The government has reached preliminary agreement about tax exemptions for the development of oil&gas deposits in the Arctic, deputy PM Trutnev said. The respective draft was submitted last week and reports were that the FinMin was still against the proposal, but it seems the ministry has now agreed to it. The tax exemptions apply primarily to projects by Rosneft, but they will affect also LNG production by Novatek, as well as gas processing projects by Gazprom Neft and Lukoil. The proposal is to scrap the natural resource tax for 12 years and then gradually return it to the normal rate within five years. There is no estimate of the total cost to the budget, but only exemptions given to Rosneft are seen around RUB60-70bn per year.
There is no clarity about the financing of those measures, which was a key objection of the FinMin. The ministry previously wanted the loss of budget revenue to be compensated by higher tax burden on the oil sector itself. According to Vedomosti Daily, there are two options discussed now, both of which effectively mean softening of the budget rule. One is an outright increase of the reference oil price from the current USD42.6 and the other is to use oil revenues from one large deposit to finance the tax exemptions, which will also reduce the saving of oil revenues to the National Wealth Fund. Sacrificing the fiscal rule for support to the oil&gas sector will be a step in the wrong direction in our view and it is also likely to be criticized by the CBR and IFIs.