Gazprom: How to Pay More/Less Taxes

• Our analysis of natural gas trade transactions in Russia and the former Soviet Union shows that Gazprom may need to use similar approaches in its practice at eastern and western borders of Russia.

  • For Gazprom, it means a choice between increasing and decreasing its tax payment.

  • In both cases, it is a matter of over $1 billion a year.

• On the eastern side, Gazprom uses RosUkrEnergo (RUE), a Switzerland-based joint venture between Raiffeisenbank of Austria and Gazprombank.

  • RUE buys gas outside of Russia and takes it across the Russian territory to Ukraine.

  • This gas is not subject to Russian import and export duties because it is owned by foreign company.

    Table 1: Opportunity for Higher Taxation of Central Asian Gas

  	Unit	Importer now:  RosUkrEnergo	New importer:  Gazprom
  Import price at Kazakhstan-Russian border	$/mcm	(62.00)	(62.00)
  Import duty - 5%	$/mcm	-	(3.10)
  Russian transit fee	$/mcm	(9.11)	-
  Export price at Russian-Ukrainian border	$/mcm	80.00	93.00
  Export duty - 30%	$/mcm	-	(27.90)
  Seller's profit	$/mcm	8.89	0.00
  Imported volume	bcm	40.0	40.0
  Total duties	$ mill	-	(1,240.0)

• Assume Gazprom replaces RUE and buys and exports Central Asian gas on its own (Table 1).

  • Then the whole transit volume becomes subject to import and export duties, and the tax payment legally increases by $1.24 billion a year.

  • Note that to break even, Gazprom would need to raise export price for Ukraine to $93/mcm.

  • Table 1 shows anticipated volumes and prices for 2005.

• The state of Russian Federation, main shareholder of Gazprom, seems to approve the practice of using foreign party that reduces tax collection by over $1 billion a year.

  • Itera of USA and Cyprus started the transit deliveries of Central Asian gas to Ukraine in 1999.

  • In 2003, Itera was replaced by Eural Trans Gas of Hungary, which in turn was replaced by Swiss RUE in 2004.

  • Note that a foreign 100% daughter company of Gazprom (like Gazprom UK Limited) would have been more beneficial for Gazprom shareholders than RUE. RUE makes profit out of Russia, while Gazprom UK Limited would have made no profit on transit of Central Asian gas.

• On the western side, Gazprom does run all transaction by itself without using any foreign party.

• Gazprom sells gas at importers' borders and pays transit costs from Russian border to the point of sale.

  • From January 2004, Gazprom pays export duty, which is defined as 30% of contract price.

  • In most cases, Gazprom pays transit costs out of Russian territory by dedicated volumes of gas. Ukraine receives about 26 bcmy (billion cubic meters a year) of payment gas. Slovakia, Czech Republic, Bulgaria, Moldova and other countries receive smaller volumes. We estimate the total volume of payment gas delivered for transit services in Ukraine, Moldova, Romania, Bulgaria, Slovakia, Czech Republic and Austria in 2004 at 33.1 bcm.

  • Transit costs are not deductible from the taxation base of export duty (see details here).

• Assume Gazprom applies the same approach to its exports to Europe via Ukraine as it does to transit gas from Central Asia (Table 2).

  • Assume Gazprom UK, a foreign 100% daughter company of Gazprom, buys all export and payment gas at the Russian-Ukrainian border. The volume includes 26.9 bcm of payment gas delivered to Ukraine and Moldova.

  • Gazprom UK would pay the price equal to total export revenue reduced by the cost of transit out of the Russian Federation. It would leave Gazprom UK with no profit from these operations.

  • Gazprom UK would deliver the same volumes to all importers, including volumes of payment gas to Ukraine and Moldova.

  • In its transactions, Gazprom UK would use the same contractual terms as Gazprom (price, volume, delivery point and time, etc).

  • Table 2 shows the volumes and prices of 2004. The introduction of this scheme would have saved Gazprom about $0.8 billion.

  • This scheme is basically different from that of RusUkrEnergo. RUE makes profit out of Russia, while the use of Gazprom UK for elimination of tax on transit cost would have increased Gazprom's profit in Russia.

  • In 2005, both prices and volumes are higher, which results in higher overpayment of export duties.

    Table 2: Opportunity for Lower Taxation of Gazprom Exports via Ukraine

  	Unit	Actual seller:  Gazprom	New seller:  Gazprom UK
  Exports to Europe via Ukraine	bcm	109.1	109.1
  Average price at European borders	$/mcm	137.0	137.0
  Revenue	$ mill	14,946.7	14,946.7
  Actual tax overpayment case:
  Export duty (30%)	$ mill	(4,484.0)
  Payment in kind for transit services	bcm	33.1
  - including to Ukraine and Moldova	bcm	26.9
  Value of payment gas	$ mill	(2,643.4)
  Gazprom's netback at the Russian border	$ mill	7,819.3
  Export optimization case:
  Gazprom UK buys at the Russian border	bcm		136.0
  - export volumes to Europe	bcm		109.1
  - gas paid for Ukrainian transit services	bcm		26.9
  Gazprom UK procurement expense	$ mill		(12,303.3)
  Gazprom (Moscow) revenue	$ mill	12,303.3
  Export duty (30%) paid by Gazprom	$ mill	(3,691.0)
  Gazprom UK payment for transit services	$ mill		(2,643.4)
  Gazprom UK profit	$ mill		0.0
  Gazprom's netback at the Russian border	$ mill	8,612.3
  Export duty overpayment in 2004	$ mill	(793.0)

• Having a working example of tax optimization of Central Asian gas transit, minority shareholders of Gazprom are surprisingly comfortable with the management's inaction to the change of taxation rules in January 2004, that has already caused a loss of over $1.6 billion.

  • Management of Gazprom has not tried to lobby the change of regulation concerning taxation base of export duty, which is the easiest solution to the tax overpayment problem.

• Gazprom continues to lose $3 million a day overpaying the export duties.