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. Last Updated: 07/27/2016

Oil at $25 Brings in Massive Windfall




Editor's note: This is the first of two articles. Tomorrow: From Chechnya to the IMF, how free a hand will Vladimir Putin have thanks to oil at $25 a barrel?


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In an unlooked-for bit of good news, soaring world oil prices are bringing the Russian economy more than $1 billion every month - including hundreds of millions of dollars in unexpected government revenues.


The 1999 federal budget was drafted on the premise that oil would be selling on world markets at $14 a barrel - an assumption that looked optimistic when the budget was being drafted, and when oil had for long months been sulking at a depressed $10 a barrel.


But the economic surprise of 1999 for Russia has been the steady climb of oil. By April it was hitting $16 a barrel, by July it was around $18.50, by August it was around $20, in September it climbed to $23 - and this week it surpassed $25, a level not seen since the 1991 Persian Gulf War.


By Tuesday, oil had slipped back to about $24.47. But oil analysts say oil prices will remain strong for the next several months. The members of OPEC, the Organization of Petroleum Exporting Countries, have committed to export cuts and are expected to hold firm at least until the group's next meeting in March 2000.


The result is a flood of oil dollars, which helps in everything from strengthening the ruble to funding the war in Chechnya.


As First Deputy Prime Minister Nikolai Aksyonenko said at a Fuel and Energy Ministry meeting in September, Russia's fuel and energy complex brings in roughly 40 percent of all hard currency the nation earns. Aksyonenko said fuel and energy also provides about 20 percent of the federal budget's revenues.


Oil is now bringing more than $1 billion every month into the national economy, according to the Russian Statistics Agency (as the State Statistics Committee is now known). If in January oil exports brought in about $700 million, by August oil brought in $1.4 billion.


This inflow of dollars is filling up government coffers. This is partly because oil and gas companies are declaring more taxable income, and partly because the government this summer slapped a euro-denominated tariff on oil exports. The export duties are indexed to world oil prices.


"Export duties - which did not exist in the beginning of 1999 - now comprise 7.5 euros (or $7.74) per ton [of crude oil] and from 10 to 20 euros per ton of petroleum products. Those revenues alone are amounting to no less than $110 million a month [in additional tax collection]," said Dmitry Avdeyev, an oil analyst with the United Financial Group.


Avdeyev also noted that the government last week hiked the export tariff on liquefied gas - gas used in petrochemical production and for household heating in Russia's remote regions - by 500 percent, from 10 euros to 60 euros ($61.95). The Fuel and Energy Ministry says this will bring in about another 2 billion rubles ($60 million) next year.


Steven Dashevsky, an oil analyst with the Aton brokerage, estimated even higher revenues from all of the various petroleum product taxes. He said they would bring in up to $450 million for the last three months of 1999.


How will these windfalls be used? So far no one is offering a clear answer.


"Where cash goes in our country - no one can understand this, including us and Western institutions," said Grigory Vygon, a senior researcher with the Institute of Financial Research, an organization founded by former Deputy Finance Minister Andrei Vavilov.


But obviously, the war in Chechnya - an unplanned expense - is eating up much of these unplanned revenues. Estimates of what the war will cost this year vary, but they are on the order of the 40 billion-ruble to 60 billion-ruble ($1.52 billion to $2.29 billion) price-tag offered last month by Vremya MN newspaper.


In other words, the war will cost several times more than the additional revenues that oil at $25 a barrel is bringing in, and other sources of financing must be added. Finance Minister Mikhail Kasyanov has estimated the government will raise an additional 90 billion rubles ($3.43 billion) this year from a mix of oil dollars, other new taxes and inflation revenues.


The Finance Ministry declined to comment immediately on how much additional money is coming in thanks to the unexpectedly strong showing of world oil prices, or on how that money is being dealt with.


"Actually, the law on the budget has a special provision that stipulates how extra revenues must be spent, and it includes spending some of them on paying off state debts and funding the social sphere," said Sergei Prudnikov, an analyst with Troika Dialog. "But as far as I know, this provision is not followed, and the cash could go anywhere, including to finance military operations."


Alexander Andreyev, an auditor with parliament's budgetary watchdog Audit Chamber, offered another insight into where oil dollars and other revenues may be headed.


"On Oct. 13, the latest amendment to the state budget, prepared by the government, was passed by the State Duma," Andreyev recounted. "It allocated 1.6 billion rubles ($61 million) received as 'extra' revenues to the budget for additional transfers to about 40 Russian regions, and leaves another 600 million rubles ($22.9 million) at the government's disposal. The document did not provide any explanation on how the money was to be spent."


What is that about?


"Well," Andreyev speculated, "elections are coming ..."


In a statement last week, the Tax Ministry said taxes collected in the first nine months of the year from a total of 240 leading commercial organizations - including the oil majors, Gazprom, national power grid UES and the Railway Ministry - brought 78 billion rubles ($2.97 billion) into national coffers. The ministry said these revenues represented a third of all cash payments.


By October, Tax Ministry data shows, 46 billion rubles had been collected above what the ministry had budgeted to collect.