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26 May, 2008 14:24

Russian oil companies to get tax holidays

The Russian government has approved tax cuts of $US 4 billion for oil companies from 2009. The reduction of the mineral extraction tax, a key reform for the country’s oil companies, is believed to be the first step towards reviving production growth in th

The state collects more than 90 % of oil company profits through corporate and production taxes, including export duties of 65 % on oil sold at more than $US 25 a barrel.

That's been great news for Russia's reserves and its economic stability, but bad news for production growth, which has dwindled to almost nothing in the last few years.

Analysts say the high taxes have been hampering companies from taking on new challenges.

Chirvani Abdoullaev, a senior analyst from Alfa-bank, said: “They were shifting their investments to the easy pickings and leaving behind a lot of oil that is harder to extract, which requires more investment, more technology.”
However, the Russian government is now taking steps to change this.

Prime Minister Vladimir Putin said: “We should increase the profit amount exempt from Mineral Extraction Tax from $ US 9 a barrel to $ US 15 a barrel.”
Russia’s Finance Minister says  the country's National Welfare Fund will be worst hit by 4 billion dollar tax cuts.

Speaking to  Business Today Alexey Kudrin admitted the concessions would strike the 32 billion dollar Fund, which also supports Russian pensioners.

He said all other government spending would remain unaffected for “several years”.

Other tax incentives are also under discussion and expected to be approved by the country’s parliament by the end of the summer.

Many analysts agree that any reduction of the tax burden is a step in the right direction, and Alfa Bank says even the first initiatives could lead to a huge increase in the value of oil stocks – of up to 30 %.