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Russia to impose floating tax on wheat exports from June 2

Highlights

Formula-based tax to safeguard from global price fluctuations

Tax seen making Russian wheat exports expensive

New Delhi — Russia on Feb. 4 confirmed it will impose a "floating tax" on its wheat and other grain exports starting June 2. The move adds to the trade measures earlier taken by the government, including an export quota that will come into effect from Feb. 15.

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The "floating tax" will be imposed on wheat, corn and barley, and will involve a mechanism where sellers will be required to register their export contracts on the Moscow Exchange, according to the Russian government and analysts.

The tax will allow minimizing the negative impact of price fluctuations seen in the global markets on Russia's market, according to the Russian government.

While the floating tax will come into effect in June, the government will determine the duty values through the grain export reporting system that will start from April 1, which will help calculate market benchmarks.

The mechanism for registering these export contracts will allow acquiring more accurate price indicators, the Russian government said.

Under the floating tax system, for wheat, the base price indicator has been fixed at $200/mt, which means the floating tax will only kick in if the calculated market benchmark price is above the $200/mt threshold.

If the price exceeds the threshold, the value difference between the market benchmark price and the base export price will attract a tax of 70%, according to analysts.

For corn and barley, the base price indicator is set at $185/mt.

Impact on markets

The complicated mechanism has already created some confusion in the markets, but analysts indicated the move will make Russian wheat exports expensive going forward.

The news is neutral to slightly bearish for the short-term as farmers will be forced to sell before the mechanism comes into effect, which will lead to larger exports, according to Andrey Sizov, managing director at Russia-based consultancy, SovEcon.

Russian wheat export prices went past the $300/mt mark on Jan. 18 for the first time since S&P Global Platts started assessing the commodity in 2014, driven by concerns around the "floating tax" on wheat exports.

However, since then, prices have remained below the $300/mt mark, with the Feb. 4 value of the Russian wheat 12.5% FOB Black Sea assessed at $285/mt, as Russian exports flooded the market after sellers looked to ship as much as they can before the export tax is imposed on Feb. 15.

Russia is aiming to tackle a rising food inflation, and as part of the move, it introduced a wheat export tax and a grain export quota in December 2020, which will limit shipments to 17.5 million mt in 2020-21

The export quota mechanism will run from Feb. 15 through June 30, and covers wheat, corn, barley and rye.

Russia will also charge a Eur25/mt tax on wheat exports made within the quota between Feb. 15 and Feb. 28, and after that, the duty will be doubled to Eur50/mt.