Russia Weighs Cutting Multibillion-Dollar Subsidies to Oil Firms

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(Bloomberg) — Russia’s government is considering cutting subsidies to the nation’s oil refineries as it looks for ways to limit spending amid the costly war in Ukraine, according to people familiar with the matter. 

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Last year, the Russian state spent 2.17 trillion rubles ($26.6 billion) compensating refiners for the difference between the base price of domestic fuels and their theoretical value if exported to Europe, according to data from the Finance Ministry. In the first quarter of 2023, the companies received more than 253 billion rubles, the data show.

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Now, as a second year of war in Ukraine strains Russia’s budget, the government in Moscow is looking to raise the base price of gasoline and diesel in the subsidy formulas by as much as 50%, said two people familiar with the matter, who asked not to be named because the discussions are private. That would reduce future subsidies, or could even lead to a situation where refiners would have to make payments into the budget if the base fuel price exceeded the European export value.

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There is no final decision on the size of the hike or whether the formulas be changed at all, one of the people said. If the proposal was implemented it would eat into Russian oil companies’ profits because the government has said it aims to keep domestic fuel price growth within inflation, so the cost couldn’t be immediately passed on to consumers. 

The Russian finance and energy ministries didn’t immediately respond to requests for comment.

Russia’s public finances have deteriorated sharply since the Kremlin started the war in Ukraine. Defense spending together with the related category of national security is now second only to the government’s social programs as a proportion of the budget.

The nation’s oil and gas industry is a key source of tax revenue for the Kremlin, yet western price caps and import restrictions have weighed on the proceeds. In March, the industry’s contributions to the budget dropped more than 40% from a year earlier to 688.2 billion rubles, according to data from the Finance Ministry. 

The government has come up with other solutions to replenish state coffers, including a one-time corporate windfall tax and so-called exit fees for foreign companies planning to exit the Russian market.