Putin to give up to $8bn to cash-rich Russian oil firms

Move comes with public squeezed by tax rise and president looks to ease falling poll ratings

Vladimir Putin aims to revive flagging public opinion by keep fuel pries curbed. AP

Vladimir Putin’s poll ratings are down after a tax hike squeezed cash-strapped consumers.

But the Kremlin has opened the coffers to give as much as $8 billion this year to another key constituency: oil companies awash in record profits.

The handouts are part of a complex arrangement under which oil companies agree to freeze fuel prices to lessen the burden on consumers, but are then compensated mostly from a rainy-day fund built up from years of austerity. The government agreed to tweak the deal as it extends the price freeze to the second quarter after the oil companies complained the hand outs weren’t good enough.

The decision to boost the payout at a time when the government is cutting spending and boosting revenues amid the threat of further sanctions highlights the sway oil giants hold in modern Russia. The Finance Ministry has been building up its rainy day funds to safeguard the economy from potential geopolitical turmoil.

“This sets a bad precedent,” said Natalia Orlova, an economist at Alfa Bank in Moscow. “If we say the wealth fund is untouchable, then it should be untouchable.”

Under an agreement that ran until the end of March, oil companies are reimbursed 60 per cent of the price difference between baseline domestic and European fuel prices, if the European price was higher. Payouts will total 300bn roubles (Dh17.26bn), with the bulk coming from the $59bn wellbeing fund, according to the Finance Ministry.

After some lobbying, the government has now agreed to lower the baseline domestic price for petrol and diesel, opening the door to an additional payout of as much as 200bn rubles this year, according to Bloomberg. The Finance Ministry is trying to prevent that money coming from the wellbeing fund as well.

Oil companies took in record profits last year and the potential payout this year works out at about a third of the industry’s total investment plan. The firms shouldn’t be relying only on compensation and can also cover losses using profits from high oil prices, Deputy Finance Minister Vladimir Kolychev said in response to questions.

“Any extra compensation at the expense of energy revenue is unfair toward taxpayers, these are funds for future generations,” Mr Kolychev said.

The fuel price freeze itself was aimed at compensating consumers who were left out of pocket by a value-added tax increase and rise in the pension age. The measures have pushed inflation to a three-year high and sent some measures of Putin’s popularity to the lowest in a decade.

The freeze may be extended into the third quarter to prevent a sudden fuel price rise during harvest season, according to Vladimir Tikhomirov, chief economist at brokerage BCS Financial Group in Moscow.

“The state used its administrative channel to freeze prices and that helps contain inflation,” Mr Tikhomirov said. “But raising the payout now shows that oil companies have very strong lobbying power.”

The news comes as Venezuelan state oil company PDVSA has asked at least two of its clients to make payments for Venezuelan oil via Russian state energy giant Rosneft, as it comes under pressure from US sanctions, according to a PDVSA source and documents reviewed by Reuters.

The proposed payment mechanism is the latest sign of the growing proximity of Venezuela's cash-strapped government to Russia as the United States tightens a financial noose around Venezuelan President Nicolas Maduro, who it describes as a dictator. Russia has publicly said the US sanctions are illegal and it would work with Venezuela to weather them.

Rosneft has denied it has acted as an intermediary for payments to PDVSA. Under the new approach described to Reuters, PDVSA has at least twice asked its clients to make payments to Rosneft for Venezuelan oil, according to the documents.

The PDVSA source said the company was proposing the new arrangements – known as "factoring" – to allow PDVSA clients to receive oil without making direct payments to the Venezuelan state oil company in the wake of January’s sanctions.