Russia relies heavily on taxes on its lucrative oil and gas exports for its day-to-day spending, but revenues have fallen amid a European Union embargo and G7 price cap on Russia's crude and oil product sales. More oil and gas sales are now going to Asia rather than Europe, making the previous benchmark based on prices of Russia's Urals in European ports redundant. Russia is therefore switching to a reference point based on a fixed differential to benchmark Brent crude. The new law - passed by the lower house on Wednesday but which needs to pass Russia's upper house and be approved by President Vladimir Putin before coming into effect - fixes the discount at which it accounts for Urals crude compared with Brent.
It sets the maximum discount for Urals compared with Brent for tax calculations at $34 a barrel in April, falling to $31 in May, $28 in June and $25 in July - in effect not far from current market prices for Urals crude. Deputy Finance Minister Mikhail Kotyukov said on Tuesday that the change would boost Russia's state budget by 600 billion roubles ($8.2 billion) this year. But analysts said earlier this week the move would not be significant in narrowing the budget deficit. The Russian government made around 11.6 trillion roubles ($165 billion) in oil and gas revenue last year. Sales to Europe, previously Russia's key market, have fallen sharply since Moscow sent tens of thousands of troops into Ukraine last February.
Moscow has shifted some supplies to the likes of India and China, but has been forced to sell Urals at a steep discount. Urals previously traded at a single-digit discount to Brent. Russia will also cut production by 500,000 barrels a day in March under the pressure of Western sanctions and the widening discount on Urals. (Reporting by Jake Cordell and Vladimir Soldatkin; Editing by David Holmes)
