Prospects for Russian Oil and Refining Industries Under Sanctions

Abstract

The sanctions imposed on Russia in February 2022 have affected the current and future revenues of the domestic energy sector as well as the tax revenues derived from it, while they have also made public welfare losses due to accumulated imbalances in the fuel and energy sector more sensitive to the Russian economy (for example, through subsidies for oil refining). Developing recommendations for adjusting the way the Russian oil refining sector is subsidized is now an urgent matter. This paper estimates the factor payment for the use of oil rent, considers the structure of its distribution in the Russian economy, and provides a scenario analysis of the consequences of imposing sanctions, which include a “price ceiling,” changes in tax regulation, and an increase in the processing depth of refineries. Based on this analysis, reforms in the taxation of the Russian oil refining sector are proposed. The results of the scenario analysis show that, under the current conditions, it is extremely important to continue modernizing oil refineries. A potential reduction in the production of petroleum products would result in the smallest losses industry-wide, provided that it is achieved by suspending the least efficient refineries (those with low GVA in the absence of subsidies) and by ending subsidies for friendly economies