Bloomberg News

Putin Setback Exposes Gazprom as Communists Seek Higher Tax

December 28, 2011

(Updates with closing share price in sixth paragraph.)

Dec. 19 (Bloomberg) -- OAO Gazprom, the world’s biggest natural-gas producer, faces demands to pay more tax after opposition groups gained against Prime Minister Vladimir Putin’s ruling party in Russian parliamentary elections.

“The liberals, the Communists and the social democrats all agree on raising Gazprom’s taxes,” Vladimir Milov, the leader of the liberal Democratic Choice Movement and a former deputy energy minister, said in a phone interview from Moscow.

State-owned Gazprom, Russia’s biggest company by revenue, enjoys a tax rate that’s less than half the country’s oil producers. The company’s tax burden, which totaled $23 billion last year, should double to bring it in line, Sergei Levchenko, a Communist Party member who served on a parliamentary energy committee, said by phone from the Siberian city of Angarsk.

Putin, whose United Russia party suffered this month its biggest setback since he came to power more than a decade ago, has been slow to raise taxes on Gazprom. With a smaller majority in the State Duma, parliament’s lower house, Putin may be forced to seek compromises with other factions. The Dec. 4 election sparked protests against voter fraud and Putin’s plans to return to the Kremlin in March’s presidential vote.

Russia expects a budget deficit of 1.5 percent of gross domestic product in 2012 after a balanced budget this year, Putin said Nov. 16. Oil and gas accounted for about 49 percent of budget revenue in the first 11 months of this year, according to the Finance Ministry’s website.

Gazprom shares on the Micex fell 2.5 percent today to 166.05 rubles at the close in Moscow. The benchmark Micex index fell 0.02 percent.

Tax Growth

Gazprom paid 731.3 billion rubles ($23 billion) in taxes last year, or about 20 percent of revenue, according to its 2010 financial report. State-controlled OAO Rosneft, the country’s biggest oil producer, paid $30.3 billion in taxes, or 48 percent of revenue, according to its financial statements.

The gas producer may pay $39.5 billion in taxes this year, with an effective tax rate of 22 percent, compared with a 52 percent rate for Rosneft, said Constantine Cherepanov, an analyst at UBS AG in Moscow.

“Gazprom is the biggest business structure in Russia, yet much smaller energy companies pay higher tax rates,” the Communist Party’s Levchenko said. The increase could be imposed through profit or mineral extraction taxes, he said. The Communists will have the biggest voice after United Russia when the new Duma meets this month.

Just Russia

United Russia won 238 seats in the 450-member State Duma, according to the Central Elections Commission, down from 315 in the 2007 vote. The Communists will get 92 seats, up from 57; Just Russia doubled its tally to 64 from 32 and the Liberal Democratic Party won 56 seats, up from 40.

“Given the added weight the opposition has in the Duma, it’s realistic to expect more pressure to increase Gazprom’s tax burden,” Milov said.

Gazprom is already facing one tax increase. As the budget slid into the first deficit for a decade last year, the Finance Ministry pushed through the first increase in the mineral- extraction tax for gas producers in five years, raising the rate by 61 percent this year.

Next year, Gazprom’s mineral-extraction tax rate will more than double to 509 rubles for 1,000 square meters of gas from 237 rubles this year, according to the Kremlin website. The tax for the gas export monopoly will climb to 582 rubles in 2013 and 622 rubles in 2014.

That may add 150 billion rubles to Gazprom’s mineral extraction tax bill in 2012, based on company estimates.

Vulnerable to Spending

Higher gas tariffs at home, which are scheduled to climb 15 percent in July next year, will partially offset the higher extraction tax. Russia is gradually increasing domestic rates to match oil-linked gas prices in Europe and 2009 was the first year Gazprom made a profit from domestic gas sales.

Gas producers, led by Gazprom, are still vulnerable to plans to raise revenue through further tax increases, UBS’s Cherepanov said by phone.

Gazprom may cut its investment program to compensate for higher levies because it has excess production and demand isn’t growing domestically or abroad, Alexei Kokin, an oil and gas analyst at UralSib Financial Corp., said by phone.

“There’s nowhere else to take the money from and there’s serious potential to increase Gazprom’s tax burden,” he said.

Easily Trimmed

Gazprom has “fat” that can easily be trimmed, Kokin said. Higher taxes are likely because the government, which owns more than 50 percent of Gazprom, may not want to pay out earnings to other shareholders as dividends, he said.

The gas company is not aware of any immediate plans to raise taxes, said a company official, who declined to be identified because of corporate policy.

Gazprom has budgeted as much as 200 billion rubles a year for dividends in 2012 through 2014, Interfax reported on Dec. 1, citing an unidentified person familiar with the plan. That would make the 2012 cash dividend 6.40 rubles a share, the highest payment since at least 2005.

The gas industry is a tempting target for government because any attempt to tax oil producers more heavily could risk undermining production, Kokin said. Last year, Putin said oil production will remain above 500 million metric tons a year, or 10 million barrels a day, for at least 10 years. That’s more than Saudi Arabia this year.

Gazprom continues to lobby for tax breaks for a number of projects in remote, gas-rich areas, including the Shtokman project in Russia’s Arctic Ocean, which it plans to develop with Total SA and Norway’s Statoil ASA.

Russia is considering tax breaks for Shtokman, Energy Minister Sergei Shmatko said on Dec. 7. French Prime Minister Francois Fillon last month urged Russia to exempt the project from the mineral extraction tax and export duties.

Gazprom is seeking similar tax breaks to develop natural- gas deposits off Russia’s Pacific coast and in the Yakutia region, Viktor Timoshilov, an official in charge of the company’s eastern projects, said in September.

--Editors: Will Wade, Stephen Cunningham

To contact the reporters on this story: Jake Rudnitsky in Moscow at jrudnitsky@bloomberg.net; Anna Shiryaevskaya in Moscow at ashiryaevska@bloomberg.net

To contact the editors responsible for this story: Will Kennedy at wkennedy3@bloomberg.net; Stephen Voss at sev@bloomberg.net


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