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Tuesday, May 01, 2007

Russia Strangles the Oily Goose

The Moscow Times reports that, once again, the Kremlin is sucking the blood of the country and destroying its chance for decent future:

The three largest independent firms in the oil and gas sector came out with earnings reports this week, and all three disappointed. The industry's future has begun to look downright grim.

TNK-BP's net income in the first three months of 2007 fell 60 percent year on year, and 11 percent compared with the previous quarter. LUKoil also saw an 11 percent drop in revenues from the third to fourth quarters of last year, revealing weakness that was "far more serious than the market expected," Alfa Bank wrote in note to investors Wednesday. On Monday, Novatek revealed 2006 earnings growth that was 15 percent below consensus expectations, and 34 percent below those of Renaissance Capital, urging the bank to reassess the gas firm's value.

"The tail end of 2006 was just not a good time for the sector," said Alexander Burgansky, oil and gas analyst for Renaissance Capital. "The dropping global prices and growth of taxes really spoiled the market environment. The taxes are the biggest strain."

Export duties on oil are adjusted bimonthly in Russia based on the price of Urals crude over the previous two months. This means that if oil prices are high, firms can expect higher taxes in the months ahead. Such was the case in the fourth quarter of last year, when oil giants were feeling the tax hikes from soaring prices that summer and fall.

"But because of the lag built into the system, taxes are going to drop in the second quarter [of 2007]," in reaction to the low prices during the first, Burgansky said. "This should bring some relief in the short term."

In the longer term, officials signaled this week that the burdens would only get worse, however. Because crude prices have of late been buoyant, averaging near $61 per barrel since the beginning of March, export duties will rise by roughly $6 per barrel as of June 1, a source in the Finance Ministry told Interfax on Thursday.

The hoped-for shift of the tax burden onto the gas sector also seemed to slip farther out of sight last week. Though various top officials said Wednesday that proposals on raising gas production taxes had been drawn up, no one could say when a decision might be reached, and the Economic Development and Trade Ministry said it had not worked with the Finance or the Industry and Energy ministries to resolve the matter.

"The uncoordinated decisions by the various ministries imply that the fight over gas taxation is poised to intensify," Troika Dialog said in a note Thursday.

Anton Tebakh, chief strategist at UralSib, concurred, adding that gas tax hikes would not be implemented until 2009. And Burgansky added that even after they were implemented, there would still be no real easing of the oil sector's burden.

Spot prices for gas on the unregulated gas market, established by Gazprom in November, have been falling since the start of the year, with their premium over the state-regulated gas tariffs dropping from 56 percent in January to 36 percent in March and 30 percent in April, MDM Bank said in a note Monday.

The gas price reacts with a six-month lag to the price of oil, said Peter Westin, chief economist at MDM, so it is now just beginning to feel the impact of the slump in crude prices that began at the end of last year.

The Central Bank, which released its guidelines last week for the next three years of monetary policy, appears to have accepted that oil and gas will soon be unseated from the center of the country's economy.

Its guidelines said the foreign trade surplus would drop to $10.3 billion by 2010 from the $139.2 billion seen last year, meaning that the value of imports will nearly outpace the value of exports in three years' time.

For the past eight years, the Central Bank's main role has been to curb inflation, first by means of letting the ruble appreciate -- to the gall of Russia's exporters -- and second by soaking up excess liquidity from the oil and gas revenues that were flowing into Russia.

A negative trade balance, which the bank expects sometime in 2010, would coincide with a new monetary policy -- that of supplying liquidity by giving discount loans to Russian firms.

Analysts have doubted whether the bank's vast bureaucratic machine can provide these loans effectively, but most agree that this role will be vital for Russia if it manages to kick the petrodollar habit and diversify into emerging industries.


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