The tax raising reforms approved in October 2020 for the Russian oil and ore-mining sectors are not sufficient to change the issuers’ ratings on their own, even though they will be negative for their credit profiles, Fitch Ratings says.
We estimate that Fitch-rated companies’ EBITDA will shrink by up to 19% on higher tax burden in 2021, based on our 2021 commodity price assumptions, but most ratings are likely to stay unaffected due to headroom present under their leverage guidelines and strong cost position.
The laws raising taxes on the Russian mineral extraction industry, including oil production, mining and ore-based fertilisers, can be viewed as another adverse effect prompted by the coronavirus pandemic.
However, taxes will not increase proportionally for every company, and they will be accompanied by tax incentives introduced for refining and petrochemical sectors. The operating cash flow of PJSC Tatneft (BBB-/Stable), PJSC Gazprom Neft (GPN; BBB/Stable) and PJSC MMC Norilsk Nickel (NN; BBB-/Stable) will be hit more considerably by additional taxes in 2021.
Based on Fitch’s USD45 per barrel of Brent oil assumption, we estimate that Tatneft could lose up to 19% of its EBITDA in 2021 depending on the Urals oil discount or premium versus Brent.
GPN’s EBITDA could decrease by up to 10%, while Lukoil may face a 5% EBITDA reduction.
The negative impact on the majority of Russian miners should be up to 3.5% of their 2021 EBITDA and about 5% for NN. Gas, gold, coal and diamond production taxes are outside the scope of the tax reforms.
Producers of higher value-added commodities will generally either be unaffected by the tax reforms or benefit from them. Petrochemical companies, such as PAO SIBUR Holding (BBB-/Stable), and oil refineries may receive tax incentives for the implementation of their projects, while metal refining operations, such as steelmaking, will not have any tax changes.
Oil and metal producers often have both upstream and downstream operations, but higher taxes will be levied only on the upstream part of their business.
Credit: Fitch Ratings