INSTITUTE OF ECONOMIC FORECASTING RUSSIAN ACADEMY OF SCIENCES Andrey Kolpakov ankolp@gmail.com facebook: a.yu.kolpakov ENERGY SECTOR IMPACTS ON THE ECONOMIC GROWTH IN RUSSIA: OIL CASE LV session of French-Russian Seminar Paris 2018

Energy sector impacts on the economy dynamics in Russia 2 Energy sector impacts on the economy dynamics in Russia Energy sector share of the main macroeconomic indicators in 2017 GDP Exports Investments Fedral budget revenues Consolidated budget revenues Employment 32% 59% 41% 48% 31% 7% Direct contribution Interindustry interactions The Russian energy sector remains one of the key factors of economic growth guarantees budget and macroeconomic stability INSTITUTE OF ECONOMIC FORECASTING Source: IEF RAS estimations RUSSIAN ACADEMY OF SCIENCES

Economic potential of the Russian energy sector 3 Economic potential of the Russian energy sector Economic potential of the Russian energy sector is rental income generated. It may be used in different ways: taxes to finance the socio-economic politics of the government low domestic prices for energy sources to provide competitive advantages for national producers energy sector income to finance its demand for the national goods and services In Russia, first option is used primarily. Oil case is the most representative: “export parity” pricing mechanism was applied In the beginning of the 1990s, which caused a significant decrease in the competitiveness of most non-energy sectors ever-increasing fiscal burden forces the oil companies to work hard on their operating efficiency, choosing more competitive imports, which breaks domestic interindustry interactions “oil dollars” from petroleum exports make it possible to import the necessary goods that the Russian economy is not able to provide INSTITUTE OF ECONOMIC FORECASTING RUSSIAN ACADEMY OF SCIENCES

Weakening of the ruble increases the oil tax revenues to the budget 4 Weakening of the ruble increases the oil tax revenues to the budget Urals price and Rub Urals price in Rub Rub/bbl 5500 5000 4500 4000 3500 3000 2500 2000 120 100 80 60 40 20 Urals, USD/bbl USD/Rub 2014 Jan 2014 July 2015 Jan 2015 July 2016 Jan 2016 July 2017 Jan 2017 July 2018 Jan 2018 July 2014 Jan 2014 July 2015 Jan 2015 July 2016 Jan 2016 July 2017 Jan 2017 July 2018 Jan 2018 July USD/Rub rate was traditionally in antiphase to the Urals price. It allowed to “smooth out” external market fluctuations for the Russian economy. But in the period of summer 2017 – march 2018 ruble was stable at rising oil price. And since march 2018 ruble is weakening at rising oil price As a result, the Urals price exceeded 5 thousand rubles per barrel in the august 2018. This is approximately 30% higher the levels of 2011-2014 when oil price was about 100 USD/bbl INSTITUTE OF ECONOMIC FORECASTING RUSSIAN ACADEMY OF SCIENCES Data Source: Ministry of Economic Development of the Russian Federation

Weakening of the ruble increases also domestic gasoline price 5 Weakening of the ruble increases also domestic gasoline price Factors of gasoline price change in 2018, rubles per liter Responsibility for the gasoline price growth +1.3 -2.2 +1.7 The only factor that restrained the gasoline price growth was decrease in gas station income +3.1 -2.7 43.8 39.8 +5.8 rubles per liter Gasoline price in 2017 World oil price increase Strengthening of the ruble, which hadn't happen Weakening of the ruble Taxes increase Decrease of the retail segment income Gasoline price in may 2018 -2.2 rubles per liter State responsibility (currency rate, taxes) Oil companies responsibility (gas stations income) INSTITUTE OF ECONOMIC FORECASTING RUSSIAN ACADEMY OF SCIENCES Source: IEF RAS esVmaVons

6 Tax maneuver Tax maneuver impact on the incomes of state budget and oil sector in 2024 (in comparison with the current tax regime) trillion rubles 1,5 State budget Oil sector It is said that the main reason for the Tax maneuver is the need to remove export duties as the customs barriers to trade inside the Eurasian Economic Union 1 0,5 Nevertheless, the parameters of the Tax maneuver are adjusted in a way to guarantee additional tax revenues to the state budget -0,5 -1 60 70 80 Urals price in 2024, USD/bbl 40 50 90 100 INSTITUTE OF ECONOMIC FORECASTING RUSSIAN ACADEMY OF SCIENCES Source: IEF RAS estimations

Oil produc9on becomes more difficult 7 Oil produc9on becomes more difficult Changes of the main oil production indicators in 2007-2017 Drilling and wells efficiency th ton th m 4,0 Oil production +11% 8 Investments (in constant prices) +44% 7 3,5 New wells +57% 6 3,0 Drilling +100% 5 2,5 Horizontal drilling +620% 4 2,0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Additional production by new well, th ton Drilling per well, th m Oil companies need more money to invest If they have money they will invest INSTITUTE OF ECONOMIC FORECASTING RUSSIAN ACADEMY OF SCIENCES Source: IEF RAS estimations

Oil producIon scenarios 8 Oil producIon scenarios Oil production and investments scenarios up to 2025 mln ton 600 bln rub (2015) 2500 We should focus on the increase in oil production. The challenge is to use potential of higher investments (in recent years imports-share of investments is 50-60%) 550 2000 500 1500 450 1000 400 500 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 INSTITUTE OF ECONOMIC FORECASTING RUSSIAN ACADEMY OF SCIENCES Source: IEF RAS estimations

Potential for GDP growth due to the energy sector in Russia 9 Potential for GDP growth due to the energy sector in Russia Potential additional contribution of energy sector in average annual Russian GDP growth rate in 2019-2025 is 1.33 percentage points Potential additional contribution of energy sector in Russian GDP in 2019-2025 1.33 0.54 Increase in oil producOon up to 600 mln ton 51 trln rub (in prices of 2018) Additional GDP growth rate due to economic potential of Russian energy sector Increase in coal production up to 560 mln ton + Railway infrastructure Increase in natural gas production up to 800 bcm Decrease in the dependence on imports of equipment Power sector modernizaOon Infrastructure for oil and gas exports 0.24 0.2 0.3 Economic inertia Increase in oil production up to 600 mln ton Increase in coal production up to 560 mln ton + Railway infrastructure Increase in natural gas production up to 800 bcm Decrease in the dependence onimports of equipment Power sector modernization Infrastructure for oil and gas exports INSTITUTE OF ECONOMIC FORECASTING RUSSIAN ACADEMY OF SCIENCES Source: IEF RAS esOmaOons

Thank you for your a2en3on 10 Taxation of electricity consumption Thank you for your a2en3on Andrey Kolpakov IEF RAS ankolp@gmail.com facebook: a.yu.kolpakov Key points The Russian energy sector remains one of the key factors of economic growth. It guarantees budget and macroeconomic stability There are different ways to use the economic potential of energy sector. Russia focuses on the tax collection to finance the socio-economic politics of the government. Such a strategy restricts economic growth in Russia Increase in oil production seems to be the most adequate scenario for Russia. But there are two challenges: profitability of new production projects and b) effective use of higher investments potential Energy sector is able to provide additional 1.33 percentage points of Russian GDP growth rate in a short- and medium-term. It may be a factor of starting and maintaining the economic growth in Russia INSTITUTE OF ECONOMIC FORECASTING RUSSIAN ACADEMY OF SCIENCES