Russia accounts for 12 percent of the world’s explored oil reserves and 8.6 percent of the world’s oil production. On this basis, it should be one of the leading players on the international markets, competing with the United States and Saudi Arabia.

Oil companies in Russia are however limited by the over-regulation of oil exports and the state-owned pipeline infrastructure, which controls these exports. However, as tax revenues from the oil industry account for the lion’s share of the federal budget, the Russian government is not ready to boost oil exports by letting go of its stronghold on this lucrative sector.

Who controls oil exports? 99.3 percent of all the production is pumped across the country and to foreign destinations by Transneft, the Russian state-owned monopoly that operates the country’s trunk pipeline network. Transneft’s 45,000km pipeline network single-handedly supports the bulk of the flow of oil across the whole Russian territory and controls links to pipeline systems of neighboring countries. Its subsidiaries are engaged in the actual transportation of crude oil from the oilfields to domestic refineries, sea terminals and various destinations abroad.

Transneft is not the only means through which the state is involved in the lucrative oil export business. A special commission was set up by the government to ensure fair and equal access of all producers to the national oil pipeline network, consisting of representatives of different federal ministries. The Ministry of Energy is also involved in regulating all issues relating to oil exports.

The issue of access to the export capacity of the pipeline system remains of the utmost importance to every oil producer given the significant difference between domestic and world oil prices and the limited export capacity of the pipeline system. The principal procedure for obtaining access to the export pipeline system in Russia is set out, among several other procedures, in "The Basic Terms of Use of the System of Trunk Pipelines, Petroleum Product Pipelines and Sea Port Terminals for Transportation of Oil and Petroleum from the Territory of the Russian Federation" (the "Basic Terms") dated 31 December 1994.

Under the Basic Terms, the oil-pipeline and seaport-terminal system is operated on the basis of (i) its delivery capacity; (ii) equal accessibility by all oil producers; and (iii) proportionality to the production volumes of the respective producers and volumes exported by them in the preceding quarter.

The proportionate access to the system for different producers is reflected in the quarterly transportation schedules arranged by the "coordinators," namely, several major Russian oil companies each of which is responsible for ensuring equal access to one or more specific supply locations. For example, LUKoil is responsible for coordinating deliveries to Lithuania; YUKOS is the coordinator for Hungary; and Sidanco for the Latvian port of Venstpils and for Poland.

Russia has the ability and the capacity to export more than half the oil it produces. The combination of a weakened ruble and a tight oil market have made Russian exports very attractive. Since 1991, Russian oil exporters have increasingly shifted their focus from the countries of the former Soviet Union and Eastern Europe to Western Europe, where demand for oil is strong and payment is in cash. The majority of Russian oil exports are destined for countries such as the United Kingdom, France, Italy, Germany and Spain.

The volumes of oil that may be physically exported are limited by the capacity of Transneft’s pipeline network. The government therefore limits the amount that may be exported, calculated on the basis of production levels and the domestic oil-product-supply obligations of the producers. Producers that also refine crude oil are subject to limitations in that certain amounts of products are required to be reserved for the domestic market. Under the current regime, oil companies should be selling approximately 70 percent of their production on the domestic market, allowing only about 30 percent for sale at much higher prices abroad.

Critics say the system, which is administered by the Ministry of Energy, has never been formally laid-out in law, thus leaving it open to exceptions, corruption and abuse. Indeed, some of Russia’s biggest oil companies have reportedly been permitted to export over 40 percent of their oil in exchange for carrying out government programs or returning hard-currency credits. As a result of these concessions, Russia kept only 56 percent of its oil for domestic consumers last year, instead of 70 percent.

A new system for regulating the country’s exports has been recently proposed. Under the proposals, oil-export quotas would be granted through open auctions. The new plan would allow the government to auction off export rights to the highest bidder. On the face of it, the system of auctions could have the advantage of being more open. But it could also be viewed as another export tariff or tax. The logic behind the idea seems to be that Russia’s pipelines are state-owned. Because their export capacity is limited, the choice is either to apportion the access or to auction it. Apportioning has already been tried. With auctioning, there is perhaps hope for greater fairness and openness, but as it means replacing one imperfect system with another such a hope may be too optimistic.

Oil companies in Russia have complained that they are taxed too heavily, noting that they, along with Gazprom, account for more than half of the federal tax receipts. However, because the oil companies provide so much revenue, the Russian government is reluctant to ease the tax burden they face. A tight rein has been kept on the oil sector and the rules have been strengthened to ensure that the industry pays all its taxes in cash.

The major current tax on export – the export customs duty nominated in euros per ton – has been significantly raised several times recently. The auctioning of access, if implemented, would to all intents and purposes become another export tariff or tax as well. The excise tax is a gross-revenue flat-rate tax at 66 rubles per metric ton levied on all oil producers. These rates are fixed in the Excise Tax Chapter that came into force at the beginning of this year.

Even more recently, on July 6, 2001, the State Duma passed at second reading a bill on changes to the existing Tax Code to raise even more money for the federal budget. The proposed law introduces a new tax on the extraction of minerals (that partially replaces a number of existing taxes), which would result in a greater tax burden on the oil companies. Among other things, the bill states that from Jan.1, 2002 to Dec. 31, 2004, a windfall tax on crude-oil exports will be reportedly levied starting from a base of 340 rubles ($11.66) per metric ton and may vary according to world oil prices. The legislators also decided to introduce a schedule of maximum rates for export duties for oil, which is to be fixed by the law on Customs Tariffs. Whether or not such caps would benefit the oil companies remains to be seen.