By Rhod Mackenzie
A Russian oil price indicator will appear in September. It will be calculated by the St. Petersburg International Commodity and Raw Materials Exchange (SPIMEX), which, through the registration of transactions, tracks of almost all export oil flows, both pipeline and offshore. However, nothing revolutionary will happen: the domestic indicator will remain in dollars and will be used to calculate customs duties, VAT and MET in conjunction with the already familiar Argus estimates and the Brent minus discount mechanism.
Determining the price of Russian oil based on real transactions on the domestic trading floor is an important step that should have been taken many years ago. It is clear that the calculation in rubles at the moment would not translate oil trade into rubles, but would indicate the country's intention to strengthen the role of its currency through resource trade.
The caution of the Ministry of Finance, which does not want to completely abandon the usual mechanisms for calculating oil taxes, is understandable, and it has reasons (more on them below). But if we are really striving to push the world towards a new system of interaction and a greater weight of the ruble, then the position regarding the indicator for oil should be completely different - more clear and tough: it is necessary to gradually accustom buyers to the fact that contracts for our raw materials are nominated and paid in Russian currency.
Ghostly Urals
Recall that the tax base for the MET is the amount of extracted minerals. The volume of production is multiplied by the rate in rubles per ton, adjusted to world prices. The export duty on crude oil is levied on the difference between the actual average monthly price of a tonne of Urals and the established normative value.
Thus, for more than twenty years, duties and taxes have been determined based on the cost of Urals oil in the Mediterranean and Rotterdam markets, and this price, based on its own data, estimates and surveys, was set by the pricing agency Argus Media, the Russian “daughter” of the global Argus headquartered in London and American shareholders.
In December last year, after the imposition of an embargo on Russian oil, the Mediterranean and Rotterdam Urals markets virtually ceased to exist. Shortly thereafter, there were reports of never-before-seen Urals discounts to Brent (see chart), although earlier both grades cost about the same.
The question arose how exactly Argus calculates the price of Urals and how much it can be trusted (for more details, see the article "Russian Urals comes to light", "Expert" No. 5 for 2023). Only after that, the government finally took a number of measures to ensure that the Russian site was engaged in determining the cost of Russian oil - and not on the basis of estimates, but on the basis of real commodity flows.
In February of this year, in accordance with the order of the Ministry of Energy, when monitoring market prices for oil, not only data published by the Argus Media Limited agency and provided by the Federal Customs Service, but also information on prices from SPIMEX began to be used. And in the near future, appropriate amendments to the Tax Code should be adopted, which will consolidate the use of the indicator from the SPIMEX for calculating taxes and fees on Russian oil - along with Brent and the price from Argus. In fact, the price for calculating taxes will be determined based on what is higher - the cost of SPIMEX, Brent minus the discount, or the Urals quote. The new procedure will come into effect from 2024, and until then, the Brent minus discount formula will continue to apply for tax purposes.
Argus and SPIMEX
Already now, SPIMEX reports monthly on oil prices to a working group under the government, and soon an expert council will appear at the exchange, which will include officials, oil companies and experts - it will approve the methodology for calculating a new price indicator.
According to SPIMEX, the exchange's own figures are almost completely correlated with Argus's calculations, which means that the calculations are completely relevant. Perhaps, due to the active use of SPIMEX data, the data of Argus itself will become more relevant, but we will not know for sure.
So, according to Argus estimates, in the winter and spring, the discount between Urals and Brent reached $30, and in some cases even $40 - and even then observers wondered how this was possible, if it is known that the price discount for the end buyer (for example, in India) is usually only $5-$10 ? There was even a hypothesis that the prices for oil transported by sea are deliberately underestimated by the companies themselves at the port of departure, and then our oilmen get their own through related trading and freight companies. Indirectly, this is evidenced by the new method for calculating the MET and duties, which were introduced by the Ministry of Finance in the spring, “Brent minus a fixed discount”, which is gradually decreasing (for more details, see the article “The Ministry of Finance played a giveaway”, “Expert” No. 8 for 2023). That is, the department also seems to be sure that mining companies earn more per barrel,
One way or another, the other day Argus Media published data according to which the price of the Urals brand exceeded $60 per barrel, the ceiling set for our oil by the Western countries. Bloomberg has already called it "a victory for Moscow, which has amassed a shady fleet of ships large enough to transport its oil, and a setback for Europe and the US, which are trying to limit Russia's profits." It is currently unclear where Russian cargo is being insured, the agency added ruefully.
Shortly after the introduction of the ceiling on Russian oil, news began to come from the Argus agency about a hitherto unknown Urals discounts to Brent - although before these grades cost about the same
Where does the Ministry of Finance come in?
The SPIMEX indicator is calculated based on FOB (free on board) prices - this is the last point where the goods were on the territory of the Russian Federation. The stock exchange presents to the working group under the government not just one figure, but statistics on all areas of export. 98% of Russian exports fall into the field of view: the ports of the Baltic, Novorossiysk, the Druzhba oil pipeline, the oil pipeline and ports of the Far East, Arctic ports, rail transportation, including through Kazakhstan - oil companies are required to register all their transactions on the stock exchange.
