All the changes in the tax regime for the industry have been widely discussed since the end of 2012, so the news does not come as a surprise. We note that the gas and condensate MET formula is in line with the recent MinFin proposal.
While tight oil tax breaks are also broadly in line with order 700-p of the Government of the Russian Federation, the tax allowance is reached via discounts (which depend on permeability) to MET rates.
We are reiterating our view that an increase in excise taxes is negative for the Russian investment climate as it undermines the industry’s trust in the sustainability of government promises and the regulations which are already in place. The difference between the Euro-4/5 and Euro-3 motor fuel excise rates was the primary incentive for oil companies to invest in quality upgrades. Now, when this difference narrows, the profitability of investments (most of which have already passed the point of no return) will have to be reassessed. Although the news is negative, we believe it is already priced in.
We do not expect any market reaction to the news.