USSIA - High Taxes & Oil Company Protests

The oil companies and Gazprom, the world's biggest exporter of natural gas, account for the bulk of federal tax revenues. They are paying more than 50% in taxes while world oil prices are very low. Gazprom, accounting for about 25% of the federal tax income, has warned that it will sign no new gas export contracts unless the government cuts the VAT from 22% and excise duty from 30%. Gazprom Chairman Rem Vyakhirev said in June the company was losing $1 per 1,000 cubic metres of gas exported to Europe.

LUKoil, the biggest among Russia's integrated oil companies, issued a statement to President Yeltsin on July 22 attacking both the IMF as a dictator and the government for its "unreasonable and irresponsible" economic policy. The company said: "This deepens the crisis, aggravates the social situation, and will lead to the bankruptcy of those few enterprises capable of working effectively". LUKoil said the statement "had been agreed" with seven other companies: Gazprom, Yukos, Surgutneftegaz, Sidanco, Sibneft, Eastern Oil and TNK.

However, the statement triggered a dispute among the companies, with Gazprom and Sidanco furiously saying they had not approved the statement's release. But Gazprom said it shared the concerns about the "complex" situation in the energy sector. Deputy Premier Boris Nemtsov said LUKoil's criticism was ill- informed. "A situation where well-informed people begin speaking about a dictatorship from international financial organisations is a joke". He said the government was prepared to reconsider financial relief for the oil and gas companies if the Duma approved a bigger austerity package at a special session in August". He added: "To our great regret, the Duma did not pass in full the anti-crisis package, and under these conditions the government would be acting irresponsibly if it cut taxes and excises on oil... I hope we will reach an understanding from the point of view of the deputies and of the oil companies".

From July 1, oil companies owing federal or local taxes had to transfer all hard currency income from exports to new accounts approved by the state tax service. Only then were the companies able to use crude oil or products export pipelines and sea terminals. Tax debtors had to transfer funds to the new accounts within 60 days of crude oils or products leaving the Russian territory. Companies which did not comply with the new rule would have their export allocations removed and given to other exporters by the ministry of fuels and energy. According to the state tax service on May 4, when the new rule was imposed, oil companies owed over $3.9 bn to the federal budget. The largest debtor were units of Yukos and Sibneft. Gazprom was excluded from the new measure, although it owed more taxes than any of the oil companies.

LUKoil expects its pre-tax profits for 1998 to fall to $540m because of low oil prices and tough operating conditions. In early 1998 it had forecast the pre-tax profits at almost $1 bn. The other oil companies are suffering as well. Among the producing JVs, White Nights involving Phibro Energy Production and other partners was wound down recently. Phibro had repeatedly warned that Russia's unstable levy-ing regime and high taxes, combined with falling oil prices, caused the company big losses and that its JV would have to wind down (see Gas Market Trends).

Gazprom has been hit hard since its patron and founder Chernomyrdin was removed as prime minister in March 1998. Chernomyrdin used to defend it from the revenue-hungry finance ministry and from ministers proposing a break up of the gas monopoly. In June the government submitted a draft law to the Duma to increase Gazprom's tax liability by assessing excises upon delivery of gas, rather than upon payment. But the company only collects 10-15% of its revenue from gas sales in cash. Vyakhirev had warned earlier that imposing excise payment on delivery, while cash payment rates were so low, "would mean the end of Gazprom. Although it reported after-tax profits of Rbs38.7 bn ($6.45 bn) in 1997, Gazprom says it lacks the money to finance projects such as pipelines and the acquisition of new assets. Only 26% of Russian consumers paid their bills in 1997, and Gazprom was owed about Rbs82.4 bn ($13.7 bn) by end-1997.

On July 30, the government extended a deadline for Gazprom to pay overdue taxes. An agreement was due to be signed on Aug. 3, under which Gazprom was to pay about Rbs3.1 bn ($496.8m) per month in taxes. On July 30, the government also decided to sell 5% of Gazprom. This would generate badly needed income for the federal budget. But the sale faces the same obstacles that stood in the way of two unsuccessful attempts to sell Rosneft, the state oil company, earlier in 1998 (see Part 2). At present the government owns 40.87% of Gazprom and the stake is managed by Vyakhirev. Gazprom says the sale should go only to Shell and ENI, its strategic partners, which had already agreed to invest $1 bn each in bonds and convertible shares owned by a Gazprom affiliate, while the government wants maximum money.