Putin Choices

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Putin’s Dilemma: To Sell

Or To Nationalize OilAssets

By Dalan McEndreePosted on Tue, 15 March 2016 23:36 | 0

Accordin to a March 11 Bloo!"er article, the #ussian o$ern!ent is considerin

chanes in the ta% rei!e &or the #ussian oil and as industry in order to "olster

o$ern!ent re$enues'

(hould )ladi!ir Putin consider nationali*in this industry as one o& the alternati$es+

Possi"lyi& the -'(' shale re$olution re.resents a .aradi! shi&t that /ill result in su"

5060 crude .rices and su"stantially lo/er natural as .rices /ell into the &uture'

(hould this "e the case, /ithout sinicant chanes in its a..roach to eneratin

re$enue &ro! this industry/hich historically has &unded 50 .ercent o& the

o$ern!ent4s "udetit see!s the #ussian o$ern!ent could consin itsel& to

.er.etual "udet re$enue .enury and Mr' Putin to .unishin .ressure on !ilitary

s.endin, his .riority'

The 2016 Budget Debacle

As 2016 a..roached and crude4s .rice &ell to/ard 30 .er "arrel, the #ussian

o$ern!ent &ound itsel& in a des.erate search &or re$enue to "alance a "udet it had

de$elo.ed "ased on 50 .er "arrel crude' The inance Ministry initially .ro.osed to

e%tract the necessary incre!ental re$enue &ro! #ussia4s oil and as industry throuh

an increase in the !ineral e%traction ta%' !!ediately, the industry and its su..orters

in the #ussian o$ern!ent 7the Enery and Econo!ic !inistries8 $oci&erously o"9ected

and /arned o& dire conseuences: reduced in$est!ent, stalled out.ut ro/th, and

e$entually .roduction cuts'

;hile the t/o sides e$entually areed instead on .ost.onin the .lanned reduction in

the e%.ort custo!s tari< rate &ro! 0'=2 to 0'36, crude4s continued &all into the >e/ ?earrene/ed .ressure on the "udet' inance Minister (iluano$ in !id@anuary .ro9ected

that an additional 20 "illion in re$enue /as needed to close a decit that his !inistry

esti!ated could ro/ to 6 .ercent o& DP'

This &orced the #ussian o$ern!ent to rene/ its search &or re$enue' The search

included hereto&ore sacrosanct sources' o$ern!ent ocials "roached the .ossi"ility o&

sellin o$ern!ent shares in such national cha!.ions as #osne&t and AeroCot' A

e"ruary 1 #euters article re.orted that the inance Ministry, /ith se$eral other

http://oilprice.com/contributors/Dalan-McEndreehttp://www.bloomberg.com/news/articles/2016-03-09/russia-s-dilemma-squeeze-oil-industry-without-strangling-growth-ilk2y8i4http://www.bloomberg.com/news/articles/2016-01-13/russia-seeks-20-billion-budget-boost-as-siluanov-warns-on-oilhttp://www.bloomberg.com/news/articles/2016-03-09/russia-s-dilemma-squeeze-oil-industry-without-strangling-growth-ilk2y8i4http://www.bloomberg.com/news/articles/2016-01-13/russia-seeks-20-billion-budget-boost-as-siluanov-warns-on-oilhttp://oilprice.com/contributors/Dalan-McEndree


2/13

!inistries4 su..ort, had .ro.osed cuttin 2016 !ilitary .rocure!ent5 .ercent, or

1'2 "illiona .ro.osal /hich Putin re.eatedly and recently has denied'

Related: Which Presidential Frontrunner Is The Best For Energy

n the last &e/ /eeFs, ho.in to e%.loit a loo.hole it .ercei$es in the -'(' and Euro.ean

econo!ic and nancial sanctions, the #ussian o$ern!ent announced its interest in

raisin 3 "illion throuh the sale o& Euro"onds 7the -'(' Treasury has /arned -'('"anFs aainst .artici.atin' ;hether Euro.ean o$ern!ents /ill &ollo/ suit is not yet

