Jason Bush

Russia backs off from Eurobond tax plan

Jason Bush — Tue, 21 Feb 2012 12:31:08 +0000

MOSCOW, Feb 21 (Reuters) – Russia is scrapping plans
to collect tax on corporate Eurobonds placed before Jan. 1,
2013, following a storm of protest from major Russian companies
and banks who warned that the move threatened seriously to dent
fragile investor confidence.

Russia’s finance ministry said late on Monday that it is
dropping the idea and may apply only a partial levy to papers
issued from next January onward.

The ministry’s statement provides reassurance to
international bondholders of Russian companies, who faced the
prospect of significant losses if issuers had redeemed their
bonds at par in response to the ministry’s earlier proposal to
withhold 20 percent profit tax on interest payments at source.

“The ministry of finance is treating investors in the right
way – it’s an investor-friendly decision – and in this respect
it’s a positive outcome,” said Elena Kolchina, fund manager of
the Renaissance Russian Debt Fund in Moscow.

“The immediate source of investor concern appears to have
been removed,” said Mikhail Galkin, a fixed income analyst at
VTB Capital.

“From an investor standpoint that was the only risk: There
was no risk of suffering from the tax – there was a risk of high
cash price bonds being redeemed early at par.”

Some of Russia’s biggest corporate borrowers, including top
gas producer Gazprom and its second largest state bank
VTB, had been facing large bills in relation to
existing bond programmes.

Oil pipeline monopoly Transneft had threatened
to redeem over $4 billion bonds at par in response to the
proposals outlined by officials in recent months.

“First, as regards interest income paid on Eurobonds issued
prior to Jan. 1, 2013, we propose to fully release Russian
borrowers from any obligations to withhold tax, i.e. from
obligations to act as tax agents (including interest income that
has already been paid to investors),” the ministry said in a
statement.

Corporate Eurobonds issued after Jan. 1 of next year will be
taxed only on interest income received by an intermediary
located in an offshore jurisdiction which has no double-tax
treaty with Russia, the ministry said.

Russian corporate Eurobonds saw only a small positive
reaction after the finance ministry’s announcement, with the
yield on 2018 bonds of Gazprom, the largest
corporate issuer, tightening by just 3 basis points on Monday
and Tuesday.

Analysts said that the reaction was muted because of
previous indications that the ministry was retreating from its
original position, following the strongly negative reaction from
issuers and investors.

“When these rumours first appeared people were a bit scared,
but then everyone calmed down. It’s just official confirmation
that nothing bad will happen,” said Kolchina.

The yield on Gazprom’s 2018 bond has tightened by around 45
basis points since peaking on Feb. 8, having previously risen by
around 50 basis points in the two weeks after the finance
ministry’s initial proposal was publicised in late January.

Deputy Finance Minister Sergei Shatalov had recommended, in
a letter to tax officials at the end of last year, that by
Russian law companies issuing Eurobonds were obliged to pay 20
percent profits tax on interest at source.

The finance ministry had also insisted that payments to
foreign debt holders through offshore units called special
purpose vehicles (SPV) are taxable under the existing Russian
law, but this tax has not been collected in the past.

Russian corporates, which have over $100 billion in
Eurobonds outstanding, could face a back-tax bill for $600
million, Shatalov said earlier this month.

While the finance ministry has ditched its previous plan to
impose the tax retroactively, the introduction of withholding
tax from next year may potentially raise the cost of issuing
Eurobonds in future.

“Higher borrowing costs could keep Russian borrowers from
frequent Eurobond issuance starting in 2013, and it would likely
push issuers to use alternative sources of funding, including
the local bond market,” VTB Capital said in a research note on
Tuesday.

However, analysts said that the impact of the tax should in
practice be limited because of further changes to the finance
ministry’s position, which would enable the majority of issuers
to avoid paying the tax.

“The issuers will be able to prove easily to the tax
authorities that they don’t need to pay the tax,” said Dmitry
Dolgin, a fixed income analyst at Alfa Bank.

“There is one condition for issuers to be exempt, which is
that they provide the identification not of final bondholders,
as was the case under the previous proposal – which is
impossible – but only first-tier bondholders, who are tax
residents of countries with which Russia has double taxation
agreements.”

Such first-tier bondholders are usually easily identifiable
structures such as depositories, located in countries with
double tax treaties with Russia, he said.

