What is the effect of EU's fuel-tax cuts on Russia's oil income?

TL;DR

This paper analyzes how EU fuel-tax cuts, implemented after a surge in oil prices due to geopolitical events, increase Russia's oil income significantly, with potential economic and military implications.

Contribution

It provides empirical estimates of the impact of EU fuel-tax cuts on Russia's oil profits and explores mitigation via cash transfers to EU citizens.

Findings

A 20 euro cent tax cut increases Russia's oil income by 11 million Euros daily.

Annual increase in Russia's oil income from tax cuts is approximately 4100 million Euros.

Cash transfers to EU citizens can significantly reduce the increase in Russia's oil income.

Abstract

Following the oil-price surge in the wake of Russia's invasion of Ukraine, many countries in the EU are cutting taxes on petrol and diesel. Using standard theory and empirical estimates, we assess how such tax cuts influence the oil income in Russia. We find that a tax cut of 20 euro cents per liter increase Russia's oil profits by around 11 million Euros per day in the short run and long run. This is equivalent to 4100 million Euros in a year, 0.3% of Russia's GDP or 7% of its military spending. We show that a cash transfer to EU citizens, with an equivalent fiscal burden as the tax cut, reduces these side effects to a fraction.