RUSSIAN EXPORT TAXES, NOT FUNDAMENTALS, BOOST CRUDE AND REFINING MARKETS

A combination of Moscow's taxation policies, increased domestic demand for (high-octane) gasoline, and very favorable refining margins inside the country encouraged Russian oil companies to process more crude domestically. In 2005 refinery throughput rose by 5.2 percent to 207.4 million metric tons, the highest level since 1993, and Russian refineries acquired 44.7 percent of Russia's total crude oil production. The major driving force, the government's move in 2005 to skew oil export taxes to more heavily favor refined products exports over crude oil, had a number of important consequences, but reinforced significant risk:

- Russian oil exports shifted strongly toward refined products at the expense of crude oil.
- As Russia's incremental crude oil production was redirected from exports to domestic refineries, the chronic shortage of crude oil export capacity was eliminated.
- Higher effective domestic demand for crude, coupled with spare export capacity, allowed the domestic crude oil market to clear; domestic (commercial) prices hit record levels in the fall of 2005, leading to average domestic prices reaching or exceeding 100 percent of export parity.

However, the current conditions in the Russian domestic oil market are essentially artificial; the government's tax policy imposes high costs on Russia's export earnings and budget revenues and is probably unsustainable.

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