OREANDA-NEWS. The decline in the rouble and a progressive tax regime should offset the impact of weaker oil prices on Russian oil companies' profitability, Fitch Ratings says. However, their financial leverage may moderately increase because of the use of hard-currency funding.

As with any exporter, Russian oil producers benefit from a lower national currency, while the fall in oil prices over the last few months is hurting US dollar revenues. Costs will adjust downwards leading to a lower overall effect on cash flows, but the impact of taxation is even more important. Russia's progressive tax regime means that the effective tax rate paid by Russian oil producers falls as oil prices decline, and vice versa.

Taking all these factors into account, Fitch calculate that if the rouble stabilises and oil prices hold steady at USD85/bbl next year an average producer would report 2015 rouble operating profits broadly in line with 2013, when oil prices averaged USD109/bbl. In this scenario Russian oil companies' financial leverage may edge up, especially for those producers that relied most heavily on international finance, because their hard currency-denominated debts will rise in value. Given that Fitch-rated oil companies, such as LUKOIL, Gazprom Neft and Tatneft, all have relatively low leverage for their current ratings, this should not trigger rating actions.

A further decline in oil prices, however, would start to hurt profitability, as would a recovery for the rouble while oil prices remain weak.

Most Russian oil companies have solid liquidity and would comfortably survive without new borrowing for at least the next one or two years. However, they may need to reconsider their financing model should access to international debt markets remain blocked for a long time, because of sanctions and overall uncertainty over the Ukrainian crisis. Nevertheless, their fundamentals remain strong, and Fitch expect them to maintain flat oil production and generate stable cash flows for at least the next three or four years, even with lower oil prices.

Our analysis is based on the assumption that the state will not attempt to increase its share of oil revenues by raising taxes. The government is implementing some changes in the tax system aimed at re-balancing the tax burden between upstream and downstream operations. But the principles of the taxation system should remain unchanged. Fitch believe a significant increase of industry-specific taxes is unlikely. Oil taxes in Russia are already reasonably high and the state seems to realise that Russian oil companies need resources to proceed with the greenfield projects necessary to maintain output at least at the current level.

Since the beginning of the year the rouble has weakened by almost 30%. Crude prices started to slip in the middle of the year and are now trading at around USD87/bbl, more than 20% lower than at the end of June.