Taxation, not privatisation ahead for Russia
The collapse of the Bashneft sale means Russia's government will wring more cash from producers instead
The shelving by the Kremlin of the sale of Bashneft casts doubts about the credibility of Russia's privatisation programme and puts the spotlight back on additional taxation of the energy sector.
Ministry of Finance officials had been banking on the sale of a 50% stake in the oil producer, assuming it would rake in about R300bn ($4.8bn) to cover gaps in a budget caused by lower crude prices and sanctions imposed over the Ukraine conflict. The entire privatisation programme, which kicked off in July with the sale of a stake in diamond monopoly Alrosa for $0.814bn, was supposed to bring in R1 trillion ($15bn). But the sale of shipping agency Sovcomflot has also now been postponed until next year, so the whole process is in jeopardy. Other assets on the block include a 19.5% stake in Rosneft, the world's largest listed oil producer by volume.
Deputy prime minister Igor Shuvalov said Russia would still consider selling Bashneft, but only next year after it offloads the Rosneft stake. The sale of Bashneft had created divisions in the government over whether state-run Rosneft should be allowed to buy a stake in its rival.
The delay was linked by some to a desire by President Vladimir Putin to keep a lid on clan warfare before the duma elections on September 18. But his party, United Russia, won a commanding majority in the assembly. Another theory posited by Aton Capital analyst Alexander Kornilov is that the Kremlin wants to divest its stake in Rosneft before allowing the state company to absorb Bashneft. The sale would leave the state with 50% of the company.
"Not doing so, the state loses a $2.6bn industry synergy and an opportunity to boost Rosneft's value ahead of its sale," says Kornilov, of the plan to let it buy Bashneft later.
Either way, Russia is still facing a glaring hole in its coffers worth about 3% of its GDP. The lost revenue from Bashneft could partly be offset by higher dividend payouts from state-controlled companies but most of these entities are dragging their heels. The state could also try to tap international bond markets again, but the last sovereign deal in May was a struggle and only brought in $1.25bn from a targeted $3bn.
Russia is enduring the worst economic downturn of Putin's 16-year reign. The country relies on oil-export duties and extraction taxes for about 23% of its budget. Ultimately, hiking the tax burden of Russia's energy sector might be the easiest and most effective way to raise cash.
The finance ministry has already drawn up a plan to reduce to zero Russia's oil-export duty from 2018, while increasing the tax on crude extraction. The plan proposes levying another R170bn in taxes on export gas monopoly Gazprom and hitting the oil producers with a bill for another R150bn. This could be achieved by raising the oil Mineral Extraction Tax (MET) rates and extending increased gas rates for Gazprom.
The Kremlin might want to divest its stake in Rosneft before allowing the state company to absorb Bashneft
If the ministry gets its way, Gazprom would be the hardest hit and could lose as much as 10% of its earnings in 2017, according to a report by VTB Capital. The impact on oil companies could be distributed in proportion to production volumes, while the overall effect would range from 5% or more of earnings made by Surgutneftegas or 1-2% for Gazprom Neft.
VTB Capital reckons the effect from the proposed R329bn tax hike would be comparable for the companies to a $3-per-barrel fall in the oil price.
Ilya Trunin, deputy minister of finance, said that setting export tax duty to zero was previously planned to take place only after 2025, but the move could be accelerated in light of the budget deficit. The finance ministry expects that the acceleration of this tax reform would provide the budget with additional tax income of R200bn in 2017-18 and R317bn in 2019, based on an oil price of $40/b.
"We believe that sector taxes will be raised in 2017, and the postponed privatisation of state stakes intensifies this risk," says Alexander Nazarov, senior oil and gas analyst at Gazprombank.