claims of losses with a big pinch of salt. The oil companies have grown rich over the past few years, and they may well have plenty of fat they could easily cut.


Another reason the government should be in no hurry to cut excise taxes on oil is the continuing uncertainty surrounding world oil prices. The market dived to a low of less than $13 last week, but has since recovered to close to $15 in response to announcements of a production cut by major world oil producers.


The government should be convinced that oil prices are set to remain low for a long time before it agrees to tax relief, which will be very hard to reverse.


It remains to be seen how courageous Kiriyenko will be in taking on the oil lobby. While his brief tenure at the Fuel and Energy Ministry should help him understand the issues, it may have also given him a soft spot for the oil sector. But if he is to have a long-term or even medium-term future, he must show the oligarchs who's boss.