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Exclusive: Dark oil: Loophole lets Russian refiners dodge duties

Reuters 

- Two Russian refiners are avoiding export duty on fuel and vacuum gas by re-naming them as an product that is exempt from the charge, according to a analysis of customs and refining data, and four industry sources.

The practice takes advantage of a loophole in customs rules and has this year saved the refiners tens of millions of dollars which would otherwise have gone into the state budget, according to the government data and sources.

Novoshakhtinsky and Mariysky refineries shipped a total of 2 million tonnes of reclassified fuel in the first nine months of this year, saving about $170 million in tax, according to the data and sources.

Novoshakhtinsky said in a statement that in producing and selling its products it acted in complete compliance with customs legislation.

Mariysky's owner, New Stream Group, denied the refinery was avoiding customs duties on its products and said it was in compliance with customs legislation.

The Federal Customs Service (FCS) did not respond to repeated requests for comment. Russia's Association of Refiners and Petrochemists said it had no comment.

Fuel and vacuum gas are low-value refined products known among refiners and exporters as "dark oil" products, and are mostly used either for shipping fuel or as ingredients to make more complex products.

The duty for dark products has been $86.7 per tonne this year on average, and stood at $96.1 in November, according to publicly available customs data. However there is zero duty on exports of fuel defined as products "containing more than 50 percent aromatic hydrocarbons".

The loophole lies in the fact that fuel and vacuum gas can be included in that latter definition, and therefore exported without duty under that customs code, according to the sources.

The four people - a customs broker, two commercial executives at refiners and a refining engineer - asked not to be named due to the sensitivity of matter.

A fifth source, an FCS manager, also told that dark products were being exported under the zero-duty customs code, but did not identify the refineries involved.

ZERO DUTY

Novoshakhtinsky refinery, in southern Russia, is the biggest exporter of products that fall under the duty-exempt code, according to customs statistics.

The plant is however only capable of producing fuel or vacuum gas oil, according to energy ministry data. It does not have the technology to produce any other products that have more than half aromatic hydrocarbons, or to produce more deeply refined "light oil" products like gasoline and diesel.

Despite this, according to ministry data based on the refinery's output declarations, the plant produced no fuel or vacuum gas in the first nine months of this year. Instead it exported about 1.5 million tonnes of fuel classified under the duty-exempt code, according to customs statistics.

Mariysky refinery, in central Russia, was the second-biggest exporter of products that fall under the duty-exempt code in the first nine months of this year.

It has the same production capabilities as Novoshakhtinsky. However, it produced no fuel or vacuum gas but instead exported 0.5 million tonnes of fuel classified under the duty-exempt code, according to the energy ministry and customs data.

exported about 30 million tonnes of fuel officially classed as fuel in the same period.

HARD TIMES

Times are tough for many refiners in Russia, a country which derives much of its wealth from commodities and where the customs tariff level is a key factor in determining whether exporters make a profit.

The government has gradually increased the duty on dark products over the past two years to encourage refiners to sell less of them, and instead invest in modernising their plants so they can make more deeply refined "light oil" products, which command higher prices.

But the duty rise has coincided with a slump in world prices. With their income falling, many refiners say they have been forced to postpone planned modernisations of plants. As a result, they say they have found themselves still producing large volumes of dark products, but with a tax set-up that penalises them for it.

Fuel oil, known in as mazut, and vacuum gas are classified under a customs code which begins with the digits 2710, making them automatically subject to duty. For reasons that wasn't able to determine, fuel defined as products containing more than half aromatic hydrocarbons has a code beginning 2707, exempting it from duty.

Fuel oil, known in as mazut, and vacuum gas are classified under a customs code which begins with the digits 2710, making them automatically subject to duty. Fuel defined as products containing more than half aromatic hydrocarbons has a code beginning 2707, exempting it from duty.

(Editing by Christian Lowe and Pravin Char)

(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)

First Published: Fri, December 01 2017. 23:18 IST
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