Turning Russian Oil Into A Tax Gusher

Public outcry has prompted Putin to squeeze drillers for more revenue

When it comes to wealth and poverty, some Russians are pretty vocal these days. "Return the nation's wealth to the people!" ran one opposition slogan during December's parliamentary elections. "Russia is a rich country, but its people live in poverty!" said another. No sector of the economy seems to arouse as much ire as oil, one of Russia's premier industries -- and a business that has made multibillionaires of a few tycoons. "The population feels that it's not fair that a small group of people got billions of dollars from exploiting natural resources when half the people live in poverty," says Sergei Glazyev, co-head of Rodina (Motherland), a new leftist party that won 36 seats after promising to use oil-company profits for social needs.

Oil businesses are by far Russia's largest taxpayers, ponying up a fifth of the national government's budget. But President Vladimir V. Putin, who stands for reelection in March, can't ignore adversaries such as Rodina if he wishes to maintain his 80% poll rating. No surprise, then, that growing evidence indicates the Kremlin wants to squeeze extra money from oil drillers. In a December TV appearance, Putin supported higher oil taxes, pointing to the "superprofits" enjoyed by oil companies because of recent price jumps. Not long afterward, Yukos, Russia's No. 1 producer, was handed a $3.5 billion bill for levies it allegedly failed to pay in 2000. That invoice followed the arrest in October of former Chief Executive Mikhail B. Khodorkovsky on tax evasion and fraud charges.

When the government proposed boosting oil taxes by $3 billion a year ago, oil companies lobbied to block the legislation. But with Khodorkovsky behind bars, the oil lobby seems cowed. Lawmakers have already banned regions from offering favorable tax rates to locally registered companies. Closing that loophole should increase regional tax receipts by $2 billion this year.

Now Moscow looks set to bring in $2.5 billion more. Of that, $1.5 billion would come from a reformulated oil-extraction tax and the remainder from a hike in export duties, currently at 40%, to as much as 60% when prices top $25 a barrel. "It's taxing superprofits, not normal profits," says Deputy Finance Minister Sergei D. Shatalov. Below $23 a barrel, he adds, "there will be practically no increase."

A MORE DIVERSE ECONOMY. Some economists worry about collateral damage. Oil businesses have been investing $8 billion to $10 billion annually to upgrade operations. "With a sharp increase in taxes, oil companies will reduce investment programs," says Mikhail M. Zadornov, a member of Parliament and former Finance Minister. But Zadornov and others accept the case for a hike of $2 billion to $3 billion. "Higher taxes may be bad news for shareholders, but they are arguably good news for Russia," says Roland Nash, chief strategist at Renaissance Capital, a Moscow investment bank. New revenues, he says, could be used to help diversify an economy that remains heavily dependent on oil and gas.

Neither are oil companies fretting. "We don't see any threat to our business plan," says Marina Dracheva, a spokeswoman for TNK-BP, a joint venture with British Petroleum. Indeed, the sector already has had to adjust to rising taxes. The biggest outfits -- Yukos, Lukoil, Sibneft, Surgutneftegas, Tatneft -- paid $18.4 billion in regional and federal taxes in 2003, according to a Renaissance Capital estimate. That compares with $8.2 billion in 2000. They now pay around 60% of profits as tax, about average by world standards, says Moscow investment bank Brunswick UBS, but that still leaves room for a tax on windfall profits.

More worrisome for oil companies is whether they will be held accountable for using loopholes they assumed to be legal. The Kremlin is telling them not to panic. "The authorities are talking about a correction, not a huge confiscation," says Igor A. Nikolaev, director of strategic analysis at consultancy FBK. But with Yukos under investigation, the oligarchs still wonder who may be next.

By Jason Bush in Moscow

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