Record oil profits to be taxed more heavily

Oil prices saw their biggest annual gain this decade in 2007. U.S. crude futures settled at $95.98, up from $61 dollars at the end of 2006. But the Russian government intends to raise industry taxes, enriching state coffers and putting pressure on Russian

Outlining the economic policy for 2008, President Putin has indicated that the government plans to raise taxes on the oil industry. Currently the industry is benefiting from record high prices. It means that if the price hits triple digits, oil companies may have more to worry about than celebrate.

As the world's second largest oil exporter Russia is a major beneficiary of the oil price surge, which has seen the price jump from less than $US 70 in mid-2007 to more than $US 90 currently. You would think Russian oil companies should be rolling in cash, but taxation arrangements mean the price boom is largely passing them by.

“They don t benefit at the bottom line. The government takes all the extra revenues, which hurts oil exporters,” Vitaly Yermakov from Cambridge Energy Research Associates believes .

The record high prices are seeing Russia accumulate revenues estimated at up to $US 220 billion. This allows the government to boost spending on infrastructure and social issues while generating a budget surplus of about $US 70 billion, almost double Finance Ministry forecasts.

However the additional expenditure is placing added strain on the economy through the inflation it's generating as well as the rouble appreciation it's triggering. If, as many analysts are predicting, it reaches $US 100 per barrel in the near future, problems could get worse.

Chief Strategist at Uralsib, Chris Weafer commented on those problems.

«$US 100 gives a lot of problems: the easy side – it brings $US 800 per day. But 75% goes in the fed budget, and creates pressure on rouble and pushes up the prices of real estate,» Weafer said.

With oil revenues expected to jump further in 2008, the government may well struggle to keep to inflation forecasts, particularly given that the 2007 forecast of 9% was blown out of the water coming in at more than 11%.

A key central bank of Russia strategy to manage inflation – rouble appreciation – is causing ever greater difficulties for exporters and manufacturers competing with imports, and that’s before the government addresses calls to diversify the economy.

The issue is likely to continue to be a key problem for the newly-elected parliament, as well as the new president after April. But President Putin’s promise to unlock the funds accumulated in the stabilisation fund could be a double-edged sword, adding fuel to inflationary pressures while the government seeks ways to diversify Russia’s economy.