Fno/n8'

(uch !easures !ay hel. the #ussian o$ern!ent close the 2016 decit' Go/e$er, each

is a oneti!e in nature and /ill .ro$ide little i& any relie& in &uture years' or this, the

#ussian o$ern!ent reuires a source or sources that steadily /ill enerate re$enue'

#ussia4s econo!ic .redica!ent li!its the o$ern!ent4s o.tions' n its &all 2015 ;orld

Econo!ic HutlooF edition, .u"lished Hcto"er 6, the M &orecast that the #ussian

econo!y, in constant 7inCationad9usted8 #u"le ter!s and in current -'(' dollar ter!s,

/ill re!ain in recession until 201I and that ro/th /ill re!ain su"dued throuh 2020'

The M data also &orecasts, in current -'(' dollar ter!s, a 2J0 "illion decrease in

o$ern!ent re$enue in 2015 &ro! 201=, a &urther 23 "illion decrease in 2016, and

re$enue in 2020 still "elo/ re$enue in 201=' (ince -rals crude !ay a$erae less than

50 in 2016, the M4s Hcto"er 2015 re$enue esti!ates &or 2016 !ay turn out to "e

o.ti!istic' 7n the chart "elo/, 2013 and 201= crude .rices are actual .rices, 20152016

.rices are esti!ates, and &or 201I2020, the M assu!ed that crude .rices /ould

re!ain sta"le in real ter!s8'

7KlicF to enlare8

The !o"ern#ent Funding $risis

As noted a"o$e, the #ussian oil and natural as industry enerates 50 .ercent o&

#ussian "udet re$enues' The "ulF o& these re$enues co!e &ro! three le$ies: the

!ineral e%traction ta%L custo!s duties on hydrocar"on and hydrocar"on .roduct

e%.orts 7e%ce.t e%.orts to countries in the #ussianled Eurasian Kusto!s -nion 7EAK-8

Belarus, a*aFhstan, Ar!enia, and the yry* #e.u"lic, /hich are custo!sduty &ree8L

and e%cise ta%es on do!estic sales o& rened .etroleu! .roducts' 7Accordin to a March

1= Bloo!"er article, a*.ro! and #osne&t, #ussia4s natural as and crude national

cha!.ions res.ecti$ely, alone account &or 30 .ercent o& the "udet' n 201=, the t/o

co!.anies enerated 10 "illion in such ta%es8'

http://www.reuters.com/article/us-russia-crisis-military-spending-idUSKCN0VS0RR)http://oilprice.com/Latest-Energy-News/World-News/Which-Presidential-Frontrunner-Is-The-Best-For-Energy.htmlhttp://www.bloomberg.com/news/articles/2016-03-14/rosneft-may-top-gazprom-as-kremlin-s-crown-jewel-of-energyhttps://oilprice.com/images/tinymce/2016/CHickitychi1.pnghttp://www.reuters.com/article/us-russia-crisis-military-spending-idUSKCN0VS0RR)http://oilprice.com/Latest-Energy-News/World-News/Which-Presidential-Frontrunner-Is-The-Best-For-Energy.htmlhttp://www.bloomberg.com/news/articles/2016-03-14/rosneft-may-top-gazprom-as-kremlin-s-crown-jewel-of-energy


3/13

The &ollo/in ta"le dis.lays the current #ussian o$ern!ent !ethodoloy &or

calculatin the !ineral e%traction ta% and the e%.ort custo!s duty on crude' 7The ta%

code o


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7KlicF to enlare8

Theoretical %ineral E&traction Ta& and E&'ort $usto#s Tari( Re"enues

Go/ !uch can the #ussian .etroleu! industry enerate &or the #ussian o$ern!ent

i$en the current ta% structure and ta% rates &ro! the !ineral e%traction ta% and the

e%.ort custo!s duty+ or the saFe o& si!.licity, the &ollo/in esti!ates assu!e that

