Kiev’s exorbitant taxes levied on its oil and gas producers make further investment a harebrained proposition
Ukraine buys its gas, coal, uranium, and oil from Russia. Post-Maidan politicians in Kiev talk a lot about decreasing Ukraine’s energy dependence on Russia, but the reality is rather different. According to Ariel Cohen, for The Wall Street Journal:
On my recent trip to Kiev to address the Adam Smith sixth annual energy conference, I learned that due to the need to raise revenue to pay back the forthcoming International Monetary Fund’s $17.5 billion loan, the government of Ukraine has imposed exorbitant taxes on local oil and gas producers. The companies are forced by law to sell their output to the government-owned monopoly.
Kiev’s new tax is a royalty, which taxes output sales, not just profits. The rates are 70% for state-owned companies; 55% on wells under 5,000 meters depth, and 35% on wells over 5,000 meters. The government views upstream as a cash cow.
This is hare-brained: The local production of oil and gas will be increasingly depressed, billions of dollars a year will continue flowing to Gazprom OGZPY +3.25%, and Ukraine will borrow from the IMF to pay Russia.
The lack of long-term, or even just medium-term, perspective is making it all but impossible for Ukraine’s carbohydrate sector to develop. The Wall Street Journal is railing against the lack of responsibility and vision in Kiev, in this instance, because it happens to affect western oil companies. However, similar problems with the state and the officialdom effectively acting as predators and rentiers on the producers plague every aspect of Ukraine economy.