Russia is overhauling how oil companies are taxed, aiming to bolster state revenues by capturing a bigger share of crude sales that often exceed the G7-imposed price cap on the country’s exports.
The Kremlin will from April shift to an indicator pegged to Brent, the international crude benchmark, for calculating taxes on oil exports, a move it expects to generate an additional Rbs600bn ($8bn) of annual revenue by reducing the market “discount” on Russian oil.
The planned reforms, first unveiled by President Vladimir Putin late last month, reflect the growing murkiness of the Russian oil market under sanctions and rivalry between the Kremlin and oil producers over potential additional revenue from sales.
The dispute has turned attention to the pricing of Russian oil and whether the international benchmarks the Kremlin has used as its basis for taxation have kept pace with recent market shifts.
After G7 countries imposed a $60-a-barrel ceiling on Russia’s exports in December, most Russian grades of oil exceeded the cap that month, according to customs data cited by a group of academics in a recent research paper on Russian oil and seen by the Financial Times. Indian customs data also suggests refiners in the country are paying higher prices.
Urals, Russia’s main export grade, has been selling for as much as $40 a barrel below Brent, largely because the EU barred seaborne imports.
Western powers have hailed the discounts as evidence their approach to sanctions is working. But the customs data suggests Russian oil producers have been able to secure higher prices for at least some of their exports.
The pricing anomalies have implications for Moscow’s tax haul. The average post-embargo price for all Russian crude blends exported in December was close to $74 a barrel, according to the customs data. That is only $10 below Brent prices for the same period and well above the $60 cap.
But the Urals price quoted by pricing agency Argus, which is Russia’s main reference point for calculating tax, averaged just $43 during the same month.
Argus says the discrepancy is because the price paid by countries such as India includes shipping and insurance costs. These have soared as Russia has redirected volumes that were primarily shipped from the Baltic to Europe, while western sanctions have restricted access to tankers.
Another index, introduced by pricing agency Platts in January, shows that the price of Russian crude delivered to the west coast of India is $16-$20 above its regular Urals assessments. While shipping costs are included, the higher price is more of a reflection of increased Indian demand, according to Joel Hanley, head of S&P Global Commodity Insights.
The picture is clouded further by Russia’s drive to hide sensitive data as western sanctions target its economy. Analysts have struggled to reconcile the gap between the reported pricing and the customs figures.
“We have worked with oil sector data for over 20 years. Looking at the Urals-to-Brent discount, we started thinking: how are the pricing agencies possibly getting the quotations now?” said Elina Ribakova, deputy chief economist at the Institute of International Finance, co-author of the customs data-based paper.
Argus, however, said it had not “experienced any difficulties in obtaining reliable market information on Russian crude”.
Russian oil companies are probably happy with the pricing discrepancy given the tax advantages, analysts said.
Sergey Vakulenko, who quit his job as head of strategy for the oil arm of state gas monopoly Gazprom when Russia launched its full-scale invasion of Ukraine last February, said the incentives for oil exporters had shifted.
“In the past they wanted to show they are selling for a high price to impress their international shareholders and keep their debtholders happy,” said Vakulenko, now a senior fellow at the Carnegie Endowment for International Peace. “Now they have nobody to impress.”
Like other analysts, Vakulenko believes Russian companies export much of their oil through affiliated traders, stockpiling the shipping payments on their accounts outside of Russia.
But he said the government was not “blind” and was now catching up after Putin demanded in January that officials “look at this discount so that it does not create any budget problems”.
The maximum Urals discount to Brent under the new tax system will be $34 a barrel, before shrinking to $25 in July.
Other Moscow officials have reached the same conclusion: the central bank last month said it would reflect the full range of Russian oil prices in its forecasts, while the energy ministry is using a new tracker based on the country’s customs and commodity data as well as Argus.
“This will track the real cost of selling,” energy minister Nikolay Shulginov said this month, adding that Moscow “may introduce its own benchmark for Russian oil prices this year”.