Despite the resolution of the Eurobond taxation issue,
analysts said that the spat has been negative for Russia’s
investment climate, as it comes as a reminder of the pitfalls in
Russia’s often complex laws, and of the often poor co-ordination
among policymakers.

“We never know where other taxation traps may be hidden in
the legislation,” Dolgin said.

(Writing by Jason Bush and Lidia Kelly; editing by Stephen
Nisbet)

Analysis: Putin’s state sector crackdown short on substance

Jason Bush — Thu, 16 Feb 2012 11:53:28 +0000

MOSCOW (Reuters) – Vladimir Putin has ordered Russia’s state firms to clean up their act, but without fundamental reforms he may only scratch the surface of endemic graft and conflicts of interest that tar the country’s bloated national champions.

Such reforms would require Putin to dismantle an entrenched system of corruption, patronage and cronyism, in which many of his own allies are enmeshed through their ties with the state-owned giants that are the focus of the crackdown.

“The problem is that all these state companies are very well-connected, and not well controlled,” said Elena Panfilova, the head of the Moscow office of anti-corruption body Transparency International.

The prime minister has his eyes on a triumphant return to the presidency in a March 4 election. As well as rhetorical swipes at unpopular oligarchs, Putin has taken aim at the state giants that dominate energy, infrastructure and banking.

“Of course it’s a pre-election move, to show an effective program against corruption,” said political consultant Dmitry Orlov, who advises the pro-Putin All-Russia People’s Front movement.

“But this isn’t just a PR move: It’s a real move that affects thousands of managers at these companies and their suppliers.”

In a bid to prevent state-appointed managers from rewarding themselves or their relatives with lucrative contracts, Putin has instructed all state companies to furnish details about the ownership of every firm with which they do business.

He has also told state auditors to investigate the biggest state-owned firms, including gas producer Gazprom, oil pipeline operator Transneft, railway company RZhD, and banks Sberbank and VTB.

The initiatives followed mass protests against alleged fraud in December’s parliamentary election that also illustrate public frustration at Putin’s failure to tackle business corruption.

The most popular opposition leader, blogger and shareholder activist Alexei Navalny, first gained fame by exposing dubious financial dealings at major state companies.

Navalny caused a public outcry in 2010 by leaking a confidential government report detailing massive cost overruns, which he said totaled $4 billion, in the construction of an oil export pipeline to the Pacific coast by Transneft.

While Putin has an electoral interest in preventing further such scandals – or at least being seen to do so – skeptics doubt he is serious about taking on vested interests with which he is himself closely entwined.

“SERIOUS CORRUPTION RISKS”

Corruption is widely acknowledged as one of the biggest deterrents to foreign investment. Russia saw a net capital outflow of $84 billion last year, while capital investment as a share of gross domestic product – at around 20 percent – is significantly below most other emerging markets.

The prime minister is talking tough. At a meeting with senior power-sector officials in December, he blasted managers for abusing their positions to line their own pockets.

Putin cited a government probe which showed that out of 352 state-appointed managers in the sector who were investigated, no fewer than 169 were involved in private businesses on the side.

These “pocket” companies – typically suppliers, contractors or intermediaries – had taken hundreds of millions of dollars offshore, he said. “It’s no secret that this creates serious corruption risks, or at a minimum conflicts of interests,” Putin fumed. “We need to bring order here.”

Several officials singled out by Putin have since resigned, including regional power chiefs, two deputy general directors of the federal grid company FSK, and a deputy general director of MRSK Holding, which owns government stakes in 11 regional power distributors.

“It’s encouraging that he’s making an effort to force bureaucrats to clean up their act,” said David Herne, director of the Specialised Research and Investment Group, a Moscow-based firm that invests in Russia’s power sector.

“Unfortunately, the ones who are clean are the exception.”

“LOOK IN THE MIRROR”

In a sign that the purge may be spreading to other sectors, several other senior managers have resigned from state companies in recent weeks, including Gazprom’s head of production, and the head of procurement at Rosneft.

But Vladimir Milov, a former deputy energy minister who is now an opposition politician, said the personnel changes were linked to pre-election battles for influence and did not represent a serious attempt to tackle conflicts of interest.

“It’s more important to investigate obvious cases than to instigate a major ‘cover’ operation, pretending that we are looking for hidden beneficiaries,” he said.

“I would strongly advise Putin to look in the mirror. Because his own friends do major deals with major state-owned companies.”

