Risks associated with government regulation and politics

Gazprom Neft carries out its activities in strict compliance with the standards of Russian legislation as well as the legislation of the jurisdictions in which the Company performs its operations.

Gazprom Neft cannot guarantee the absence of adverse changes in Russian legislation in the long term since most risk factors are out of its control. The negative impact of this risk category is mitigated by monitoring and timely reaction to changes made to various sections of legislation as well as active interaction with the legislative and executive authorities and public organizations on matters involving the interpretation, proper application, and improvement of legislative norms

Description Risk management measures
4.1. Risks associated with more sanctions from the EU and the U.S.

In 2014, the U.S. (taking into account the changes in U.S. sanctions in 2017), EU countries, and certain other nations imposed sanctions on the Russian energy sector and a number of Russian companies from different industries. Further sanctions could negatively impact the overall situation in the industry and also have a specific effect on the Company’s long-term projects and the ability of its counterparties to meet their obligations

The sanctions have had a negligible effect on the Company’s business and financial condition. In response, the Company is implementing a targeted programme to phase out imported services and equipment. The Company has no grounds to believe that it will be specifically targeted by any new sanctions, but the sanctions may have a specific effect on the Company’s long-term projects. At present, based on an assessment of the impact of the sanctions, the Company does not believe that they will have a significant effect on the consolidated financial statement

4.2. Political risks

The political situation in Russia is currently stable, as evidenced by the stability of the federal and regional branches. Gazprom Neft PJSC is registered as a taxpayer in St Petersburg, which is the second largest city in the Russian Federation and the administrative centre of the Northwest Federal District with significant natural resource potential, highly developed industry, and an extensive transportation network. Gazprom Neft PJSC has subsidiaries in the Central, Northwest, Urals, Volga, Siberian, and Far Eastern Federal Districts

Overall, the Company regards the political situation within the country as stable and believes that there are currently no risks of negative changes

4.3. Risks associated with foreign assets

The Company is implementing a number of foreign projects that aim to expand the geography of production operations. Entering new regions is associated both with the ability to obtain additional competitive advantages as well as the risks of underestimating the economic and political situation in countries where the Company’s assets are located, which subsequently may lead to the failure to achieve planned performance indicators

At present, Gazprom Neft assesses the level of risks associated with foreign assets as acceptable, however it cannot guarantee the absence of negative changes since the risks described are beyond the Company’s control

4.4. Corruption risks

As the Company actively enters new international markets, the risk increases of U.S. or UK anti-corruption laws extending to it

Gazprom Neft pursues a strategy of corruption risk management on an ongoing basis. The Company has approved an anti-fraud and anti-corruption policy, and all Gazprom Neft subsidiaries have been given recommendations to approve similar policies. All Gazprom Neft employees are required to review and comply with the policy requirements. In order to monitor corruption risks when working with third-party contractors, standard forms of anti-corruption reservations have been prepared and approved by an order of the Gazprom Neft CEO for inclusion in contracts with third parties (both Russian and foreign). The Company also has a permanent anti-fraud and anti-corruption hotline. An internal inspection is conducted in response to hotline complaints Gazprom Neft pursues a strategy of corruption risk management on an ongoing basis. The Company has approved an anti-fraud and anti-corruption policy, and all Gazprom Neft subsidiaries have been given recommendations to approve similar policies. All Gazprom Neft employees are required to review and comply with the policy requirements. In order to monitor corruption risks when working with third-party contractors, standard forms of anti-corruption reservations have been prepared and approved by an order of the Gazprom Neft CEO for inclusion in contracts with third parties (both Russian and foreign). The Company also has a permanent anti-fraud and anti-corruption hotline. An internal inspection is conducted in response to hotline complaints

4.5. Risks associated with changes to judicial practice on matters related to the Company’s operations

In the existing system used to administer the law in the Russian Federation, the legal positions of the highest judicial instances (the Constitutional Court of the Russian Federation and the Supreme Court of the Russian Federation) that are capable of influencing the conditions for the Company to conduct business activities are of great importance

Gazprom Neft regularly monitors decisions adopted by higher courts and also assesses trends in law administration practices that take place at the level of federal district arbitration courts while actively employing and utilizing such practices not only in defending its rights and legitimate interests in court, but also when settling legal issues that arise in the Company’s operations. In this regard, risks associated with a change in judicial practice are deemed to be insignificant.

In 2014, the Supreme Arbitration Court and the Supreme Court of the Russian Federation were merged. The legal practice that has amassed since the merger on issues related to the activities of oil and gas companies is not yet sufficiently extensive, so it is difficult to forecast its further development with any certainty. Changes that may adversely affect the Company’s current and future litigation are possible, including in the practice of the Supreme Court

4.6. Risks associated with changes to the tax legislation of the Russian Federation

The Gazprom Neft Group’s key companies are among the biggest taxpayers in the Russian Federation and pay federal, regional, and local taxes, in particular VAT, the corporate profit tax, mineral extraction tax, corporate property tax, and land tax.

The taxation system of the Russian Federation is continuously evolving and improving. Potential growth in tax rates paid by the Company as part of its business operations may lead to increased costs and a reduction in the amount of cash at the Company’s disposal to finance its day-to-day operations and capital expenditures and meet its obligations, including on outstanding bonds. Virtually any company in Russia may potentially incur losses as a result of claims by the tax authorities that may arise for previous periods and day-to-day operations. However, the Company estimates such risks as average.

The Company believes that the impact of the obligations arising as a result of such potential events on its operations would not be any more significant than the impact of similar obligations on other Russian oil sector companies with government participation

In order to mitigate risks related to changes in the tax legislation of the Russian Federation, Gazprom Neft carries out thorough work to analyse bills and legislative acts that have been adopted in tax legislation.

The most significant recent changes to the tax legislation of the Russian Federation affecting the issuer’s activities include:

  • changes to the base rates of the Mineral Extraction Tax (MET), export duties, and excise taxes as a result of so-called ‘tax manoeuvring’;
  • changes to tax legislation concerning the taxation of the profit of controlled foreign companies and the revenue of foreign organizations as part of the ‘de-offshorization’ of the Russian economy that has been carried out since 2015;
  • the introduction of a formulaic procedure for calculating the MET for gas and gas condensate on 1 July 2014.

The Company evaluates and predicts the extent of a possible negative impact from changes to the tax legislation of the Russian Federation and makes every effort to minimize risks related to such changes

4.7. Risks associated with changes to the rules for customs control and duties

Gazprom Neft PJSC is involved in foreign economic relations and therefore exposed to risks associated with changes to the legislation of the Russian Federation concerning the government regulation of foreign trade activities as well as customs legislation governing relations to establish the procedure for the movement of goods across the customs border of the Russian Federation, establishing and applying customs regimes as well as establishing, introducing, and collecting customs payments.

Another risk may be the ability of the Russian Government to change customs duty rates (both import and export) on certain goods for which the Company concludes foreign trade transactions as well as changes to the administration of law in matters concerning customs regulation. The primary adverse effect from this risk is an increase in expenses and lower export efficiency

The Company meets the requirements of the customs legislation of the Russian Federation, completes all documentation required for both export and import transactions in a timely manner, and has sufficient financial and human resources to comply with the standards and rules in matters of customs regulation and timely respond to changes in customs legislation and the law administration practice