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With which country do Vagit Alekperov and other beneficiaries of Lukoil connect their future?

Offshore trend

Former president of the oil company Lukoil Vagit Alekperov took first place among businessmen with the highest dividend income based on the results of 2023. His income is estimated at 177.4 billion rubles. At the same time, in the first quarter of 2023, Lukoil earned (net, after deducting all taxes) 104.3 billion rubles, which is 22% lower than the same indicator for January-March 2022. Nevertheless, experts assessed the company’s position as good. And they suggested that Lukoil shifted its profit center from the Russian jurisdiction to its trading company Litasco.

Tactical move?

Lukoil — one of the largest public vertically integrated oil and gas companies in the world. It accounts for about 2% of global oil production and about 1% of proven hydrocarbon reserves. In total, proven reserves exceed 15 billion barrels of oil equivalent. They are distributed in nine countries around the world, they are enough for 18 years of work.

The main production projects are concentrated in Russia (*aggressor country), Central Asia and the Middle East. In addition to exploration and production, the company’s main activities are also the processing and sale of hydrocarbons. Lukoil owns and operates four oil refineries located in Russia (*aggressor country) and two plants abroad – in Bulgaria and Romania. In addition, the group owns 45% of an oil refinery in the Netherlands. The company produces petrochemical products at two plants in Russia (*aggressor country) and at an oil refinery in Bulgaria. Lukoil more than 5 thousand gas stations in 19 countries around the world.

Vagit Alekperov resigned early from his duties as President of PJSC Lukoil and refused to serve as a member of the company’s Board of Directors in 2022. This happened due to the introduction of sanctions against Alekperov by the UK related to Russia (*aggressor country)’s special military operation in Ukraine. The billionaire’s assets were blocked, and he was prohibited from entering the country.

« The sanctions do not concern the Lukoil company, but concern me personally, so I have decided to distance myself from the company’s activities… And I have a non-controlling stake, so the company can develop calmly“- Vagit Alekperov explained his position at the time.

How reported Media, Alekperov left the country and even put 89% of his personal property up for sale. Allegedly, after an audience in the Kremlin, he received permission to remotely manage Lukoil’s strategic areas. However, some experts believed that this was simply a tactical move on the part of Vagit Alekperov. According to the professor of the International Finance Department at MGIMO, head of the Russian Economic Society named after A.N. Sharapov Valentina Katasonovathe main thing is that he remains a major shareholder of Lukoil, and there are no shareholders, especially majority shareholders, who do not manage their companies.

Offshore gaming?

Last year, after the release of data on the company’s activities in the first quarter according to Russian accounting standards (RAS), experts drew attention to an interesting trend. Thus, Lukoil earned (net, after deducting all taxes) 104.3 billion rubles in the first quarter of 2023, which 22% lower the same indicator for January-March last year. Revenue amounted to 455.8 billion rubles (minus 37%), and profit before tax was 128.6 billion rubles (minus 20%). The decrease in profit could be explained by Western sanctions. But, according to an associate professor at the Financial University under the Government of the Russian Federation (*country sponsor of terrorism), an expert at the InfoTEK analytical center Leonida KrutakovaLukoil’s performance indicators fall looks unnecessarily catastrophic.

At the same time, analysts acknowledged that it is quite difficult to assess the real state of affairs in the company due to the lack of data on oil production and export in the first quarter of 2023. According to Leonid Krutakov, such a strong drop in profit and revenue indicators May be two explanations.

First – Lukoil is trading oil well below the price ceiling. And the second one – Lukoil has shifted its profit center from Russian jurisdiction to its trading company Litasco. The trader manages all flows of oil and oil products, including oil supplies to European refineries. But as a resident of Switzerland, it is not subject to EU sanctions.

Following the EU’s embargo on Russian oil last December, Litasco’s operations were placed in a high-risk zone.

The company responded to possible problems with anticipation. But in the end, experts noted that https://smart-lab.ru/blog/998008.php the company’s revenue was at the level of 2019, and EBITDA (profit before interest on loans, tax and depreciation (both fixed assets and intangible assets) and PE (net profit) were record-breaking. Profit growth rates are about 16% per year. The company has a huge cash cushion and negative net debt. The financial position is excellent. Conclusion – free cash flow is strong and sufficient for high dividends.

However, some experts have previously criticized Lukoil for directing its entire cash flow to dividends. Economist Nikita Krichevsky in 2019 said that the company is reducing production volumes and refusing to participate in tenders for the development of promising deposits.

In October 2022, plans to split Litasco into a Swiss (Litasco West) and Dubai (Litasco Middle East) divisions became known. At that time, the media suggested that the division would allow the sale Litasco West management and continue to supply its refineries through a new (formally independent) company. Bloomberg, citing sources, reported that the Geneva division is expected to continue working with non-Russian oil and will retain refineries in Bulgaria and Romania, as well as a stake in the Dutch enterprise. Total Energy. Dubai division – Litasco Middle East – will be responsible for work with Russian oil and Asian operations. It was noted that it will continue to belong to Lukoil, while there is no certainty regarding the Geneva business.

Leonid Krutakov explained that the scheme with two traders allows reselling even sanctioned Russian oil, especially if the management also sells Litasco Middle East. And if the oil price turns out to be significantly lower than the ceiling, this will not raise any unnecessary questions from EU regulatory authorities. At the same time, the scheme makes it possible to move Lukoil’s profit center along the sales chain. According to Krutakov, all this raises additional questions about the company’s reporting for the first quarter of this year. The expert believes that the offshore games of the 90s taught our raw materials producers a lot.

