junction between the producer's and the main pipelines, before VAT, for consumption in Russia and other CIS countries. Production costs include the weighted cost of transportation to export gates, labor costs (including auxiliary personnel) and other production costs. Nonnal profit is the profit needed to ensure a competitive return on assets. Rent captured is the total tax take of the various levels of government, including the weighted shares of export duties and customs fees on exports and VAT on domestic sales, oil excises, subsoil user fees (royalties), mineral replacement fees (geological taxes), road taxes, social security contributions to extra-budgetary funds, housing taxes, profit taxes, and other taxes. Rent appropriated is the rent remaining at the enterprises' disposal after cost recovery, allowance for a normal profit and payment of all taxes. The detailed data are presented in Annex.

2.29 The average rent appropriated by oil companies is derived from market capitalization.<sup>12</sup> The normal profit is the return on equity expected by a new investor acquiring shares in an oil company for the long term. All Russian oil companies together were worth an average US$ 75-80 per ton of oil extracted in 1999. The last line in Table 8 suggests that the Russian government forewent US$ 4.5 billion in revenues in 1999 and US$ 12 billion in 2000. This does not include part of the unrealized rent that would be realized and captured if producers were free to export as much oil as they wished. US$ 4.5 billion represented about 9% of consolidated budget revenues in 1999. In other words, if the Russian government had captured instead of foregone that rent, taxes on capital and labor could have been cut by over 9% in 1999.

2.30 The choice of a rate of return is a controversial matter. Theoretically, the normal profit is the opportunity cost of allocating resources to the current economic activity. The opportunity cost is the profit that would be achieved in the next best alternative. The corresponding rate of return is then applied to the investment in the activity at hand. This method presupposes that opportunity costs are easily quantified. However, conditions in Russia do not allow easy quantification. Reliable information about profit margins is not available, and opportunity costs are uncertain because of multifarious risks. The ruble has experienced wide fluctuations in the past 10 years, ownership rights are not adequately protected, tax regimes have a high propensity to change, banks go bankrupt, _etc._ 2.31 Practically, the assumption here is that resources invested in oil extraction could be allocated to alternative long-term assets. For example, the return on the Russia Eurobond 2007, _i.e._ the debt issued in foreign currency by the Russian government with a 7-year maturity yielded an average 16% in 2000. The Russia Eurobond 2007 is a relevant reference asset as it gives an idea of the opportunity cost of investing money in Russia in the long term.'<sup>3</sup> It involves a 10% risk premium over a risk-free asset such as the 7-year U.S. Treasury bill. The question is whether investments in the Russian oil sector should receive an 12 This method is used by the U.S. Bureau of Economic Analysis to assess natural resource rent in the United States under the name Current Rent Method I (BEA 1994, 2000).

13 The Russia Eurobond 2007 yielded an average 30% in 1999, which is quite high, in the aftermath of the financial meltdown of August 1998. The downward trend in yields since 1999 indicates that investors are regaining confidence in Russian Eurobonds, which also justifies using that this type of instrument as a benchmark for normal profit.

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