5. For the field located in the Sea of Azov and in the Caspian Sea zero oil extraction tax rate has been determined for the period prior to the moment when accumulated volume of oil production reaches 10 mln t or for the time interval of 7 or 12 years starting from the date of state registration of the license depending on the type of the license for the right to use subsurface mineral resources. For the subsoil blocks located there, licenses for the right to use subsurface mineral resources were issued prior to 1 January 2009 and the level of depletion does not exceed 0.05 zero oil extraction tax rate is effective up to the moment when accumulated volume of oil extraction reaches 10 mln t or during 7 years starting with 1 January 2009.
In order to provide additional incentives for the development of Eastern Siberian oil fields the government has determined zero export customs duty rates effective from 1 December 2009. It is envisaged that these rates will be effective only a limited period of time. Furthermore, amendments to the RF Tax Code have been developed regarding tax holidays for the oil extraction tax effective for the deposits located in the Black Sea and Okhotsk Sea (for the Black Sea fields – up to 20 mln t of accumulated volume of oil production or for the period of 10 or 15 years depending on the type of the license for the right to use subsoil mineral resources; for the Okhotsk fields up the 30 mln t of accumulated volume of oil production or for the period of 10 or 15 years).
RUSSIAN ECONOMY IN trends and outlooks Gradual reduction of the tax burden effective for specific regions is characterized by excessive costs required for the development within the framework of the current tax system seems to be justified because it allows ensuring required investment yield in the development of the new deposits. At the same time, the mechanism of tax holidays which is rather simple from the tax administration point of view is rather imperfect. All deposits of specific region (shelf) are subject to a unified averaged approach which does not account differences in characteristics and costs required for the development of certain field of the given region.
Moreover, on the relatively small oil fields oil production under regular development rate during tax holidays will remain sizably below the determined production limit, tax holidays create incentives for the rapid development aimed at exempting from taxation the maximum volumes of oil production. It may result in the contraction of tax revenues and in the fall of the quality of final oil extraction..
The problem of development of small fields remains unsolved. As a rule, their development is connected with high production costs per a ton of crude oil. In the new regions benefits for the oil extraction tax effective for small fields in many cases remain insufficient, and in case of old oil producing regions benefits for small fields are not envisaged.
Ad valorem rate for the oil extraction tax is a more flexible tax tool as compared with the specific tax rate. Crude oil price at its production site, in other words, oil sale price minus transportation costs represents the tax base in case of ad valorem rate for the oil extraction tax. This allows to directly account at the time of taxation differences in transportation costs determined by geographic location (as well as difference in sale price determined by the quality of oil and supply routs). High transportation costs represent one of the important factors leading to cost increase of deposits development in promising regions (for instance, in Eastern Siberia). Furthermore, growth of Transneft’s tariffs in this case is offset for the oil producers by a reduction in tax payments because transportation costs are removed from the tax base.
In case of ad valorem rate to the oil extraction tax needed to preserve progressive dependence of tax burden on the oil price there should be progressive dependence of tax rate on the price for Urals. In this case, on the one hand, tax burden in relative terms will be growing together with the oil price; on the other hand, advantage of the ad valorem rate will be effective.
At the same time, it is necessary to determine reduced rates for the oil extraction tax in case of the new production regions and for the small oil fields in order to take into account higher capital and production costs for taxation purposes.
Additional profits tax (APT) represents a better form of oil production taxation. Due to the fact that all mining-and-geological and geographic parameters of the oil field finally tell on the obtained profit volume, such an approach ensures automatic differentiation of tax burden depending on specific conditions of oil production. Under such approach not only gross revenue is taken into account but production costs on a specific field as well. As a result, there are no economic barriers for the development of oil fields with high capital, production and transportation costs.
Additional profits tax (APT) has a number of advantages vis--vis oil extraction tax. In contrast with the oil extraction tax, APT is based on the additional incomes indicators and Pfactor which objectively reflect actual economic efficiency of specific oil field development.
In the even of highly profitable projects the use of APT will ensure progressive resource rent extraction for the state budget. Simultaneously, conditions for the implementation of low profit projects are improved.
Section The Real Sector Use of APT for the new fields will ensure automatic bringing of tax burden in line with the development conditions of specific deposits. Application of such tax regime will allow creating necessary conditions for the development of new oil fields with excessive capital investments, high production and transportation costs.
3.5. Russian agrifood sector: performance and trends in the crisis period 3.5.1. General outline of agricultural performance Due to its specifics agriculture is very inert and cannot promptly respond to the changing environment. As a result the signs of crisis appear therein later and the after-crisis recovery goes slower than in other sectors of the economy. Some sub-sectors may need years to restore. The diagram (Fig. 1) shows that as different from the economy at large the GDP in agriculture, hunting and forestry continued growing till the third quarter of 2008. Beginning from the fourth quarter a sharp drop took place in all sectors but in agriculture it was not so deep – 2% versus the general 10%.
IV-VI VII-IX X-XII I-III IV-VI VII-IX I-III 2008 2008 2008 2009 2009 total including agriculture, hunting and forestry Source: Rosstat, http://www.gks.ru/bgd/free/B09_00/IssWWW.exe/Stg/d12/2-1.htm Fig. 1. Gross domestic product in market prices, as percent of the previous year Crisis developments in the Russian economy could well be observed in the second half of 2008 but the farm sector’s annual performance was then better than in 2007. 2008 was recognized as one of the most successful years in terms of agricultural production beginning from the 1990s. Despite the lowering of grain prices in 2008, a good basis for 2009 crop was laid in autumn: the winter grain acreage expanded by 5% as compared with 2007, the share of lands fertilized with organic and mineral fertilizers increased up to 6.2% and 44% of the total planted area, respectively. Still, the area of under-winter plowing decreased by 2% conditioning smaller spring crop acreage in 2009.
