Mineral incentives

Why do authorities protect "poor" oilmen and secret millionaires?

Evgeny Arsuhin

Rossiyskaya Gazeta, 12.05.2006, p. 1, 9

Recently the Government has submitted to the State Duma a  set of principal draft laws on taxes.

First of all, they include measures aimed at, as it was declared, stimulating oil industry to explore and develop new fields. By -  actually - providing incentives to oilmen. Second of all, it is draft law on so called financial "amnesty" to those who hided income from taxes. But both issues are perceived ambiguously by the society. Why to provide incentives to those who are already very rich? Why to pardon those who refuse to pay almost the lowest income tax in the world? One of the authors of those laws, Deputy Minister of Economic Development and Trade of the Russian Federation, Kirill Androsov, has his own opinion on the issues.

Rosiyskaya Gazeta: Petrol excise is to be paid now not by petrol stations but by oil refineries. Officials say that finally there has appeared a long-awaited system of control of petrol prices jumps. However, it is totally unclear how changing of excise payer could allow restraining the prices.

Kirill Androsov: Actually there is neither direct nor indirect connection between petrol prices and an excise payer. Transferring excise payment from a petrol station to an oil refinery is by no means aimed at increasing oil industry effectiveness. The real target is to increase transparency of excise collection. Ultimately, we together with the Ministry of Finance believe that it would increase excise collection volume while the excise rate would stay the same.

RG: You mean, it is merely fiscal measure?

Androsov: First of all, yes. But the fiscal target would ideally match with our next step: to reduce excise on better quality petrol in order to stimulate production of higher quality petrol and correspondingly to increase investments into oil processing. After technical regulations are introduced (requirements for petrol), it would become much easier to manage 28 oil refineries and to stimulate quality petrol production, as better petrol from the environmental point of view would get better excise incentives.

RG: The Government has introduced mineral extraction tax incentives for deposits under exploration. Thus, the fact is admitted that oil companies being the most advanced sector of the Russian business lack funds for their own development. Is it really true? Haven't officials given in to oil companies' pressing?

Androsov: Our draft law is not based on the assumption of money shortage in the oil industry. The industry is profitable. There are no wild profits there, but an average marginal revenues account for 10-20%. Thus, it is wrong to say the industry does not have funds to invest. I agree with the idea that all new wells should be developed according to the project financing principle. That means all revenues gained from the extracted oil should cover expenditures for the field development with a certain rate of return. But according to our estimates, East Siberian oil fields can't be developed on the basis of such a principle. If we don't provide incentives, oilmen would have to cover losses in Eastern Siberia by profits from Western Siberia, and that is incorrect from the economic logic point of view. Mineral extraction tax incentives make profitable development of East Siberian fields with no infrastructure. But the profitability is not high. We took an average long-term Urals oil price at $52 per barrel and profitability then accounts at 12%. When capital expenditures account for billion of dollars, 12% profitability rate doesn't seem to be extraordinary high, does it?

RG: An opinion exists that foreign companies could develop Eastern Siberia without any incentives, but the state doesn't let them in.

Adrosov: Let's take TNK (Tumen Oil Company) - BP, as an example: although it's a Russian company, it has got western corporate culture and a significant foreign share. TNK-BP has got a license on Verkhnechonskoye field development in Eastern Siberia, but the company is not developing the field, as it's impractical. However, TNK assured us that after a law on tax incentives is adopted, it would be shown in their financial investment plan and they would be able to start Verkhnechonskoye field development. I assure you, it's not a question of an extractor being a Russian resident, it's a question of mere effectiveness.

RG: You've said that shelf is "hopeless", but why then observers are so persistent in saying that shelf fields would nevertheless be included in the system of mineral extraction tax incentives when Duma considers the draft law?

Androsov: Well, may be yes, may be no. My statement means that tax incentives for shelf fields would never be a substantial stimulus for their development.

RG: It is obvious that after incentives are introduced we would receive less oil money and Stabilisation Fund would suffer. To what extent would it suffer and could it be compared to losses incurred by the Stabilisation Fund from incorrect, as many believe, investment of the Fund reserves?

