The G7-led price cap on Russian oil exports has forced the Kremlin to raise the tax burden on producers, dealing a fresh blow to an energy sector already struggling with western sanctions, according to officials from the western coalition.
An analysis of the tax change by a member of the G7-led coalition, which was shared with the Financial Times, found that the move was likely to backfire by sacrificing the industry’s ability to invest for the long term in order to plug a gap in government finances.
“It is definitely destructive to their industry,” a coalition official told the Financial Times.
“Russia’s changes will . . . undercut the future production capacity of the Russian oil and gas industry by taking away revenues that could otherwise be used to invest in equipment, exploration and existing fields.”
In April, Vladimir Putin changed Russia’s method of taxing oil companies by setting levies based on the Brent crude international benchmark price minus a fixed discount, rather than the price of Urals, the country’s main export crude, which has been trading at a lower price in recent months.
The move was intended by Moscow to capture up to Rbs600bn ($8bn) in additional revenue and plug the hole in oil export revenue caused by western sanctions aimed at crimping financing for the Ukraine war.
In the first quarter of 2023, Russian oil and gas tax revenue fell by 45 per cent over the same period last year, including an 85 per cent year-on-year decline in March on refined oil products. The official added that Russia depended on such revenues for 45 per cent of its budget.
“The tax change they are making is prima facie evidence that their revenues are suffering significantly,” the official said.
The G7 price cap — set at $60 per barrel for crude — was introduced in December after months of talks in an effort to keep Russian oil flowing to the global economy and to minimise disruption to markets, while reducing Moscow’s revenue. Western officials say it is meeting both goals as part of their strategy to force “hard choices” economically on the Kremlin if it is going to continue funding the war. With the tax change, Russia was stealing from its “future” in order to pay for the “present” conflict, the G7 price-cap coalition official said.
Russian oil production fell last month to 10.4mn b/d, possibly reflecting the Kremlin’s threat to cut output in reaction to the price cap, according to OilX, a division of consultancy Energy Aspects. Exports — mainly to Asia — were 4.7mn b/d, below its five-year average, according to OilX. Although G7 countries believe their price cap is working as intended, customs data suggests Russian oil producers secured higher prices for at least some exports. The International Energy Agency calculated last month that the weighted average price for Russian crude exports had risen above the $60 per barrel price cap level in April, with one crude stream in the far east selling in recent weeks for as much as $74/b.
Brent crude was trading this week at a price of $71.40/b, down nearly 30 per cent compared with a year ago
G7 finance ministers and central bank governors are set to meet in Japan this week ahead of a leaders summit later in the month, where Russian sanctions are expected to be at the heart of talks. “There will be a focus on the price cap and how it succeeded,” the coalition official said.
The official said members of the G7-led price cap coalition would also “intensify efforts to combat evasion, including the use of deceptive practices to access coalition services for oil traded above the cap” in the coming period.
The official said the G7 price cap coalition would try to help oil service providers comply by pointing to “red flags” such as “manipulation of ships’ location tracking or failure to itemise shipping, freight, customs and insurance costs separately from the oil itself”.
Taxing oil sales based on a discount to Brent prices rather than the Urals price amounts to Moscow recognising that Russian oil will trade at a discount to world markets for the foreseeable future. The price cap coalition official said it amounted to a “sea change” for the Kremlin: even if it was intended to raise higher revenue from Russian oil sales in the short term, it was a tax system that would have been seen as deeply unfavourable to the government before the conflict.
The coalition member’s analysis found that, in a hypothetical scenario in which Russian oil had been taxed based on Brent prices minus a fixed discount rather than Urals before the Ukraine war, the Kremlin’s monthly oil revenues would have been between $5bn and $6bn lower.