The effect of European fuel-tax cuts on the oil income of Russia

Abstract

Following Russia’s invasion of Ukraine, there has been a surge in transport fuel prices. Consequently, many European Union (EU) countries are cutting taxes on petrol and diesel to shield consumers. Using standard theory and empirical estimates, here we assess how such tax cuts influence the oil income in Russia. We find that an EU-wide tax cut of €0.20 l−1 increases Russia’s oil profits by around €8 million per day in the short and long term. This is equivalent to €3,100 million per year, 0.2% of Russia’s gross domestic product or 5% of its military spending. We show that a cash transfer to EU citizens—with a fiscal burden equivalent to the tax cut—reduces these side effects to a fraction.