Why Gasoline Prices Will Have to Rise: Netback and the EAEU

A few more facts about gasoline prices, and why the government will still have to raise them.

1. The price of crude at the Atyrau refinery is about $80 per ton, or KZT 27,200, which is KZT 24,285 excluding VAT.

The world price is currently $50 per barrel. The trader's discount and transportation cost about $10 per barrel, which leaves $40 per barrel. From this you subtract the 11% export rent tax, the 14.3% export customs duty, and the 5% mineral extraction tax (MET; the MET discount applies to deliveries to a domestic refinery). That gives the netback (net production) price of $27.88 per barrel. A ton contains 7.2 barrels, so for that volume the netback price is $200, or KZT 68,000.

The gap between the domestic and external market prices in tenge is therefore KZT 43,715 per ton, or KZT 32 per liter of gasoline.

2. Unfortunately, we are in the Eurasian Economic Union (EAEU) and our borders are open. This means that residents of any border region can easily drive into Kazakhstan, stock up, and drive back. This matters most for fuel, because a large vehicle such as a KamAZ truck can be fitted with a fuel tank of up to 500 liters.

Now let us calculate the price difference.

In Russia, 92-octane gasoline retails at 35 rubles per liter, which at the current rate of 5.28 tenge per ruble is KZT 184.8.

Here, the retail price (which is set by the market) is KZT 125 per liter. The difference is KZT 60.8. If gasoline is smuggled across the border in a single vehicle, up to 500 liters at a time, the profit is KZT 30,400 per trip. Transportation costs are roughly KZT 5,000–7,000. A discount for quick sale takes off another KZT 10,000. In total, about KZT 15,000 can be earned from one trip. Making one trip a day is decent income for a rural area.

But the most critical case is diesel fuel, which in Russia costs about the same as our AI-92, that is, KZT 180 per liter. In Kazakhstan it costs KZT 99 per liter. So in the border areas, Russian farmers can easily use our diesel for the harvest.

And that is not all. AI-80 gasoline is banned in Russia, while here it costs KZT 89 per liter. A large number of vehicles in Russia can run on AI-80, which is half the price here, and the borders are open.

3. Why is this happening? Unfortunately, it is the result not only of inadequate state regulation of the fuel market, but also of different tax systems and the tenge exchange rate against the ruble. The national currency is not strengthening and now stands at 5.28 tenge to the ruble. As a result, Russian fuel is becoming more expensive for us in tenge terms.

The difference in excise taxes is huge. In Russia the excise on gasoline is 7,500 rubles, or KZT 39,600, per ton, while here it is KZT 11,000 per ton.

To understand whether our fuel prices are understated, one simply needs to recalculate Russian retail prices using our taxes. AI-92 in Russia costs KZT 184.8. Subtract 18% VAT and we get KZT 151.5. Subtract the Russian excise of KZT 28.9 and we get KZT 122.6. This is gasoline stripped of VAT and excise. Now add our excise of KZT 8 per liter, which gives KZT 130.6, and then add VAT, and we get KZT 146.3. This is the retail cost of Russian gasoline converted to the Kazakhstani tax system.

In other words, for our prices to match Russian ones (and we depend on Russian gasoline), they need to rise by at least KZT 20 per liter. The current gap of KZT 21.3 is precisely the amount by which prices on our fuel market are understated.

Within a single economic space with different tax systems, it is practically impossible to stop goods from being taken out of border areas. And when an industry is distorted by government intervention, the result can be a fuel shortage.