Tax lift on refined petroleum products
Russia’s Finance Ministry has proposed raising, from 1 April 2016, the excise tax on gasoline and diesel fuels by respectively 2 and 1 roubles a litre. According to Finance Minister Anton Siluanov1, this will generate about Rb 80bn in tax revenues to the consolidated budget, whereas prices of refined petroleum products will see no growth.
An excise tax lift on gasoline and diesel fuels by respectively 2 and 1 roubles a litre implies a considerable increase in excise tax rates on a tonne of refined petroleum products such as gasoline (gasoline grades that meet the Euro-5 standard) and diesel fuels, up 35.2% and 28.3%, respectively. Such increase will boost inflation costs.
According to our estimates, such raise may boost the price of Ai-95 grade gasoline (similar to the Euro-5 standard) and diesel fuels by respectively 2.36 and 1.18 roubles a litre. In relative terms, gasoline and diesel fuel prices are therefore expected to increase 6.42% and 3.33%, respectively. These estimates allow for a potential price raise similar to that seen previously as a result of lifting excise taxes. Note that in 2015 excise tax rates were lowered as prices of refined petroleum products kept growing. It is worth noting that the recent months-long fall in oil prices, as such, has triggered no price raise on refined petroleum products.
The government can control the value of refined petroleum products by setting a cap on retail prices of gasoline and diesel fuels. However, it is highly questionable that the industry could painlessly absorb higher excise taxes (keep prices intact) amid the ongoing crisis and Western sanctions, as well as declining dollar revenues. However, according to Russia’s Federal State Statistics Service (Rosstat), return on sales of refined petroleum products has been falling over the recent five years (23.1% in Q4 2010 vs. merely 5.77% in Q3 2015)2.
Should Russia eventually set a price cap, this may trigger a shortage. For instance, in August 2011 Kazakhstan set a cap on retail prices of Ai-80 grade gasoline, Ai-92/93 grade gasoline and diesel fuels. The prices didn’t fully reflect the demand and supply balance, which among other things resulted in a shortage of refined petroleum products. Note that there was no shortage of Ai-95 grade gasoline. Accordingly, Kazakhstan’s Energy Minister issued executive order No. 556 on 4 September 2015 to shorten the list of refined petroleum products subject to retail price capping: Ai-92/93 grade gasoline was deleted from the list.
Hence under current economic conditions an increase in excise tax rates by 2 and 1 roubles on a litre of gasoline and diesel fuels may lead to a price hike of gasoline and diesel fuels by respectively 1.18 and 2.36 roubles a litre, and higher prices of gasoline and diesel fuels will ramp up the pressure upon private savings and can hardly promote a recovery in the Russian economy.
Elena Velikova, a senior research scholar from the Tax System Development Department;
Yelisei Leonov, a junior research scholar from the Tax System Development Department.