Moscow - The splurge of oil profits feeding Russia's years of growth has turned sticky with falling production and energy prices.

This double whammy is threatening to undercut the government's economic policy as the industry that is its main source of revenue takes a battering from the country's worst financial crisis in a decade.

Scooping huge oil windfalls into state coffers over the oil industry's boom years from 1999 to 2004 has been at the root of Russia's ideology under former President Vladimir Putin.

The surplus helped pay back a national debt as part of a therapy to recover from the humiliation an impoverished Russia suffered by the Soviet collapse and then move toward a resurgent foreign policy.

It went to a sovereign-wealth fund as insurance for storms like the one which buffeted financial markets last month. And it went to subsidize domestic energy prices and a planned array of social renewal programmes.

The policy was to maximize the state's share of industry profits through high taxation and intervention.

But the floor fell out from under Russian industry at a time when leaders like state energy giant Gazprom were on a major debt-financed buying spree. Stocks of Gazprom and highly-leveraged Rosneft led a market crash last month that sucked 70 per cent of the value out of Russian shares from their peaks in May.

Slapped with million-dollar margin calls by foreign lenders, Lukoil, Gazprom, Rosneft and TNK-BP asked the government for help and were promised 9 billion dollars to roll over their debt.

Rosneft and state pipeline monopoly Transneft won a reprieve last week, obtaining a credit from China under a high-level deal signed with Chinese Prime Minister Wen Jiabao in Moscow to build a long- awaited pipeline link with Russia.

The deal became possible as the drop in energy prices leveled the playing field in a drawn-out pricing dispute between Moscow and Beijing.

The planned pipeline is to reroute Siberian oil and gas now destined for European markets, in the latest warning to Western leaders of realignment provoked by the current market turmoil that could upset the West's energy security.

Russia's west Siberian production, the traditional locomotive of the oil industry, has been stagnating since 2005 despite the government's braggart image of infinite resource wealth, and production has moved to less gratifying off-shore locations.

Moscow may even see a political benefit in letting supplies drop off, some observers noted, as a means of aligning its policy with OPEC's production cuts.

Russia cannot cap its Siberian wells as they would freeze deep under the permafrost, but Deputy Prime Minster Igor Sechin, who overseas the country's energy policy, revived the idea last week that Russia could start stockpiling oil reserves as another way to becoming a swing producer and influence energy pricing.

The comments came as Russian officials met OPEC secretary general Abdullah al-Badri in Moscow in the the highest-level talks ever held between the two sides.

Despite their billions in profit, Russia's taxes on energy companies working in the country have suffocated capital investment needed for new development, industry analysts say.

Oil companies pay an export duty of about 65 per cent and a production tax of 22 per cent - or a total of over 90 per cent of their revenue goes to state hands, calculates Thane Gustafson, a senior director at consultancy Cambridge Energy Research Associates.

Then, Russia's main export Urals blend fell below 70 dollars a barrel from a July peak of 142 dollars.

"If you are an oil company right now - you have no reason to produce oil," Dmirty Loukashov, an energy analyst at UBS said in a televised interview. "You would rather shut up your wells."

Last month, Finance Minister Alexei Kudrin, who spearheaded the country's tax policy, warned that the 2009 budget would suffer a deficit if oil priced at less than 70 dollars a barrel.

And oil taxes are paradoxically progressive on the decline, in other words, the government stands to lose more. "As oil production declines, the government takes 90 per cent of the pain," Gustafson, a professor at Georgetown University, told Deutsche Presse-Agentur dpa.

The government showed its concern this week, saying it was mulling measures, including a revision of the export duty, to stimulate upstream investment despite the collapsing energy prices, news agency Interfax cited deputy prime minister Igor Shuvalov as saying.

"The pie will get smaller for everyone, and the government has the largest fork at that table. Meaning, the state will no longer be able to take the biggest stake of that pie," Gustafson said in a lecture at Moscow's Higher School of Economics. "That calls into question the entire economic policy of the last few years."

Government measures were unlikely to be substantial, analysts said, partly because the tax also serves as a wedge between domestic and international prices.

"There will be no lowering of that tax; it is the only thing that permits the current policies," said Moscow-based analysts Alexei Makarkin, deputy head of the Centre for Political Technologies. (dpa)