Energy Tax Reform in Russia and Other Former Soviet Union Countries

• Author: Dale Gray
• Position: Formerly worked in the IMF's European II and Fiscal Affairs Departments, is Principal Economist in the Private Sector Development Department of the World Bank

The taxation of oil and gas production and consumption has become an important fiscal issue in most countries of the former Soviet Union. How can these countries modify the taxation of their energy sectors to increase fiscal revenues, improve efficiency, and encourage foreign investment?

THE COUNTRIES of the former Soviet Union are typically large consumers of energy, and four of them-Azerbaijan, Kazakhstan, Russia, and Turkmenistan-are large producers of oil and gas. Revenues from the petroleum sector averaged about 4.5 percent of GDP in Russia, Azerbaijan, Kazakhstan, and Turkmenistan during 1993-96, compared with between 10 and 30 percent of GDP in oil producers elsewhere. Many observers have asked whether the sector is being taxed sufficiently, while others have complained that it is overtaxed.

Large oil and gas reserves

The existing petroleum reserve base in former Soviet Union countries is very large and could support significantly higher production and exports. Russia has one-fourth of the world's proven gas reserves and is the world's largest producer of natural gas. Turkmenistan has the sixth-largest gas reserves in the world. Russia has an estimated one-seventh (6.7 billion tons) of the world's proven oil reserves outside the Middle East, which is comparable to the oil reserves of Mexico. It is the world's third-largest oil producer, with an output of 300 million tons in 1996. Production has fallen 45 percent, however, since the peak year of 1988. Azerbaijan and Kazakhstan each has oil reserves about one-sixth those of Russia. Oil production in these two countries could double or triple once oil export pipelines are built from the Caspian Sea fields.

Gas surplus but tight oil supply

Gas supply in the region is dominated by production from a few large, low-cost fields owned and operated by the monopoly Gazprom. Gas sales are demand constrained, since demand for gas in the region has declined and there are surpluses of gas in western Kazakhstan, Russia, and Turkmenistan. Demand for energy in the fomer Soviet Union has fallen owing to recent declines in GDP, energy price increases, and some improvement in what has characteristically been inefficient use of energy in the region's economies. One-tenth of the gas produced in Russia is exported to Western Europe, where it satisfies one-fourth of Western European demand. Ukraine is the main country through which Russian gas flows to foreign markets.

There is scope for some increased gas exports from countries of the former Soviet Union, but concerns about security of supply and limited expansion of the gas market are likely to prevent a large-scale expansion of gas exports. Since Russia's gas sector produces large amounts of low-cost gas and is a monopoly, it should generate significant revenues from sales and, potentially, large tax revenues.

The supply and demand conditions and market structure for oil are very different from those for gas. Oil is supply constrained. Production of oil in the former Soviet Union countries (which comes overwhelmingly from old fields) has been declining owing to poor production practices and low investment. Output stabilized in 1997. Production could be increased from old fields and completely new oil fields, particularly those in the Caspian Sea region.

Ownership change

In Russia, ownership and control of substantial oil and gas assets have been transferred to new domestic owners and managers. The energy sector was privatized in a nontraditional manner by issuing and trading vouchers encompassing large stakes in oil, gas, and power companies and by other means. Oil and gas sector assets were privatized between 1992 and 1996 for a total budgetary contribution of less than $1.5 billion. These assets are worth an estimated...