Editor's Note: This is the second installment in a three-part series on Russia's energy sector. Part 1 covered the Russian energy industry from the 1990s through the Putin era; Part 2 will discuss upcoming national policy changes; and Part 3 will examine Russia's oil and natural gas giants and their relations with Europe.
Over the summer, the Russian government came under increased pressure due to a domestic budget shortfall and pushback from Europe on Moscow's energy policies. In response, President Vladimir Putin began assembling a controversial energy commission composed of industry and political chiefs. Formally known as the Commission for Strategic Development of the Fuel and Energy Sector and Environmental Security, the group is tasked with reassessing the status of the Russian energy sector and ensuring its viability into the next decade.
The commission is also considering the energy sector's critical role in funding the state budget. After the shortfall, the Kremlin announced that it would increase a mineral extraction tax on oil and natural gas companies to help make up the difference. However, the added taxes on the sector will constrain its ability to pursue administrative and technological reforms. The commission will now have to decide whether to abandon the measure and, more broadly, how to deal with the state's dependence on energy revenues.
Members of the Commission
Putin will be the titular head of the new commission, but he has empowered Deputy Prime Minister Igor Sechin to lead the group as executive secretary. Sechin is one of the most powerful and feared members of the siloviki clan, and Putin also named him head of state oil giant Rosneft in May shortly after the president's own election to a third term. Other members of the commission include Deputy Prime Minister Arkady Dvorkovich, Economic Development Minister Andrei Belousov, Finance Minister Anton Siluanov, Industry and Trade Minister Denis Manturov, Energy Minister Alexander Novak, Natural Resources and Environment Minister Sergei Donskoy, LUKoil President Vagit Alekperov and Gazprom CEO Alexei Miller.
The membership of the commission makes it uniquely positioned to look at the energy issues from the point of view of the companies involved while also taking into account wider economic, technical and political considerations. Its first order of business will be to look into the government's reliance on oil and natural gas revenues.
State Reliance on Energy Revenues
The Russian government receives 38 to 50 percent of its revenue from the energy sector. With energy prices at an all-time high during the past decade, the Russian government has been able to increase federal spending between 15 and 30 percent each year, except during the 2009 financial crisis.
Moscow has grown accustomed to high energy prices, expecting European countries to pay more than $400 per thousand cubic meters of natural gas on average and oil to remain around $117 per barrel. But with Europe now demanding lower natural gas prices and with oil prices falling in recent months, the Kremlin has had to step back and form a more conservative spending plan.
Even after taking into account its planned spending cuts, the Kremlin has demanded more cash from Gazprom and Rosneft to make up for the decline in energy revenues. In May, the Kremlin made several changes the tax code. One of the biggest changes requires that starting in 2013, the mineral extraction tax on natural gas will double through 2015. Gazprom has said that this adjustment will cost the company more than $3 billion in additional funds per year, effectively confiscating any profits higher than what the company earned 2011. This will affect its ability to modernize technologically.
The Kremlin has countered that Gazprom's excessive corruption and internal mismanagement have handicapped the company more than the proposed tax changes and that an administrative restructuring is needed to fully modernize the firm. Putin even indicated Oct. 3 that the government would increase crackdowns on Gazprom's inefficiencies. Gazprom has been considering such a restructuring over the past year, and it has already taken certain steps, such as firing more than 100 managers and drafting new anti-corruption strategies. But at this time, it is difficult to see how the Kremlin would clean up the activities inside a firm that is as large, political and non-transparent as Gazprom.
Gazprom is not the only firm being targeted with increased taxes and the expropriation of funds. Non-state natural gas suppliers such as Novatek, Itera, and LUKoil will have their mineral extraction taxes quadruple through 2014. The Kremlin has also targeted Rosneftgaz, the natural gas division of Rosneft. While the Russian budget was being drafted at the end of September, the Kremlin ordered Rosneftgaz to transfer 50 to 95 percent of its dividends to the state to cover a budget shortfall. Sechin, the head of the new energy commission and Rosneft's protector in the Kremlin, viewed his firm as unfairly targeted compared to Gazprom and blasted the directive.
Tax Policy Complications
The energy firms have said that an excessive seizure of funds would cripple their ability to fund large projects in the future and prevent them from investing in the type of research and development needed to modernize. Gazprom, which has shelved the ambitious Shtokman Arctic project due to lack of funds, blamed the increased share taken by the government. Additionally, foreign firms already operating in Russia have been reluctant to invest further due to the new tax scheme. Wintershall, a German energy firm, said Oct. 3 that the mineral extraction tax has deterred them from increasing their role in the Urengoy natural gas fields.
The tension over how to deal with the budget deficit without crippling the energy sector's ability to reform will set the financial and economic representatives on the new energy commission against the energy firms' representatives. As suggested by the commission, the Kremlin could repeal the new tax measures, but such a move would force the government to reopen the contentious budget discussions that, due to a dearth of other options, led to the tax increase in the first place — a situation Moscow wants to avoid.