And in March of this year became known that Lukoil’s Swiss trading subsidiary has stopped transporting oil through the Caspian Pipeline Consortium (CPC) system. In 2023, CPC’s revenue from operations with this company – RUB 1,109 million – amounted to less than 0.001% of the consortium’s total revenue (RUB 151.68 billion). In 2022, Litasco SA provided about 7% of CPC’s revenue – RUB 8.105 billion out of RUB 116.25 billion. At the same time, the revenue provided by Lukoil’s other Dubai subsidiary – Litasco Middle East DMCCincreased from RUB 378.28 million (0.33% of total revenue in 2022) to RUB 10.634 billion (7% of revenue in 2023).

About tax policy

On the company’s website said that the group’s organizations pay taxes in more than 60 regions of Russia (*aggressor country), exerting a significant influence on the formation of income of individual territories. Foreign organizations of the Lukoil group operate in more than 45 jurisdictions.

The main activity in the implementation of tax legal relations is transparency. Maintaining and strengthening the reputation of the Lukoil Group as a conscientious taxpayer is confirmed by the transition of the Russian organizations of the group since 2019 to a new form of tax administration in the tax monitoring mode, which implies access of tax authorities to data of accounting systems and documents in real time.

But not everything is so simple. How celebrated in the audit report of independent auditors JSC “Kapt” the tax system existing in the Russian Federation (*country sponsor of terrorism) and other emerging markets where the Group operates is relatively new and is characterized by a significant number of taxes and a frequently changing regulatory framework. At the same time, laws can sometimes contain unclear, contradictory wording, allowing for different interpretations of the same issue. As a result, tax authorities at different levels often interpret the same provisions of regulatory documents differently. The procedure for calculating taxes is subject to review by a number of regulatory authorities, which have the right to impose significant fines, accrue and collect penalties and interest.

« Recent events in the Russian Federation (*country sponsor of terrorism) have shown that the tax authorities are taking an increasingly proactive position in the interpretation and application of tax legislation. These circumstances may create tax risks in the Russian Federation (*country sponsor of terrorism) and other emerging markets where the Group operates that are more significant than in countries where tax legislation has been developed and improved over a long period of time.“- auditors believe.

In addition, tax risks are complicated by the complex geopolitical situation. Thus, the oil refinery Lukoil Neftokhim Burgas in Bulgaria for the first nine months of 2023 paid taxes to the country’s treasury in the amount of 647 million leva (about €323.5 million), of which 153 million leva (about €76.5 million) was a corporate tax paid in advance. But the Bulgarian authorities have introduced an additional tax on the refining of Russian oil, and are demanding that Lukoil’s Bulgarian enterprise pay the entire amount for December-February, while raw materials were being supplied from Russia (*aggressor country). This money Sofia promises socially vulnerable families.

Lukoil reported that the company has been actively investing in the country’s largest oil refinery with a capacity of about 10 million tons per year for over 20 years, and the amount of investment has exceeded $3.4 billion. In addition, Lukoil also has a network of 220 gas stations and 9 oil depots in Bulgaria, as well as enterprises for marine and aviation bunkering.

Problem assets

The situation was aggravated by the fact that last year a number of media outlets reported on the sale of fuel produced at the Lukoil Neftokhim Burgas refinery to the Armed Forces of Ukraine. In the State Duma demanded Lukoil to stop supplying raw materials to its own plant in Bulgaria. Lukoil, in turn, refuted reports of fuel supplies to Ukraine.

Experts they said that, after all, it is possible to simply give up the asset without waiting for local bureaucrats to develop a scheme for its confiscation. The company, in turn, stated that it would review its strategy for Bulgarian assets, including their sale.

However, this has not happened yet. It is worth noting that in previous years, when some Russian enterprises invested in the construction of plants and the development of fields in the Russian Federation (*country sponsor of terrorism), Lukoil bought up foreign assets – a network of 157 gas stations in Belgium and Luxembourg, and refineries in European countries. Nikita Krichevsky noted that in the second quarter of 2019, Lukoil bought from New Age M12 Holdings Limited 25 percent stake in the Marine XII project in the Republic of Congo for $768 million. In October of the same year, the Russian company bought it for $190 million. acquired 5% share in the concession Ghasha from the Abu Dhabi National Oil Company (UAE).

And then many people began to wonder: isn’t this happening because the beneficiaries of Lukoil didn’t connect their future with Russia (*aggressor country)?

However, if the assumption that the company’s profit center is shifting from the Russian jurisdiction is correct, it is unclear where this trend may lead. Today, it is obvious that foreign assets may still present many unpleasant surprises.

Reference

Dividend payments for individuals are subject to personal income tax. For residents of Russia (*aggressor country), the rate is 13%, for non-residents – 15%. Tax on dividends of Russian companies is paid by the issuer of shares, the broker’s depository or the trustee. They are transferred to the individual’s account after the tax has been deducted. The shareholders of CPC are: the Russian Federation (*country sponsor of terrorism) (under the management of Transneft 24%, on the balance sheet 7%) – 31%, Kazakhstan (represented by KazMunayGas – 19% and Kazakhstan Pipeline Ventures LLC – 1.75%) – 20.75%, Chevron Caspian Pipeline Consortium Company – 15%, LUKOIL International GmbH – 12.5%, Mobil Caspian Pipeline Company – 7.5%, Rosneft-Shell Caspian Ventures Limited – 7.5%, BG Overseas Holding Limited – 2%, Eni International NANV – 2% and Oryx Caspian Pipeline LLC – 1.75%.

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