Russia’s Finance Ministry proposed cutting subsidies to the nation’s oil refineries by $4.5 billion over the course of a year, as the government tries to boost revenues amid the war in Ukraine.
(Bloomberg) — Russia’s Finance Ministry proposed cutting subsidies to the nation’s oil refineries by $4.5 billion over the course of a year, as the government tries to boost revenues amid the war in Ukraine.
The ministry seeks to reduce budget payments to the industry by 30 billion rubles ($374 million) per month from July 2023 to July 2024, the Interfax news agency reported, citing Finance Minister Anton Siluanov in St. Petersburg. The cut for refineries is to be achieved by adjusting the subsidy formula, he said.
Russia introduced fuel subsidies for refiners in 2019 to limit the effects of global price volatility, and to support fuel supplies to the domestic market. Such payments last year reached 2.17 trillion rubles, a hefty sum for a country burdened with massive military spending.
However, public finances have deteriorated sharply since the nation’s invasion of Ukraine early last year. A European Union ban on most purchases of Russian crude and petroleum products — as well as price caps imposed by the Group of Seven countries — have reduced the price of the nation’s oil, a key source of budget revenue.
The government had been discussing possible changes to fuel subsidies, including raising the base price of gasoline and diesel in the formulas by as much as 50%, Bloomberg reported earlier this week. Other options include adjusting the discount of the nation’s flagship Urals crude to global benchmark Brent in the formula, or alternatively, a one-off windfall tax on oil companies, according to people familiar with the matter. They added that no final decision has been taken on any of the options.
Subsidy Formula
The cut in the subsidies will be achieved by applying a 0.5 ratio in the formula, Siluanov said, without providing details on which part of the formula will be affected.
“The current downstream margin is 8,000 rubles per ton, earlier it was below 2,000 rubles per ton,” Siluanov said, according to Interfax. “If we look where it comes from, it comes from the subsidy.”
If the Finance Ministry’s proposal is approved, the federal anti-monopoly service should monitor the situation, to ensure that oil companies don’t raise prices of petroleum products, he added.
The government is also discussing ways to improve the methodology to calculate taxes for the oil industry in order to set a “fair” price for crude, the minister said. That follows related changes announced earlier this year. The base price used in the oil-output and profit-based tax calculations for crude producers is set at a discount of $34 to Brent for April. By July, it’s set to narrow to $25.
Deputy Finance Minister Vladimir Kolychev said earlier this month that Russia may consider reducing the discount even further.
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