Russian Strategy - Government Reportedly Mulling Higher Taxes for Several Sectors

The Vedomosti business daily has reported that the Russian government is discussing tax adjustments for a number of sectors that should generate an extra R400 bln in annual revenues for the budget. The tax increases are reportedly aimed at funding the government's strategic breakthrough initiatives. Vedomosti's sources have given the following breakdown for the additional revenues:> R100 bln from a higher MET levied on the metals and mining sector. The MET increase would impact not only the usual suspects such as the base metals producers, but also the precious metals segment, which has previously been spared from tax increases.> R90 bln via adjustments to excess profit taxation in the oil sector. > R100 bln via excise tax increases, mainly on alcohol and sugary drinks.> R100 bln from additional personal income taxes for higher income groups.OUR TAKEThe article itself is quite patchy and its wording is too vague for us to draw reasonable conclusions about potential tax changes. It remains unclear on what base these extra revenues have been calculated. For example, the introduction of a progressive personal income tax was announced almost a year ago. The article does not clearly state whether the government is considering another tax hike or whether it is referring to one already announced (which will come into force this year and the full effect of which will only be felt in 2022). The discussions of extra revenues from other sectors generally suffer the same lack of clarity about whether recent initiatives are factored into the reported revenue figures, or whether these revenues would all come from expanded taxes.Oil sectorIt is very difficult to understand whether the discussion is about steps that have already been taken or refers to new proposals. Last year, the government cancelled MET discounts for depleted fields, offering companies the option of switching to EPT. Most of the companies (except for Tatneft) took this opportunity and moved their depleted reserves to EPT. The government is still considering the terms for switching high viscous fields to EPT (for Lukoil and Tatneft). We think it is quite questionable that the government might be starting to discuss expanding the EPT regime in the sector without properly analyzing the numerous changes instigated last year. We therefore believe it would be premature to draw any conclusions for the sector based on the article at this stage.Metals and miningThe article does not mention the fate of the export duties recently introduced in the metals and mining sector. These duties are set to expire at the year-end and are meant to be replaced by a completely new tax framework for the sector. The wording of the article suggests that only a MET hike is being considered, but we really doubt that the government would give up on the idea of progressive export duties. Nevertheless, if we were to take the article at face value, it would be a very positive development for the sector. The temporary export duty will take an estimated R115 bln from the steel sector and R50 bln from base metals producers between August and December this year. So the annualized offtake from the sector stands at R400 bln. If this were to be replaced by a R100 bln MET hike, this would be a very welcome step for the companies. Meanwhile, a MET hike for the precious metals segment would be a negative surprise for the respective stocks.To reiterate, we would take the potential tax changes mentioned in the article with a grain of salt and would not make long-term investment conclusions at this stage. Meanwhile, recycling of the claims by other media early today has placed the subject at the top of investors' minds, and may also provoke some short-term volatility in relevant names. Any subsequent clarifications or substantiated facts could also move the market. More broadly, we note that recurring discussions of tax amendments - either official, or speculated in the press - are not helpful for the investment climate.