By Gordon Feller
For the Journal

Following summer records of almost $150 a barrel, oil prices have fallen dramatically, and the Russians are not happy.

Global oil companies and OPEC countries have said high prices were favorable to neither consumers nor producers of oil.

But Russian oilmen are more sensitive to the decline: their revenues will suffer more than the profit of other extracting companies. The problem is the so-called “Minister Kudrin's scissors,” which essentially consists in delayed revisions of high oil export duties following sharp reductions in price.

An acknowledgement of these concerns is the participation of Russian Deputy Prime Minister Igor Sechin at the last OPEC meetings, where OPEC members decided to cut production.

After Russian authorities lowered taxes on the oil and gas sector, legislative initiatives emerged. The Russian Union of Industrialists and Entrepreneurs, or RUIE, released suggestions from interested companies on tax reform for the sector.

Tax reductions would promote capitalization growth for the enterprises. At the same time, the main problem experienced by the government is that decreases in the tax burden have no systematic character.

As soon as the euphoria wore off following passage of amendments to Russia's tax code, oilmen again asked to rewrite laws. The lobbyists at RUIE have prepared a number of suggestions on reforming the oil and gas sector taxation on behalf of interested companies.

These proposed revisions would change the operating formula used to calculate the mineral extraction tax (NDPI) for oil, inserting factors reflecting the inflation rate and the strengthening of the ruble against the dollar.

Russian oilmen, together with the RUIE, also have suggested replacing the current manner of calculating NDPI with an ad valorem rate, which sets the specific rate depending on the cost of the extracted raw material, set at a flat 16.5 percent.

Several other proposals include fixing the export duty on light oil products at a level equal to 60 percent of the duty on crude oil, to lower excises on all types of motor fuel and to cancel the import customs duties on equipment not made in Russia.

Experts say that, until recently, the authorities reluctantly listened to oilmen requests. However, given the stagnation besetting the sector, the official attitude has changed. Troika Dialog analyst Valery Nesterov, said one of the main problems of NDPI differentiation is its complicated management and, as a consequence, its creation of grounds for corruption.

The ad valorem rate would make collecting NDPI more progressive, according to Veles Capital analyst Dmitry Lyutyagin. In his opinion, suggestions to cancel the import customs duties on the new equipment for refineries and their modernization, decrease excises, and establish export duties on light oil products are sensible and can receive government support. He said it would not be critical for the Russian budget.

“Acceptance of such measures, by and large, makes economic sense,” he said. “Not having one's own modern industrial base for petrochemical equipment, to forbid its import and at the same time to demand a transition to Euro-3, -4, -5 (gasoline grades) does not seem logical.”