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Head of the Central Bank of Russia Elvira Nabiullin says that the Russian economy and ruble have become less dependent on oil markets. This comes at a time where the Russian oil giants are getting record prices, but not commesurate profits with the price of crude in rubles at an all-time high. Questions remain.

Russia Oil Price

Nabiullin says the Bank of Russia will continue reducing the dependence of banks' balances on foreign currencies, this has much to do with the budget rule. With this rule investors in Russian oil giants Lukoil PJSC or Rosneft PJSC will be forced to wait until later in the year to see the full benefit of the higher prices in crude. Denis Borisov, a director at the Ernst & Young Oil and Gas Center in Moscow says that the tax burden effectively means that the Russian government is faring better than the oil companies with the high Rouble Crude prices.

Bank of Russia Chief

Elvira Nabiullina, Governor at Central Bank of The Russian Federation

This conflicts with Nabiullin's assertions on the face of it. In her interview with Reuters she said the Central Bank wants to increase provisioning requirements for forex loans for all borrowers including export-focused companies. The Bank of Russia injected 758.3 bln roubles in three banks it took over though a bailout she said, another 1.86 trln roubles provided in deposits. Looking through the Russian oil giants earnings it is hard to see how they could achieve this without high oil prices and that the banks, and therefore the economy are vulnerable should either oil or the rouble turn south.

Russia Oil Tax Burden

“The golden rain will likely fall on the companies in the second quarter if key conditions, the oil price and ruble exchange rate, remain in place,” Borisov said a few weeks ago. The price of international benchmark Brent crude averaged 3,823 rubles a barrel ($67.23) in the first quarter, just shy of the previous quarterly record in 2014. It’s risen further to as high as 4,881 rubles in May. Yet the price of Urals crude in Russia’s currency, net of taxes, was 3 percent lower from January to March compared with the fourth quarter due to higher oil-extraction levies, according to Deutsche Bank AG. Tighter Burden Tax costs of Russia's producers have been rising since last year The energy industry also was hit by petroleum-product excise tax as an additional support to the state budget to fund road construction that may reach 40 billion rubles in 2018 according to Finance Ministry’s estimates made last year. - Bloomberg

Russian Oil Companies Profits

The revenue of state-run Rosneft, which produces over 40 percent of Russia’s oil, hit a record of 1.73 trillion rubles in the first quarter, but it's  net income fell 19 percent from the fourth quarter to 81 billion rubles. Rosneft will start its first-ever share buyback program this quarter, spending $2 billion over three years.

Several other Russian oil companies are planning  buybacks as a way to share the rewards from rising crude prices with investors. Lukoil announced a five-year repurchase scheme worth as much as $3 billion back in January, four months before Rosneft. For 2018 as a whole, Lukoil and Gazprom Neft PJSC are expected to post big gains in net income, according to analysts surveyed by Bloomberg.

Rosneft’s cash flow should more than double to some 550 billion rubles, which is enough to cover interest payments, dividends and as much as half of the planned share purchases. The size of the tax burden remains a risk, particularly as Russia forms a new government. President Vladimir Putin’s administration will soon lay out targets for the economy and budget for his fourth term. While his government  has promised to avoid significant changes in oil taxes this year, Prime Minister Dmitry Medvedev said last month that Russia will need at least 8 trillion rubles in additional spending to fulfill its plans.

This in an economy that the head of the Bank of Russia says is less reliant on oil. How can all these buybacks, taxes, loans and programs be funded? Nabiullin says the former owners of bailed-out banks should be responsible with all their assets if the state steps in. She also sees the Russian banking system posting an overall profit of 1.5 trillion roubles in 2018 Seems a lot of brush strokes for it all to work and the dreaded unintended consequences should oil fall, then we will likely get the right answer of the Russian dependancy on oil.

Source: Bloomberg Reuters

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