Author: Oksana Belkina
(iz.ru) - The Council of Federation has approved the law on increasing the mineral extraction tax (MET) on gold. It is aimed at offsetting the losses of federal budget revenues from the declined exports. In addition, the Ministry of Finance is considering the possible abolition of an export duty when an increased MET is imposed. The Izvestia newspaper found out the effect of such a move on the market and budget, and why it makes sense to abandon export duties on precious metals.
Surcharge rate
The Council of Federation supported the law introducing a surcharge rate to the mineral extraction tax on gold from June to December 2024 to offset the losses of the federal budget revenues due to a decline in the gold exports.
At present, the MET on gold production in Russia is 6 percent of the cost of the metal. In early April, the State Duma Committee on Budget and Taxes proposed to set a tax on gold equal to 78,000 rubles per 1 kg from June 1 to December 31.
As explained by Deputy Minister of Finance Alexey Sazanov, the move was expected to bring 15 bn rubles to the budget by the end of the year.
Moreover, the Russian Ministry of Finance is considering the possible abolition of export duties on gold when an increased MET is imposed, the director of the ministry’s department Danil Volkov said at a meeting of the Council of the Federation Budget and Financial Markets Committee.
Upsurge in gold purchases
Statistical data on gold production in Russia has not been published since 2022. In 2021, gold production decreased by 0.2 percent year-on-year and amounted to 330.9 tons, according to the Union of Gold Miners. Taking into account the gold production from secondary raw materials, the total output of gold amounted to 363.5 tons. The statistics provided by the Ministry of Finance are slightly different. According to the Ministry, 313.8 tons of gold were produced in Russia in 2021, and 346.4 tons of gold were produced when the recycled metal is taken into account.
From October 1, 2023, an export duty pegged to the ruble exchange rate was imposed on a number of goods in Russia, including gold. The maximum duty is 7 percent when the exchange rate is above 95 rubles per USD. With the US dollar exchange rate below 80 rubles, the duty rate is zero percent.
As the Ministry of Finance stated early in the year, a surge in purchases of gold by individuals was recorded after the introduction of the duty. While before 2022, the population bought about 5 to 7 tons of gold per year, they purchased 100 tons of gold in 2022, and about 95 tons last year.
“In other times, when the lion’s share of the Russian gold was exported, collecting a duty would have added a significant amount to the federal budget. However, back in March 2022, Russia lost its main gold distribution channel because the London Bullion Market Association (LBMA) suspended the Good Delivery status for Russian suppliers. Sales shifted to the domestic market. After the VAT on gold was abolished and the dollar and euro fell into the category of ‘toxic currencies’, many people treated purchasing gold as an alternative to traditional foreign currency savings,” points out Ekaterina Bezsmertnaya, Dean of the Faculty of Economics and Business of the Financial University under the Government of the Russian Federation.
Exports went to zero
The Russian citizens started taking the gold purchased within the country abroad in their ‘pockets’ to avoid paying a 7-percent duty. At the same time, exports of precious metals reduced to virtually zero, and the budget revenues from export duties decreased accordingly.
“We are afraid that the situation will simply get out of control because exporting the gold by individuals has become a way to bypass the duty, and it’s a legal way,” Deputy Finance Minister Alexey Moiseyev said in an interview with Interfax early in the year.
“The fact is that after export duties on gold were introduced, gold exports went to zero in the literal sense of the word, because, as you know, we adopted a change the year before last, and banks can now sell gold to individuals without a VAT; so, accordingly, they often began to give small discounts on the price of gold in the domestic market due to the [absence of] duty, and this encouraged individuals to buy gold through banks, and our export of gold practically has stopped, it has really stopped,” explained Alexey Sazanov.
Reasonable measure
Thus, experts considered the measure to be reasonable and justified, especially in the context of the sanctions, a budget deficit and a huge amount of gold mined in Russia.
It is necessary to abolish the export duty on gold because Russian gold miners export the precious metal in significantly smaller quantities due to international restrictions, and they supply gold mainly to the domestic market, notes Natalya Milchakova, a lead analyst at Freedom Finance Global.
Therefore, such a move is aimed at stimulating exports and equalizing the tax revenues coming to the budget.
“In recent years, our country - with its production exceeding four hundred tons - has consistently ranked among the top three countries in the global gold market in terms of gold production by volume, being inferior to China and Australia only. In addition, the reproduction of gold stocks due to geological exploration amounted to more than 700 tons at the end of last year and exceeded the production totaling 421.8 tons,” recalls Vadim Petrov, member of the Intersessional Financial Advisory Group (IFAG), the IOC UNESCO.
Level playing field
At the same time, the global precious metal market is extremely volatile, its prices depend on many factors, including exchange rates, investment demand, and the geopolitical situation.
Recently, there has been an upsurge in prices for the precious metal. Gold prices have reached $2,383 per ounce and continue rising. Citi Research analysts predict that the price of gold could rise up to $3,000 per ounce in the next 6 to 18 months.
Due to these circumstances, abolishing the export duties reduces the financial burden on gold exporters. Consequently, domestic gold can become competitive and stimulate exports. To continue the maneuver, the increased MET will ensure offsetting the budget losses incurred due to abolishing the duties. In case of predicting the preservation of high production margins, this is expected to become an efficient tool for ensuring stable budget revenues, points out Vadim Petrov.
According to Ekaterina Bezsmertnaya, the introduction of the additional MET is set to create a level playing field for all gold miners. According to some estimates, the profitability of mining is expected to decrease, but not critically, and the decline in the gold miners’ revenues is estimated at about 1.5 percent, while most analysts consider the market conditions for the industry as extremely favorable. And as for the federal budget, this is considered to be an adequate replacement for lost revenues from export duties.
