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Russian Prime Minister Putin backs more tax cuts for oil sector as short-term stimulus measure

By IRINA TITOVA | Associated Press Writer

2:25 PM CST, February 12, 2009

KIRISHI, Russia (AP) — Prime Minister Vladimir Putin said Thursday he backed limited tax cuts for the Russian oil industry, signaling some short-term relief for the ailing sector.

Putin endorsed proposals to cut export duty temporarily on oil production from cost-intensive and remote East Siberian oil fields that have been newly commissioned, noting the higher costs involved at these projects.

"We have seen a trend of a decline in production since early 2008 together with a falloff in investment to develop new fields," Putin said during a visit to an oil refinery in Kirishi, a town near St. Petersburg.

But he ruled out sweeping changes to the tax regime, saying that the government must also consider its budgetary and social obligations.

"It is possible to work in the current environment," he said.

Russian oil companies have grumbled that heavy taxes prevent them from investing in new exploration to offset declining output in mature fields in West Siberia.

The government bowed to pressure from the oil lobby last year and announced wide-ranging tax cuts for the sector. The energy sector was among those badly hurt by the crisis in the last quarter because export duties did not allow for rapidly falling oil prices.

Efforts to bring relief to the oil industry come at a time that divisions are emerging in the government over ways to tackle the financial crisis.

Russia is widely expected to slide into recession this year and is facing its bleakest economic outlook since the 1998 financial crisis, hurt by both the global credit crunch and slumping oil prices.

Russia is facing a substantial budget deficit of 8 percent this year, according to presidential aide Arkady Dvorkovich. But earlier, First Deputy Prime Minister Igor Shuvalov said the budget would be slashed to stave off a sharp fiscal deficit and conserve dwindling reserves.

Alexei Kudrin, Russia's liberal-leaning finance minister, has resisted calls for further large tax breaks for oil companies, arguing that the industry has enjoyed sufficient relief to revive production.

But Energy Minister Sergei Shmatko, who was also speaking in Kirishi, argued that if wider tax breaks were not implemented, oil production could fall.

Russia oil output declined for the first time in a decade in 2008, dropping by 0.7 percent.

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Associated Press writer Catrina Stewart in Moscow contributed to this report.