Tax scheme, weak ruble help Russian majors

Tax mechanisms and a weak ruble helped Russia’s major oil companies maintain and in some cases improve ruble-denominated profitability in the first quarter despite weakness in the price of crude oil, reports Moody’s Investors Service.

Russia’s overall tax burden on domestic companies falls when prices decline, explains an analysis by Julia Pribytkova, Moody’s vice-president and senior analyst. Combined with a 40% decline in the ruble’s value against the dollar, the tax buffer offset a 50% drop in the crude price from the first-quarter 2014 average and weak performance from refining.

For all five Russian companies tracked by Moody’s, first-quarter 2015 tax burdens fell as percentages of revenue from their levels in the first and last quarters of 2014.

The lower tax burdens largely reflected the price sensitivity of Russia’s minerals extraction tax, which is a volume-based royalty, and export duties lowered for crude oil and oil products at the beginning of 2015.

Companies followed by Moody’s are Rosneft, Lukoil, Gazprom Neft, Tatneft, and Bashneft.

Ruble weakness in the first quarter helped the companies generate cash flow. The companies’ operating expenses and a large share of their capital expenditure are denominated in rubles, while their cash flows are largely in dollars because they export most of their crude and products, the analyst explained.

Although Russian oil production changed little in the first quarter from its year-earlier average, the tracked companies increased total exports by 20% for crude and 7% for refinery products.

Their overall refinery output dropped in the first quarter, however.

“The ruble’s significantly weaker exchange rate and the lower export duty made crude oil more expensive for domestic refineries and squeezed their margins,” the Moody’s analyst said.

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