Shares in Russia's biggest oil producer OAO Rosneft (ROSN.RS) plummeted more than 7% on Tuesday on fears that government discussions to abandon tax breaks on crude oil produced in East Siberia could hurt the company's profits.
Shares in Russia 's biggest oil producer OAO Rosneft (ROSN.RS) plummeted more than 7% on Tuesday on fears that government discussions to abandon tax breaks on crude oil produced in East Siberia could hurt the company's profits.

At a government meeting on Friday, Russia 's Finance Minister Alexei Kudrin suggested revoking the zero export duty on oil produced at fields in East Siberia in order to release more funds for the federal budget.

He fears that the export duty exemption--an incentive introduced late last year designed to stimulate investments in the oil-rich, but largely undeveloped, region--will hurt the federal budget more than previously anticipated. The finance ministry previously opposed some of the tax cuts granted to the oil industry.

However, removal of the exemption would impact earnings at state-controlled Rosneft, said Renaissance Capital, who calculated it would reduce the company's estimated net income for this year by 25%.

Russia --the world's biggest oil producer--last year increased output to over ten million barrels of oil a day, thanks largely to the launch of new East Siberian fields. Production fell in West Siberia, Russia's traditional oil region, as fields matured.

While the tax proposal isn't new, it could cause investors to sell out of Rosneft, as most have priced in East Siberian tax holidays for three years, said Chirvani Abdoullaev, an analyst at Alfa Bank.

"If the duty is reinstated, it would deal a major blow to investors' confidence in the Russian oil industry and its major producers," Abdoullaev said.

Rosneft shares tumbled 7.2% to $7.77 each at 1550 GMT in London . The company's local shares had lost 5.2% to RUB238.50 on the Micex Stock Exchange, compared with a decline of 2.3% for Lukoil Holdings (LKOH.RS)--the country's second biggest oil producer--and a drop of 2.2% for the Micex Index.

Kudrin's proposal follows a public statement made on Friday by the head of the Finance Ministry's tax department Ilya Trunin that federal budget revenue will fall by $4 billion this year, as output declines at fields in other parts of the country.

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