Russia Ethanol Production Set to Grow
By Eugene Gerden
Plans to lift a hefty excise tax on fuel ethanol by the Russian government are being called revolutionary. Recent statements from the office of Alexander Tkachev, Russia Minister of Agriculture, indicate the government plans to lift the excise tax on domestic ethanol by the end of the year with the goal of stimulating production. It will help implement one of the more ambitious state goals to increase the share of ethanol in the domestic motor fuel up to 10 percent by 2020.
The existing tax has been one of the major obstacles for the development of the ethanol industry in Russia, as it made local ethanol production unprofitable and resulted in low investment attractiveness for fuel ethanol, mainly due to the positioning of ethanol as a potable alcohol-containing product subject to excise duties by the Russian government.
The rate of the tax is 102 rubles ($1.62) per liter, roughly 90 percent of the final cost of production.
Until 2016, the Russian government has not been ready to lift taxes on ethanol sales and production within the country, fearing production of vodka under the guise of bioethanol. Excessive consumption of vodka and spirits is a big problem for Russia, which has one of the world's highest consumption levels.
The decline in global oil prices also likely played a role in the state's change of attitude toward the development of an ethanol industry in Russia, along with the plan approved in 2012 outlining a complex program of development of biotechnology in the country.
Alexei Ablaev, president of the Russian Biofuels Association, says lifting the excise tax is good news for the industry. Russia has huge potential for the development of the ethanol industry, he says, and may become one of the world's leaders in production, alongside the U.S. and Brazil.
Eugene Pantskhava, a senior expert at the All-Russian Committee of Renewables, one of Russia's leading analyst agencies in the field of ethanol and biofuels, says rapid development of the ethanol industry in Russia historically has been prevented by the strong lobby from the leading domestic oil and gas producers. That situation may be changing already, indicated by the government's increased attention to the development of a national renewables industry and, in particular, ethanol.
Specific government plans include introducing amendments to Chapter 22 of the national tax code for the lifting of the excise duty on the sales of ethanol in the domestic market. The Russian government also is introducing a bio-ethanol definition, qualifying the product as denatured ethyl alcohol, containing not more than 1 percent water. The government also has announced tax benefits for a period up to five years for newly established facilities for the production of ethanol.
The Russian government believes that the production of ethanol in the country can be profitable even amid the current low global oil prices, while the level of profitability will be increased significantly after the expected recovery of prices during the next several years.
State plans project the lifting of taxes will increase the domestic ethanol production up to 670 million gallons per year during the next several years. In the past five years, work has begun on reconstructing existing ethanol plants and construction and planning for up to 19 new facilities, supported by the government and private investors. Particular attention will be paid to the building of plants with the capacity of 150 million liters (40 million gallons) per year. Plants with the production capacity of less than 70 million liters per year are considered economically inadvisable. The payback period is expected to be in the range of four and a half to seven years, depending on the capacity of the plant. Investments in plant sizes between 250 to 1,000 metric tons (84,000 to 335,00 gallons) in daily capacity are expected to range from $113 million to $150 million, and take between one and a half to two years to build.
At present, the annual production of ethanol in Russia is estimated at 5.6 billion liters, mostly for the production of vodka. There are nearly 140 plants in the country with a total capacity of 9.5 billion liters. Modern production technologies, however, are used only at 10 to 12 industrial sites.
Russia still lacks specialized plants for the production of fuel ethanol. Most of the existing distilleries, due to their small size, low level of automation and high energy consumption are unable to produce ethanol at an acceptable cost. Analysts from the Russian Ministry of Agriculture believe that lifting of duties will result in the influx of investments in the industry, which should help to create conditions for the building of modern ethanol plants.
According to state plans, a cluster for the production of ethanol in Russia will be established in Russia's North Ossetia region, the region in southern Russia on the northern slope of the Caucasus Mountains, which is the current center of Russian ethanol production. The Russian Ministry of Agriculture predicts that the annual volume of ethanol production in the region will reach 300,000 metric tons (100 million gallons) in 2017 and will increase more with the lifting of the excise duty.
Miranda LLC, Vladikavkaz, North Ossetia, is Russia's largest ethanol producer. The plant has a design capacity of 200 metric tons a day (67,000 gallons), and current production of about 100 metric tons per day, according to the company website. Its main raw material comes from regional sugar producers, although the plant also processes a smaller amount of wheat, selling wheat gluten, bran and high-protein distillers grains, along with wheat starch.
According to Kazbek Lyanov, technical director of Miranda, the majority of the plant's production to date has been shipped abroad, although the situation may change next year, with the lifting of excise tax on the sales of ethanol within the country.
Along with the policy changes designed to increase the nation's ethanol production, the Russian government also has announced its plans to accelerate research and development activities in the field of ethanol. The research will be conducted by the new bioenergy laboratory located at the Kurchatov Institute, Russia's leading research and development institution in the field of nuclear energy.
Author: Eugene Gerden