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European Business Russia pays its oil companies $4.4-billion to hold down domestic fuel prices

Russia is part of a global agreement to cut oil production aimed at propping up crude prices, a major source of state revenues.

VASILY FEDOSENKO/Reuters

Russia expects to use about 210 billion rubles ($4.4-billion) from its National Wealth Fund this year to pay back oil firms as part of a deal to keep down domestic gasoline and diesel prices, a senior finance ministry official said on Friday.

The government and oil firms agreed to cut wholesale domestic fuel prices last year as a temporary measure to keep a lid on petrol and diesel costs, a politically sensitive issue.

Under the deal, which runs from Nov. 1 until June 30, oil companies are allowed only to slowly increase gasoline and diesel costs, which started to rise due to stronger global oil prices.

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Russia is part of a global agreement to cut oil production aimed at propping up crude prices, a major source of state revenues. But that is hitting it back at home as the cost of gasoline is one of the key factors affecting inflation – and the central bank’s main policy rate.

Alexei Sazanov, head of the Russian finance ministry’s tax department, told reporters that in February alone the state paid back oil companies 20-30 billion rubles for keeping fuel prices under control.

Russia is using the National Wealth Fund (NWF) as a buffer against potential external shocks and to pay out pensions or support some important large projects at home. The spending rules are strict as the state wants to preserve the fund.

Mr. Sazanov said that, for 2019 as a whole, the payout from the NWF to the oil firms was estimated at 210 billion rubles.

“If we are paying the cash, we want to get a quality service in return. This service should result in the fact that the consumer should see prices at the fuel filing stations based on levels we pay back to the oil companies,” Mr. Sazanov said.

Under a “fiscal rule,” any revenue from oil prices higher than US$40 per barrel goes into the NWF, which is part of Russia’s gold and foreign exchange reserves, held by the central bank.

The NWF currently stands at $79-billion and is expected to quadruple to more than $268-billion -- about 12 per cent of gross domestic product -- in 2021.

Reuters

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