Androsov: Mineral extraction tax incentives for new fields would not entail revenues decrease. These are incentives on oil that is not extracted today and would not be extracted unless the incentives appear. Incentives provided for old fields would indeed result in revenues decrease. But at the same time they would encourage further development of exhausted fields and development of previously unprofitable satellite fields. It should result in oil extraction growth. So far we expect additional 3-5 mln tons of oil to be extracted in 2009. Those additional millions would compensate for the revenues decrease entailed in 2007-2008. According to our estimates, the budget would receive 21 bln roubles less in 2007 and 25 bln less in 2008. Compared to annual Stabilisation Fund growth, it accounts for 2-3% and is not vital.

RG: The most noted recent scandal is Rosneft announcement that its IPO would be reduced two times. What has happened? Doesn't Rosneft need money or is it the result of negative attitude towards the company's IPO in the West?

Androsov: There was no official statement on the matter. Volume of funds to be attracted via IPO has never been discussed at the Rosneft Board meetings and has not been considered by the Government. That is why it is incorrect to talk about decrease of IPO. When talking about volume of emission one should proceed from mere economic logic. It is necessary to attract enough money via IPO to pay off Rosneftegas credit that was borrowed to buy out Gazprom stock, to improve the company's balance structure, to get enough funds to finance investment projects, to support stock market. Also we have to take into account Rosneft evaluation made by all investors, Russian and Western, and not to sell shares too cheap.  It is combination of all those factors that would influence volume of Rosneft IPO.

RG: But nevertheless, does boycott of IPO by such market players, as Mr. Soros psychologically influence the situation with this procedure?

Androsov: Western financiers have a proverb "market's memory is like a sieve". Investment society is professional enough to make an independent decision. Investors would make up their minds regardless of official statements, including by Mr. Soros.

RG: One of oil companies has submitted an application to the Investment Fund. People thought that InvestFund was created to support manufacturing companies to diversify the economy. Nevertheless, the application has been accepted and would be considered. Doesn't it violate InvestFund ideology?

Androsov: InvestFund ideology is based on two ideas. Firstly, you should remember that the Fund was formed by oil money and it should help to derive from oil dependency. Secondly, InvestFund should stimulate setting up new production. In order to reach a multiplicative effect: per 1 federal rouble - 5-6 private roubles.

The project you have mentioned, to my mind, ideally corresponds with both ideas, because we are talking about construction of a petrochemical complex. First of all, instead of raw oil we would get value-added products. Second of all, these would be petrochemical products, prices on which do not directly depend on carbohydrates prices. Third of all, we would be able to reduce export of high-sulphur oil, which mixes in our trunk pipe with West Siberian oil and worsens its quality. Thus, we would be able to demand from the market to re-price our product, as having improved its quality. That means we would increase potential oil export revenues. Fourth of all, we would push the development of small and mid-size businesses based on petrochemical products. It is going to be a beautiful project.

RG: It seems that the West is seriously concerned with energy supply from Russia. It also seems that we failed to persuade it that this supply is reliable and the dependency on it is not excessive. Are there any new arguments that Russia could advance in this dispute?

Androsov: The reality is the following: Western Europe by 30% depends on Russian energy supply. At the moment there are no alternatives. They could be found within 15-20 years, the question is if it is economically sound? Supply via already constructed pipeline infrastructure is surely more effective than any future projects. Talks about "dependency" on Russia are simply quasi-political. However, European business thinks not in political categories. And thinking in economic concepts convinces everybody that Russia is a profitable and reliable energy partner.

RG: There are plans to create a new agency - for attracting investments. Nobody in the Ministry of Economic Development and Trade now remembers the rhetoric of two years ago when it was said that an official would spoil anything he deals with. Now he would be responsible for attracting investments. Does it mean that an official is still better than an "invisible market hand"?

Androsov: "Invisible market hand", as well as visible market brains are always better than an official. Because market philosophy is based on a growth motivation. An official - is a state employee, his task is to provide state services, and this is just a process.