#ussia e%.orts crude only, not .etroleu! .roducts 7/hich /ould reuire esti!atin the

e%.ort $olu!e o& each .etroleu! .roduct and ta% rate !ulti.lier8, and that all crude

e%.orts are su"9ect to e%.ort custo!s duty 7i'e', includin those to EAK- countries8' The

esti!ates also inore the i!.act on indi$idual oil co!.anies and their nancial situation

7&or e%a!.le, on an o$erle$eraed #osne&t8'

The EA esti!ates that #ussian crude out.ut a$eraed 11'06 !illion "arrels .er day in

2015accordin to !ost o"ser$ers, the #ussian do!estic industry4s .eaF le$el' The

&ollo/in ta"le .ro9ects !ineral e%traction ta% re$enues at current !ineral e%traction

ta% rates 7assu!in no ta% "reaFs &or diculttoe%tract resources8:

7KlicF to enlare8

The EA esti!ates that in 2015, #ussian do!estic consu!.tion a$eraed 3'5 !illion

"arrels .er dayL thus, assu!in #ussia e%.orts only crude, it e%.orted I'=I !illion

"arrels .er day:

7KlicF to enlare8

https://oilprice.com/images/tinymce/2016/CHickitychi6.pnghttps://oilprice.com/images/tinymce/2016/CHickitychi5.pnghttps://oilprice.com/images/tinymce/2016/CHickitychi4.png


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/ould enerate so!e 6IQ o& the re$enue the #ussian o$ern!ent collected in 201=

&ro! "oth the !ineral e%traction ta% and the e%.ort custo!s ta% enerate at 100 .er

"arrel crude'

7KlicF to enlare8

Data &ro! OuFoil4s 3 nancial and !anae!ent re.orts 7/hich re.orts in -'(' dollars8

can illustrate /hat this /ould !ean in .ractice, /hile Fee.in the e%.ort custo!s duty

on the crude .rice di


7/13

21'222 "illion to OuFoil4s #enin, MarFetin, and Distri"ution 7#MD8 se!ent, /hich

it turned into I0'23 "illion in re$enue, includin 6'610 "illion &ro! sales to third

.arties, and 62 !illion in interse!ent sales'

7KlicF to enlare8

(ince OuFoil4s EP se!ent .roduced 6=I,6I0,000 BHE and enerated 2=,I=2,000,000in re$enue, its re$enue .er BHE sold to third .arties and OuFoil4s #MD se!ent /as

3J'20' 7OuFoil4s !ethodoloy &or .ricin EP crude is as &ollo/s: As a result of certain

factors considered in the “Domestic crude oil and rened products prices” section on

page 9, benchmarking crude oil market prices in Russia cannot be determined with

certainty. herefore, the prices set for inter!segment purchases of crude oil re"ect a

combination of market factors, primarily international crude oil market prices,

transportation costs, regional market conditions, the cost of crude oil rening and other

factors#.

7KlicF to enlare8

n 20154s rst three uarters, OuFoil4s #MD se!ent enerated I0'23 "illion in

re$enues' Assu!in that the #MD se!ent .urchased all the .urchased crude oil, as,

and .roducts, it netted 63'INBHE &ro! the 56I,000,000 BHE it .urchased &ro!

OuFoil4s EP se!ent 7assu!in the EP se!ent chared the sa!e .rice to third

.arties that it chared to OuFoil4s #MD se!ent8:

7KlicF to enlare8

https://oilprice.com/images/tinymce/2016/CHickitychi13.pnghttps://oilprice.com/images/tinymce/2016/CHickitychi12.pnghttps://oilprice.com/images/tinymce/2016/CHickitychi11.png


8/13

-sin this a..roachthe #ussian o$ern!ent clai!in throuh the !ineral e%traction

ta% all re$enue a"o$e the 15 Coor .rice and lea$in the e%.ort custo!s duty rate on

the .rice di


9/13

>ationali*ation could "e use&ul in &ocusin the #ussian enery industry on de$elo.in