From November 2008 agricultural production started to demonstrate a downward trend (Fig. 2) and fell to its lowest level in August 2009. The good crop harvested in September 2009 reverted this trend: in the fourth quarter of 2009 the increase of production exceeded as % of the previous year RUSSIAN ECONOMY IN trends and outlooks 6%. This helped to finish the year with 1.2% increase over the 2008 indicators (in 2008 the annual production increase amounted to 10.8%).
I II III IV V VI VII VIII IX X XI XII 2007 2008 Source: Rosstat.
Fig. 2. Agricultural production in the pre-crisis and crisis periods (as percent of the corresponding period previous year) 2009 was not favourable in terms of weather conditions. This factor can account for the lowering of yields (from 1% for sunflower seeds to 12% for corn) of all major agricultural crops in corporate farms. The growth of gross output of vegetables was provided entirely by household plots whose increase of production exceeded the respective decline in corporate and individual private farms. Larger output of potatoes was also mostly due to the expansion of household production (Table 1).
The above data show that the output of crops whose production is concentrated in corporate and individual private farms has slightly fallen while the output of crops produced primarily by household plots has increased. The latter growth should not inspire much optimism since as different from data about the output of corporate and individual private farms there is no statistical information about the actual output of households. Statistical agencies estimate Section The Real Sector their output by means of carrying out sample surveys in a limited number of household farms and then extrapolating these data to 29 million of such farms. In this case a minor increment of potato and vegetable productivity or area planted (sometimes by less than 0.01 hectares) in surveyed farms transforms into a great increase when extrapolated to the whole country.
In spite of the crisis the dynamics of livestock production in 2009 remained positive (Table 2). The data on output of meat in slaughter weight is lacking but according to estimates in 2008 it was about 5.96 million tons, in 2009 – not less than 6.35 million tons.
Table Output of basic livestock products in all types of farms 1986-1990 19991-1995 1996-2000 2005 2006 2007 2008 Livestock and 9.7 7.5 4.7 4.9 5.2 5.7 9.3* 9.9* poultry, million (5.96) (6.35) tons slaughter weight Milk, million tons 54.2 45.4 33.6 31.1 31.4 32.2 32.4 32.Eggs, billion 47.9 40.3 32.8 37.1 37.9 37.88 37.8 39.pieces * - live weight.
Beginning from 2005 the share of household farms in livestock production fell from 52% to 48.3%. It is currently approximately the same as the share of corporate farms (48.1%). In 2009 the output of livestock products in households remained at the 2008 level. The reduction of their share in the total output is due to the growing production of pork, poultry meat, milk and eggs in corporate farms. Its increase there ranged from less than 1% (milk) to 7% (red and poultry meat). One can assert that bigger government support to agriculture in the precrisis and crisis years (2006-2009) whose beneficiaries are primarily corporate farms helps them to sustain the recession.
The dynamics of basic livestock inventories is shown at Fig. 3. Cattle population is shrinking despite government support to livestock producers. The trend is the same both for feeder young stock and for the dairy herd. Meantime the number of pigs, sheep and goats in continued to grow (by 6.7% and 0.9%, respectively). The dynamics of livestock population depends on its distribution between different types of producers: the higher share of corporate farms - the bigger annual swings. In its turn it’s determined by the structure of livestock inventories: in corporate farms the share of short-cycle species is larger than in household farms. The share of cattle kept by households is growing: from 1990 to 2008 it increased from 17.3% to 47.3%, in 2009 – up to 47.7%. They also keep about 78% of goats and slightly less than one half of sheep. The population of pigs and poultry is concentrated in corporate farms (65.7% and over 72%, respectively). The growth of households’ share in livestock population is due not to the increase of inventories but to their slower (sometimes by percent or less) decline as compared with corporate farms.
RUSSIAN ECONOMY IN trends and outlooks 2000 2001 2002 2003 2004 2005 2006 2007 2008 young and feeder cattle cows pigs sheep and goats Source: Rosstat.
Fig. 3. Livestock inventories, million heads by the end of the period Larger production volumes in corporate farms in spite of the decreasing inventories is an indicator of higher animal productivity. Previous years’ data prove this trend: from 1991 to 2008 production of milk per cow in corporate farms grew by 51%, in household farms – by 36%. The 2009 indicator is not available.
The decrease of cow population from 2005 is accompanied by growth of milk output. The examination of 2007-2009 data reveals that milk production demonstrated the worst performance from January to August 2009 (Fig. 4).
I II III IV V VI VII VIII IX X XI XII 2007 2008 Source: Rosstat.
Fig. 4. Output of milk as percent of the corresponding month previous year Million heads % Section The Real Sector 2009 was special for milk production. Beginning from December 19, 2008 the Federal Law “Technical regulation for milk and milk products” (adopted by the RF State Duma at the end of May 2008) came in force. From then on all produce named “milk” should be made out of fresh (the so called whole) milk. The Technical Regulation was meant as a measure for protecting consumers and agricultural producers. Its enforcement should have resulted in bigger demand of milk processors for milk produced by domestic producers and accordingly in the growth of prices received by them. Since before the law’s enactment the price for milk made out of imported dry milk powder was unduly high, the transfer to natural milk should not have led to the surge of retail prices. The more so as in the current crisis situation they are “constrained” by the shrinking solvent consumer demand.
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