We don't insist that it should necessarily be a Federal Agency. It is possible to use outsourcing for promoting Russian investment image abroad. At the moment we are working on developing the concept of such an agency. We have conducted a survey among foreign investors and found out that they considered state activities to attract investments to be very low, lower than of our colleagues in China, India, Czech Republic, Poland. For us it's a sign to start analysing what we are doing wrong.

RG: Tax amnesty for people is coming soon. Why is it offered to people to "surrender" with their grey incomes and pay taxes at the rate of 13%? International experience shows, that an amnesty becomes efficient if the tax rate is lower than the current one. Thus, experts have counted that by hiding part of their incomes people in fact paid 8% tax and have recommended using this rate for an amnesty.

Androsov: Actually, I believe that Russia is a tax paradise for rich people in terms of income tax rate for individuals. 13% is probably one of the lowest rates in the world. It's profitable to be rich in Russia. Why 13 and not 8? Eight percent is a virtual number; it was arrived at just by certain expert estimations. While 13% is an approved standard.

More important is another thing. Anybody who earned money but didn't declare it would get a chance to do it. I would rather call it not an amnesty, but an opportunity to legalise one's incomes. It is very important as a businessman would automatically get a right to invest the money without being asked about its origin. We get a colossal investment resource. I believe that any businessman having compared two options: to act underground or to pay 13% and act openly, would choose the latter.

RG: Is it likely that amnesty might be followed by penal provisions, such as tax rate increase or resuscitation of a law on income and expenditures correspondence?

Androsov: I don't see any sence in it.

RG: Do you trust the estimates that the amount of money moved abroad after the YUKOS case is equal to the size of Stabilisation Fund? Doesn't this money also need a kind of amnesty?

Androsov: I don't have trustworthy statistics, but according to Central Bank statistics, capital outflow in 2004-2005 increased.  Basically, these are not companies? income, these are individual incomes. Thus, by tax amnesty at 13% tax rate we are doing our best to return this money to Russia.

RG: And do you believe that this amnesty is sufficient to overcome "YUKOS" effect?

Androsov: Yes.

RG: How to legalise property and land in the same way? So far the procedure of land and property registration has become more complex due to controlling and registration institutions disunity.

Androsov: The law on simplified procedure of land plots registration has not come to force so far. When it is adopted, a country house user won't have to prove why he has built it. He will only have to identify the border of his property within "real fence". If a plot is not situated within fixed zone a user turns into owner automatically. Now it becomes possible to gift, devise, sell or mortgage a land plot. Gargeners turn into owners; they get an asset that could be involved in business.

RG: How would you comment on the Ministry of Agriculture desire to dispose agricultural land on which, by the way, a lot of cottages have been built?

Androsov: Our attitude is clear. The land is an economic asset. It is possible to either build a house, or a plant, or a road, or to plant grapes, or forest, or to make a pond or whatever on the land.  If grapes are planted, let the Ministry of Agriculture manage grapes. But the original right to dispose the land should belong to one authority. As of today it is the Federal Agency for Management of Federal Property and registration belongs to the Federal Agency for Realty Cadastre. Those functions can't be split, otherwise we won't be able to identify who is responsible for ineffective land management.

RG: If disunity of authorities is harmful, may be the Federal Agency for Realty Cadastre should be united with the Federal Registration Service?

Androsov: No it shouldn't, as their functions differ. The task of the Federal Agency for Realty Cadastre - records keeping and registration of objects, while the Federal Registration Service confirms rights of property and not only for real estate.

RG: And where is "single window" then? In between them?

Androsov: Single window for records is in the Federal Agency for Realty Cadastre, for registration - in the Federal Registration Service.

RG: My question for you as one of the St. Petersburg economic forum organisers. How in particular do you plan to hold a liberal, pro-western, as it was announced, forum on the site which is not consider liberal by many around the world?

Androsov: We plan to make a Russian and not pro-western forum here in Russia. We would like to show cultural, economic and political identity of Russia. Its perception in the West is often distorted. We would like to show the true identity. To prove that there are other constituents to our economy apart from oil and gas. Today we have everything at our disposal to successfullymanage this task.