Russia cuts taxes to free up capital for investment in oil production equipment


Russian officials are attempting to use tax breaks to encourage investment in oil production equipment.

Russian lawmakers and President Vladimir Putin recently approved legislation that will reduce the amount of taxes companies must pay to operate oil and gas wells in the country. This move will also benefit other firms in the natural resources sector, as the tax on all mineral extraction activities will be rolled back. Export taxes and the duties assessed against the profits of oil and gas companies will also be decreased under laws passed late last year. The new tax system is expected to be officially put in place during 2014.

Increase in oil production could provide much-needed boost to national economy

The tax-cutting initiative seems to be aimed at bolstering the overall competitiveness of the Russian economy, which is closely tied to the pace of energy production and market prices of crude oil, natural gas and other resources. Although its economy is the world's eighth largest, the outlook for Russia has been trending downward.

In 2013, both the World Bank and International Monetary Fund cut their growth forecasts for the Eurasian nation, reporting that investment has decreased as falling commodity prices and weakening demand for raw materials have drained money out of the oil-dependent Russian economy. Corruption and other forms of crime are also said to remain major issues.

The problems in Russia mirror a broader pattern that has seen large emerging economies cooling off after years of rapid growth. Chinese growth has also slowed and, like its northern neighbor, that country also faces structural problems. Other nations including Brazil, India and Indonesia have faced obstacles as well, with the flight of investors capital posing a significant risk to growth.

Ambitious production plans will depend on technological advances

In this challenging economic environment, Russian officials seem to be hoping that the tax breaks being implemented will encourage investment and spur a breakthrough. The country has consistently been producing oil at close to its current maximum capacity, about 10.5 million barrels per day, but sustaining this level of output will require the development of new oilfields.

There are believed to be vast untapped reservoirs in Russian territory, but successfully capitalizing on these resources will require modern drilling and hydraulic lift solutions. American producers will need to ensure that they are implementing the latest technologies as well, in order to remain competitive.