Putin’s return to the Kremlin and implications for Russia’s energy future

The return of Vladimir Putin to the Kremlin has been heralded as something of a retrograde step in the development and liberalisation of Russia’s economy. Putin’s broad social spending plans, outlined in his pre-election mandates and to include increases to public sector pay, child allowances, student grants, greater education provision and modernisation of the armed forces, will put increasing pressure on the federal budget. Estimates suggest that his plans may cost the budget up to US$ 165 billion annually.

Budget pressures could prompt tax increases

Pressure on the budget will force the new government to re-assess its federal revenues, which is likely to prompt tax increases to support the spending plans. With gas and oil prices high, the extractive industries are likely to be a prime target for tax reforms. Putin has called for greater tax on gas producers and domestic gas rates are set to be increased in order to achieve parity between local sales and exports, which could see Gazprom liable for up to US$ 22 billion a year in extra taxes. From 2013 Gazprom and other independent gas producers may be taxed up to 80 per cent of profits from price increases in domestic sales, with mineral extraction taxes set to be raised, which will help the budget in the short term.

Tax breaks needed to address field depletion

However, it will be a balancing act to ensure that increasing revenues in the short term do not undermine longer term investment in the exploration of new fields; current producing fields are mainly depleted and production in traditional areas like West Siberia is declining. The natural decline in production will ultimately force the government to take measures ensuring that there is more money available to oil companies through tax breaks, such as plans to introduce mineral extraction tax (MET) breaks for hard-to-recover oil resources from 2013.

Foreign contracts could mark greater Kremlin support

The recent Rosneft-Exxon Arctic deal also marks an important partnership that could signal greater access for foreign companies and increase the level of foreign investment in the energy sector. The offshore exploration partnership will see the development of Arctic and Black Sea fields, and will allow Rosneft minority rights to Texan projects. Eni and Rosneft are also set to jointly explore offshore deposits in the Barents and Black seas, marking the second strategic partnership for Russian hydrocarbons in April. Going forward, therefore, there are some positive signs that the Kremlin may take into account the importance of longer-term development and exploration. The joint venture deals with foreign entities further indicates the government’s positive attitude to foreign investment in the development of offshore reserves and coupled with tax reforms, could signal renewed government support for reforms in the energy sector.

Author:

Louise Taggart is a Russia specialist from AKE, a global security and risk management firm. For more information on AKE’s services please email: intel@akegroup.com or call +44 (0)20 7816 5454. You can also view the website at www.akegroup.com and you can follow Louise on twitter at http://www.twitter.com/FSULou

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