Russia’s oil sector may get a $US 4 billion tax cut after the issue was discussed at the annual board meeting of the Economic Development Ministry. The tax cut proposal will be put to the government by the end of the week.

Tax administration has often been cited as one of the most serious issues facing the Russian economy. The country’s Finance Minister, Aleksey Kudrin says the economy is not yet ready for VAT reform, which could cause a budget deficit and will take several more years.

But he says oil tax cuts may be the way forward.

“Thanks to the mineral production tax we have managed to strengthen our tax system. Now, due to the strengthening rouble and growing development costs for the industry, we are going to propose a $US 4 billion dollar tax break package for oil companies,” Kudrin said.

The inflow of cash from oil receipts into the Russian economy has caused higher inflation and rouble appreciation, according to Kudrin.

Nevertheless, business representatives say that the hand-out for oil means other sectors won't get tax breaks.

“The Ministry of Finance is focusing on the big productive profit-making sectors, stimulating their growth, but practically loosing the diversification of the economy,” said Boris Titov, the Chairman of Business Russia organisation.

Currently, oil provides up to 40% of federal budget revenues. Russia has been increasingly dependent on oil earnings, as the price of crude has shot up fivefold in the last six years.