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. Last Updated: 07/27/2016

Oil Firms Gang Up on Finance Ministry

After holding their tongues while the Finance Ministry hammered out a tax plan it said wouldn't harm the industry, four of Russia's top oil firms have broken their silence to condemn the ministry's proposals.

"In reality, the Finance Ministry does not lower, but raises the tax burden on oil companies, while at the same time making public statements about lowering taxes," said a joint statement by LUKoil, Yukos, Sibneft and Tyumen Oil Co., or TNK, Wednesday night.

Over the past two months the government, as part of an attempt to reduce the burden on business, submitted its tax package to the State Duma piecemeal, including laws on corporate profit tax, customs duties, state fees and royalties.

Last summer, the first four chapters of Part 2 of the Tax Code — on value-added tax, excises, income tax and social taxes — sailed through parliament.

The Finance Ministry trumpeted the achievement in its own letter Wednesday, saying that the "submitted draft laws carry the tax reform forward."

But the details of the new changes to the tax code, taken together, have alarmed the oil majors, who say their profits will drop if prices go up.

Their calculations show that if the average price of a barrel of oil jumps from $17 to $25 per barrel, a 47 percent increase, profits for the industry will drop 11.8 percent — from 289 billion rubles ($10.3 billion) to 255 billion rubles.

Oilers complain specifically about the government's plan to increase export duties and excise taxes, as well as the introduction of a royalty tax, which replaces three different existing taxes.

The plan calls for a new royalty tax of 425 rubles on a barrel of oil sold for $17, and 625 rubles at $25 per barrel — currently the tax is 322 rubles if the price is $20.

The government also plans to raise export duties at the high end of the price curve. If oil prices top $32.5 per barrel, for example, the export tax will jump 37.5 percent to 66 euros ($57.70) per ton.

The Finance Ministry defended the moves.

"We are aware of the concerns of oil companies, which try to defend the extra profits they raked in on the tails of the bull run on the global oil market," the ministry said. It also disagreed with calculations that show a decline in profitability if prices grow.

Earlier this year, Finance Minister Alexei Kudrin, who is also a deputy prime minister, said that taxes on other industries should be lowered at the expense of oil majors. "The oil sector should serve the interests of the budget, the social sphere, the state and should help lower overall tax burden on the industry," he said.

No. 2 producer Surgutneftegaz opted not to join the letter of protest.

A Surgutneftegaz official who asked not to be named said that his company's position differed from the other four in that it wants royalties calculated on the basis of the quality of oil wells.

"I would not consider the government's proposals unjustified," said Dmitry Druzhinin, analyst with Prospect brokerage. "Oil in the ground is public property, so it is natural that it is being taxed, especially at a time when the state has to repay huge debts."

"It is quite natural that oil companies complain," said Ivan Mazalov, analyst with Troika Dialog. "They will have to pay more."