#ussian rather than &orein enery resources' At .resent, #ussian co!.anies continue

to in$est outside o& #ussia 7and, as ta%es rise in #ussia, in$estin o$erseas could

"eco!e !ore attracti$e than in$estin in #ussia8' or e%a!.le, #osne&t recently

"orro/ed =JJ !illion &ro! a*.ro!"anF to nance natural asrelated .ro9ects in

)ene*uelathis at a ti!e /hen #osne&t &aces declinin .roduction in #ussia' OuFoilin$ests in EP outside #ussia 72'623 "illion 20154s rst nine !onths8' n 3 2015, its

out.ut in ra a$eraed 10,000 "arrels .er dayand each OuFoil.roduced "arrel

.roduced in ra rather than #ussia co!.etes /ith do!estically.roduced "arrels &or

sales to Khina and de.ri$es the #ussian o$ern!ent o& !ineral e%traction ta% or e%.ort

custo!s duty'

>ationali*ation could hel. rationali*e and si!.li&y the industry and increase its nancial

&oundation' Presently, the #ussian enery industry is ri$en /ith ri$alries and conCict'

#osne&t and >o$ateF are constantly at /ar /ith a*.ro! o$er its !ono.oly on natural

as e%.orts, /hich consins the! to sellin natural as at sinicantly lo/er do!estic

#ussian .rices' OuFoil in$ests in ra as #osne&t searches &or ca.ital to de$elo.e%.ensi$e crude resources in Eastern (i"eria' #osne&t "orro/s =JJ !illion &or natural

as .ro9ects in )ene*uela as >o$ateF searches &or ca.ital to co!.lete the rst train o&

its ?a!al O> &acility in 201I and ca.ture rst!o$er ad$antae in Euro.e and Asia

o$er -'(' O> .roducers'

a*.ro! continues to enerate su"stantial cash Co/, /hich, in a nationali*ed enery

industry, the #ussian o$ern!ent could use to .ay do/n so!e o& the 2= "illion in net

de"t that re!ains &ro! #osne&t4s T>BP acuisition'

;ere the industry restructured into t/o $erticalscrude and natural asEP

in$est!ent could "e concentrated on the !ost lucrati$e crude and natural asresources in #ussia, and thus a*.ro! /ould not "e loath to use the natural as #osne&t

no/ .roduces to su..ly Khina under its Po/er o& (i"eria contract and reduce the

$olu!e it /ill ha$e to e%tract &ro! ne/, e%.ensi$etode$elo. resources in Eastern

(i"eria and there&ore ca.ital e%.enditures' The #ussian o$ern!ent liFely could "orro/

at lesser rates than #ussian enery co!.anies, i$en its so$erein status, and the

.otential cash Co/ &ro! a consolidated enery industry'

By Dalan McEndree &or Hil.rice'co!

%ore To' Reads Fro# il'riceco#:

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@oin the discussion

+B9T T7E +9T7R

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10/13

Dalan %cEndree

Dalan McEndree has a BA in history, MA in Euro.ean Gistory, M'Phil' in #ussian and (o$iet history,

(o$iet econo!ics, and nternational econo!ics, and MBA inW 4ull bio

%ore articles 4ro# Dalan %cEndree

I)PRI$E PRE%I9%

• Inside In"estor

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Why Energy In"estors 3eed Pre#iu#

I3 I)PRI$E PRE%I9%

>at as n$est!ent HutlooF s BleaF

;hat The EKB Actions Mean or Hil

Go/ (ustaina"le s This #ally+

lo"al Enery Ad$isory 11th March 2016

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11/13

;e4re Klose To or!in A Ma9or Botto! or Hil

Au"rey McKlendon4s Oeacy

Oearn Go/ to Prot &ro! the H


12/13


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