April 10 (Bloomberg) -- Russia will cut taxes on oil companies to overcome production ``stagnation'' after a decade of growth, Energy and Industry Minister Viktor Khristenko said.

``The output level we have today is a plateau, stagnation,'' Khristenko said in an interview with Bloomberg Television in Moscow. ``We hope the debate on tax changes will be complete within two or three months.''

Russian oil stocks rallied on the timeline. OAO Rosneft, the country's biggest producer, gained 2.8 percent to 226.77 rubles in Moscow after falling as much as 0.6 percent. OAO Lukoil climbed 1.7 percent to 2,051.21 rubles, reversing a decline of 0.4 percent.

Output may fall for the first time in a decade this year as producers struggle with soaring costs and aging fields. Finance Minister Alexei Kudrin said last month that the government may cut its crude-extraction tax by 100 billion rubles to spur development of harder-to-reach deposits.

Khristenko, 50, a former acting prime minister who has overseen the world's largest energy industry for four years, said he and Kudrin have agreed on draft tax legislation. The main question is how big the cut should be, he said.

``Kudrin's proposed change is too limited to make a difference,'' said Ron Smith, chief strategist at Alfa Bank in Moscow. The government needs to make deeper cuts and speed up the process, he said. ``They need to have it in place by Jan. 1, 2009.''

Potential Savings

Lukoil, Russia's second-largest oil producer, would save about $1.1 billion annually if the tax cuts proposed by the government were implemented, the company said in a presentation today.

Production in Russia, the largest oil supplier after Saudi Arabia, declined 1.3 percent in March to 9.76 million barrels a day, compared with the same month last year. Natural Resources Minister Yuri Trutnev warned last month that there may be a drop in output this year for the first time since 1998.

``To a certain degree, it was accounted for in the energy strategy -- at first a slowdown in production growth and then reaching a constant level,'' Khristenko said today.

To decrease oil producers' exposure to volatility on currency markets, Russia is seeking more trade of oil and gas in rubles. The ``main instrument'' for this change will be domestic trading on bourses such as the St. Petersburg Exchange for oil and the country's electronic trading platform for gas, Khristenko said in the interview.

Gas Cartel

Khristenko, who will host an annual meeting of ministers from natural-gas-producing nations in Moscow later this year, said closer cooperation won't lead to a ``banal cartel agreement'' along the lines of OPEC.

``Of course the organization needs to be strengthened,'' he said, referring to the Gas Exporting Countries Forum. There need to be ``permanent institutions'' that will help come up with common positions on issues such as pricing, Khristenko said.

As far as cooperation with oil producers is concerned, Russia's position is unlikely to change in relation to the Organization of Petroleum Exporting Countries, Khristenko said. OPEC President Chakib Khelil said last month he hopes Russia will join the group once President-elect Dmitry Medvedev takes office in May.

``I don't think our position will change because Russia's position was established quite long ago,'' Khristenko said.

To contact the reporters on this story: Lucian Kim in Moscow at lkim3@bloomberg.net; Ellen Pinchuk in Moscow at epinchuk@bloomberg.net

Last Updated: April 10, 2008 11:00 EDT