Russia's tax hike on the oil and gas industry will be destructive to a key piece of its economy

• Russia's taxes on its oil and gas industry will hamper long-term growth, a G7 analysis found.
• The tax mechanism was changed in April to help the government regain lost revenue.
• "It is definitely destructive to their industry," an official told the Financial Times.

Russia's energy producers, already battered by Western sanctions, may become further impeded from long-term growth as the Kremlin tries to squeeze more tax revenue from the sector.

That's according to an analysis by a member of the G7-led coalition that was seen by the Financial Times.

"It is definitely destructive to their industry," an official told the FT, adding that the tax changes will "undercut the future production capacity of the Russian oil and gas industry by taking away revenues that could otherwise be used to invest in equipment, exploration and existing fields."

The price of Russian crude has suffered since the G7 and European Union imposed a cap of $60 per barrel in December. That coincided with the EU's ban on seaborne Russian oil imports.

The Kremlin's tax receipts took a hit. So in order to cover government funding shortfalls, President Vladimir Putin changed the way oil and gas firms are taxed in April.

Instead of basing the tax rate on the price of Urals, which is a grade of Russian crude that commands lower prices, levies are now based on the Brent crude international benchmark, minus a fixed discount.

This would allow Russia to gain around $8 billion in revenue, making up for losses caused by Western sanctions that have helped keep Russian crude prices low. Nearly half of Russia's budget depends on oil and gas revenue, which fell by 45% in the first quarter.

The G7 views the tax change as an acknowledgement from the Kremlin that it will have to continue selling its oil at a discount for some time.

Meanwhile, Russia continues to export oil at higher-than-expected levels, as China and India snap up barrels at discounts. Their purchases are helping Russian crude exports return to pre-war volumes.