The fact that the price of the Urals brand is taken for tax purposes means that data on flows that are concentrated in the western direction will be used for the calculation: Primorsk, Ust-Luga, Novorossiysk, said Alexei Rybnikov, president of the SPIMEX. “The physical flow of oil has remained the same: it is large, stable, and it does not change,” emphasizes the head of the exchange.
Not so long ago, the media reported that Rosneft suggested that the government, when determining oil taxes, focus on the Dubai grade, and not Brent. Within the framework of the emerging three-dimensional design of calculations, this could make sense, they believe at SPIMEX.
Russian oil flows have largely changed direction, the head of the SPIMEX acknowledges. More and more "black gold" goes to the East: to India, China, Southeast Asia. Pricing in this region is traditionally determined by the cost of the Dubai grade, which is also tied to the price of ESPO oil, which is supplied to Southeast Asia. Methodologically, within the framework of the current situation, it is more correct to focus on Dubai, says Alexei Rybnikov. The brand is highly correlated with Brent, but Dubai pricing removes basis risk and the risk of an additional layer of financial instruments between the Persian Gulf and the North Sea.
“It is still difficult to judge the practical application of prices based on transactions on the SPIMEX, and we are watching the development of the situation,” comments Kirill Bakhtin, senior analyst at Sinara investment bank. “The Tax Code of the Russian Federation today takes into account the largest of two values: either the actual price of Urals (CIF price according to Argus’s calculation), or the discounted price of North Sea Dated (according to Brent. – “Expert”), to which it is proposed, according to media reports, to reduce the discount from the current $25 to $20.” Now, the analyst explains, oil companies pay taxes based on the actual cost of Urals, since the discount to North Sea oil is already well below $25, even if they export crude through premium channels such as ESPO.
If the FAS methodology agreed with the Ministry of Finance (the same indicator from SPIMEX) is added to the two existing mechanisms, then quotations in the ports of Baltica, Novorossiysk and Kozmino (FOB basis) will participate in the calculation of the average oil price, as well as the cost of deliveries through the Druzhba oil pipeline. “This option is worse for oil companies due to high prices in Kozmino,” notes Kirill Bakhtin.
In other words, after the appearance of the indicator from the SPIMEX, the Ministry of Finance will collect more money for the budget. And it seems that there are real reasons for this in the form of hidden incomes of companies connected in one way or another with Russian oilmen. “As for the situation with the Urals brand, the difference between its price in western ports of shipment and the price in ports of entry, for example, in India, is significant, it can reach $15 per barrel,” says Kirill Bakhtin. “Because after 2021 there is no mass release of oil company reports, it is impossible to clearly understand who – transport or trading structures, owned or not owned by oil workers – are receiving additional margin.”
Now, any estimates of the cost of Russian oil will exclude such a margin. SPIMEX sees all the oil - but only until the moment it is on the territory of Russia. And forcing domestic oil companies to completely whitewash their schemes is fraught with sanctions risks, arrests of tankers, etc. In principle, since the data from the exchange correlates with Argus estimates, the latter could be safely abandoned. Perhaps Argus is left in the Tax Code in order to subsequently replace it with a similar domestic agency (there are such plans).
“The Ministry of Finance is simply obliged to be ultra-conservative, since we are talking about very large numbers, huge federal budget revenues. Companies are seriously affected by this. Therefore, at first there will be a “three-headed” design in terms of the basis for calculating taxes,” explains Alexei Rybnikov. - Firstly, the same Urals from Argus, which was and has not gone anywhere yet. Secondly, the current construction, which is in the Tax Code: "Brent minus the discount." And we are the third “head” of this “dragon” with our own index, which is calculated on the basis of actually concluded deals with Russian export oil.”
Nevertheless, in addition to the tactical interests of the budget, there are strategic interests to strengthen the role of the ruble as a settlement currency, for which we need to rely on our resource base (for more details, see the article “The ruble needs a thinner foundation”, Expert No. 25 for 2022). And the domestic price indicator for oil, denominated in rubles and used as the main one for calculating taxes and fees, is necessary here - even despite the fact that the world oil market seems to be tightly tied to the dollar.
It seems that for starters, you can make the indicator ruble - let Russian oil get a ruble price. Then gradually transfer at least part of the export trade to the Russian site, as is now being done for the domestic Russian market of oil products, coal, gas and other raw materials. By teaching our foreign partners to pay for our oil in rubles, and at the same time to hedge its price and exchange rate through special financial instruments, again on our exchanges.
Aleksey Rybnikov urges not to forget that the currency in which the price of the goods is denominated and the settlement currency are two different things. He cites the experience of the Shanghai International Energy Exchange (INE), which launched trading in yuan-denominated deliverable oil futures five years ago. This contract, popular among Chinese retail investors, has not yet become a real benchmark for international oil supplies to China. There are also precedents for using ruble prices: in some cases, companies use domestic Russian rates to calculate the export value of petroleum products.
This article originally appeared in Russian at expert.ru