A Wide Range of State and Federal Subsidies Help Support Fossil Fuel Production in Russia

Fossil fuel production has historically played a vital role in energy balance and the industrial sector of the Russian Federation. Everybody knows about the weight and importance of the sector, which has been among the top contributors to the federal budget for decades. (Russia’s export of goods and services in 2022 accounts for 628 billion US $ out of which crude oil, natural gas, and petroleum products represented 384 billion USD, 2021 coal export was 18 billion USD, 2022 coal export dropped by 7.5 % to 211 million tons, 2022 federal budget revenues were at 27.8 trillion rubles out of which oil and gas revenues were 11.6 trillion rubles.  Proven reserves represent 20% of the world’s gas, 6% for oil, and 15% for coal.

Russia is among the top 3 global producers of gas (2022: 670 billion cubic meters or -19% vs. PY) and oil (2022: 535 million tonnes per annum or 11.1 million barrels per day, +2% vs. PY) and the sixth largest producer of coal (2022: 437 million tonnes per annum or +0.4% vs. PY). Fossil fuels account for 90 % of consumed energy (2018 Russia energy consumption by fuel type: 60% gas, 16% coal, 13% crude oil and petroleum products, 8% nuclear, 3% hydro, 0.3% renewable, e.g., wind, solar, geothermal. One-third of Russia’s gas, half of its crude oil and refined petroleum products, and half of its coal are exported. Fossil fuels account for 60% of Russia’s export revenue.

Gazprom, which is under state control, dominates natural gas production, and Gazprom fully owns domestic gas pipelines. LNG production is in the hands of Novatek (a public company: 20% share is owned by Total). Crude oil production is in the hands of a few sizable companies – Rosneft (circa 20%), Lukoil (20%), Gazpromneft, Surgutneftegas, Tatneft, Bashneft, etc. The state controls Rosneft. In turn, Rosneft controls Bashneft. Gazprom controls Gazpromneft. Tatneft is controlled by Tatarstan (one of the federal subjects of the Russian Federation). Lukoil and Surgutneftegas are public companies. Crude oil pipelines are controlled and operated by Transneft (states owned monopoly, though a public company). Coal production and transportation is in the private hands mainly.

Few people know that fossil fuel production has always enjoyed material support and subsidies from the state and federal regions. The subsidies and support vary in nature, and information about them is quite hazy and untransparent. They target production on depleted or new deposits (lower rates of mineral extraction tax), stability of internal prices and tariffs for fuel and electricity, transportation tariffs for railway and pipelines, investment activities (low or zero import duties, tax refunds, buy-Russian refunds), foreign trade/export (low duties). 79 words.

There are two official estimates of fossil fuel subsidies in Russia. The first one from OECD (the Organisation for Economic Cooperation and Development ) is based on the official reporting of Russian authorities and services. It contains budgetary transfers and government revenue foregone due to tax breaks (OECD, 2019). These two types of subsidies amount to 0.5 % of GDP or 1.5 % of Russia’s general government revenue. The second estimate originates from the IEA (International Energy Agency) and captures subsidies to Russian consumers via prices (tariffs) regulated below international benchmark levels. These subsidies do not affect the government budget directly, but they are considerable: at 1.3 % of the GDP or 3.9 % of general government revenue (IEA, 2019).

To provide a real example, in 2022, Russian oil producers received 2.16 trillion roubles (~30 billion dollars) from the state. This is to offset revenues caused by lower prices inside Russia.

Energy products are subject to a standard value-added tax (VAT) rate of 20 %. In addition, excise taxes are applied to oil products (e.g., gasoline, diesel, heating oil, engine oils, medium distillates) and gas. There are estimates that government revenues from VAT and excise taxes on fossil fuels amount to 0.8 % of GDP or 2.3 % of the general government revenue. There is no carbon tax in Russia to regulate greenhouse gases emission. In 2018, the International Monetary Fund (IMF) estimated the value of under-taxing fossil fuel consumption in Russia in 2017 at USD 74 billion in terms of climate change effects and USD 422 billion in terms of air pollution impacts on human health. In other words, the IMF estimates of fossil fuel under taxation are roughly equivalent to the general government revenue.

Russia is a party to the UN Framework Convention on Climate Change and the Paris Agreement on climate change. Under its Intended Nationally Determined Contribution within the framework of the Paris Agreement, Russia committed to “limiting anthropogenic GHG emissions to 70–75 % of 1990 levels by 2030, subject to the maximum possible account of absorbing capacity of forests” (Government of Russia, 2015). This target allows Russia to increase its emissions above the current levels, which at the end of 2017 stood at only 68 % of the 1990 level without accounting for land use, land-use change, and forestry (LULUCF), and 51 % with LULUCF (Russian Federation, 2019). However, Russia’s low-carbon strategy for 2050 is still being developed.

This Post was submitted by Climate Scorecard Russia Country Manager Svetlana Chubova

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