24.10.2020

Can power to curb rising gasoline prices in Russia

What do we have? Unlike Venezuela, Nigeria and many Arab oil-producing countries in Russia, as is known, the authorities do not carry out any “sponsorship” of participation in the formation of gasoline prices. On the contrary, they created the original model that the idea was to “cut off” through windfall taxes from the owners of this important for the budget of the business in times of prosperity and more or less leave them alone during periods of poor pricing environment. In fact, it was not as straightforward and trivial. Well, as they say, its hand – the Lord.

Prices of gasoline in different countries are divided into two types – with and without the composite component state subsidies. As a rule, state regulation of the cost of gasoline due to the fact that it directly affects the pricing of products farmers. Given from year to year increasing input costs for the cultivation of crops and slaughtering of livestock, the fuel component in the final cost of food over time becomes more noticeable.

Who is to blame

Tax model operating in the Russian oil and gas sector, is not a concrete structure but is breathable and viviparous organism. Latest sensational act of legislation was the so-called “tax maneuver”. In the bill, presented in July of this year, it was proposed to gradually lower the rates of export customs duties on oil with 30% of the price of oil in over 6 years to zero from 1 January 2019. This shortfall in revenues of the Russian budget was planned to compensate by increasing the amount of tax on mineral extraction (met).

For Russian major oil companies (vertically integrated oil companies) it was an unpleasant surprise, as the companies that do not have a large resource base and are at the stage of exploration and test drilling, increased severance tax threatened non-payment of the loans and eventually bankruptcy. In addition to this, as we know, decided to raise half the excise tax on gasoline from January 2019.

Taken together, these maneuvers have led to a gradual reorientation of export business models of Russian Vinca, in which they tried in advance to compensate for future loss of profitability and even potential losses after increasing excise taxes in advance, which led to the first indignation of motorists, transport workers and farmers, and then on up the chain, and the government.

At this stage it is already possible to make an intermediate conclusion: tax law is no place for excessive creativity, even if it is dictated by the proverbial good intentions.

The situation was exacerbated by a sharp jump in oil prices on the global market this year, and the upward dynamics of a liter of gasoline has a second component.

Do I need to intervene

To solve the problem, the state has gone the way of administrative influence. In the end, some semblance Solomon solutions was found. After several warnings to Prime Minister Medvedev about the possibility of introduction of prohibitive duties in the case of disobedience of the oil company pledged to freeze prices for gasoline and diesel fuel in Russia.

But ironically (or rather, due to the changing market situation), in the domestic market they have to earn even more than abroad, where prices fell by 2.5–3.5 rubles in terms of liter.

To say, good or bad – very difficult. The free market, frankly, in the world for ten years as, therefore, each country, each government decides the kind, essential for any economy issues on an individual basis and on the basis of their own beliefs.

Gasoline prices are somehow tied to two factors: world oil prices and foreign exchange value of the national currency. Now the conditions to reduce petrol prices by far more favorable than they were a month ago.

However, due to the complex and constantly changing tax, in contrast to countries with a free market economy, the price of Russian gas stations react unidirectional: while the fall in oil prices on world markets, the price of gasoline is not reduced, and in their growth – grow. In this sense, Russia is sufficiently unique market.

How comparable Russian gasoline prices with fuel prices in the world? In terms of the liter as of 12 Nov, the average price of gasoline AI-92 in Russia (or in Western terminology, Regular Unleaded) is 67 us cents per liter and is ahead of almost all countries with subsidized pricing regime. However, this price is somewhat better than in the US (80 us cents per liter) or even the oil-rich Mexico (a$1.02 per litre). Why do we “complain about life”?

The thing, of course, the purchasing power parity of the ruble. At the PPP exchange rate to the dollar is about 23 rubles, and in fact gasoline would have to participate in the national program of import substitution. Moreover, as noted, gasoline prices directly affect nearly all retail price tags.

Then, at the average price of a carton of milk and a dozen eggs in Moscow against the same combination in new York (to keep the same share of fuel prices in the retail price of the relevant product), a liter of gasoline would have to cost about 18 cents per liter. The price of AI-92 was in the fall of 2005, when a barrel of Brent crude oil on the global market was worth… $67!

Truly is a fascinating thing – the manual management of the economy!

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