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Ministry of Finance to consider an increase in motor fuel excises

According to Vedomosti, regional road funds are facing a deficit of some RUB 108.7bn because oil companies have shifted to Euro4-5 motor fuels and, correspondingly, there is a decline in excises paid. The Ministry of Finance has proposed increasing the excise on Euro4-5 motor fuel, but this would be not enough according to the paper. In order to offset the deficit, the ministry is also proposing to increase the export duties on oil products, from 66% at present to 72% in 2014, and the mineral extraction tax on crude oil.

The difference in excise between low quality and high quality motor fuels was the only incentive for Russian oil companies to invest in quality upgrades. This was already narrowed on 19 November, to which the market reacted negatively. Were it to be narrowed further, lowering the efficiency of this project beyond the point of no return, that would put additional pressure on the sector. The other option, to increase export duties for oil products (mainly attributed to dark oil products), is also quite questionable, in our view. We believe that Russian oil companies are not ready for a 100% export duty. However, increasing it from 66% to 72% would lead to a decline of 1-2% in the EBITDA of major Russian oil companies (which is not that so material). On the other hand, increasing the oil MET rate might lead to more sizable consequences for the industry in general.

At this stage there are no details, but we highlight the risk of a corresponding decline in production in the medium to long term if the rate is increased. Any decrease in oil production would likely lead to a decline in export duties and additional pressure on the Russian budget. All in all, the news is negative for sentiment on the Russian oil sector and supports our cautious view on Russian oils. 

Dmitry Loukashov, Alexander Kirevnin, Ekaterina Rodina, Elena Kopylova
VTB Capital analyst

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