Milov cited the example of Arkady Rotenberg, Putin’s former judo partner, who is now one of the biggest suppliers of steel pipes to Gazprom – a lucrative business that has boosted his fortune to $1.1 billion, according to Forbes magazine.

Both Rotenberg and Gazprom have denied any violation of rules, insisting that all tenders were competitive.

But such cases reinforce concerns that many analysts have about Gazprom’s murky procurement practices and high costs.

“Gazprom has about $40 billion in capital investment each year, two-thirds of which is not producing value,” said Anders Aslund, senior fellow at Washington’s Peterson Institute for International Economics and a former economic adviser to the Russian government.

“It costs three times as much to build a pipeline per kilometer in Russia as it does in Norway.”

LACK OF OVERSIGHT

To address such concerns, Putin ultimately needs to do more than replace sticky-fingered managers and impose tougher rules on the ones that remain.

In part, the lack of oversight reflects chronic weaknesses in the governance of state companies – a particularly serious issue in Russia where the government is often divided between competing lobbies, and state managers have close relations with officials who are supposed to control them.

“So many people report to the prime minister that he doesn’t have the ability to monitor it all closely,” said Herne. “And below him the lines of authority are diffuse, so if you’re the manager of a state company you have wiggle room.”

Although in principle the government has committed itself to reducing the state’s economic role through privatization, in practice the large state companies have grown under Putin’s government. The state’s share of stock market capitalization has leapt from 24 percent in 2004 to some 50 percent today.

An even broader problem is weak public oversight. Anti-corruption campaigners say little progress is possible without a genuinely free press, a more independent parliament, and a greater role for civic bodies.

Until these issues are resolved, many Russians and foreign investors will be unconvinced by Putin’s latest initiatives.

“We’ve seen a number of anti-corruption campaigns in Russia over the last decade,” said Steven Dashevsky, director of Moscow-based investment firm Dashevsky & Partners, “And each campaign was followed by even greater corruption.”

(Reporting by Jason Bush; Editing by Douglas Busvine and Paul Taylor)

Putin’s state sector crackdown: more show than

Jason Bush — Thu, 16 Feb 2012 11:35:25 +0000

“Of course it’s a pre-election move, to show an effective programme against corruption,” said political consultant Dmitry Orlov, who advises the pro-Putin All-Russia People’s Front movement.

“But this isn’t just a PR move: It’s a real move that affects thousands of managers at these companies and their suppliers.”

He has also told state auditors to investigate the biggest state-owned firms, including gas producer Gazprom, oil pipeline operator Transneft, railway company RZhD, and banks Sberbank and VTB.

The initiatives followed mass protests against alleged fraud in December’s parliamentary election that also illustrate public frustration at Putin’s failure to tackle business corruption.

The most popular opposition leader, blogger and shareholder activist Alexei Navalny, first gained fame by exposing dubious financial dealings at major state companies.

Navalny caused a public outcry in 2010 by leaking a confidential government report detailing massive cost overruns, which he said totalled $4 billion (2.5 billion pounds), in the construction of an oil export pipeline to the Pacific coast by Transneft.

While Putin has an electoral interest in preventing further such scandals – or at least being seen to do so – sceptics doubt he is serious about taking on vested interests with which he is himself closely entwined.

“SERIOUS CORRUPTION RISKS”

Corruption is widely acknowledged as one of the biggest deterrents to foreign investment. Russia saw a net capital outflow of $84 billion (53 billion pounds) last year, while capital investment as a share of gross domestic product – at around 20 percent – is significantly below most other emerging markets.

The prime minister is talking tough. At a meeting with senior power-sector officials in December, he blasted managers for abusing their positions to line their own pockets.

Putin cited a government probe which showed that out of 352 state-appointed managers in the sector who were investigated, no fewer than 169 were involved in private businesses on the side.

“Unfortunately, the ones who are clean are the exception.”

“LOOK IN THE MIRROR”

“It’s more important to investigate obvious cases than to instigate a major ‘cover’ operation, pretending that we are looking for hidden beneficiaries,” he said.

“I would strongly advise Putin to look in the mirror. Because his own friends do major deals with major state-owned companies.”

Both Rotenberg and Gazprom have denied any violation of rules, insisting that all tenders were competitive.

But such cases reinforce concerns that many analysts have about Gazprom’s murky procurement practices and high costs.

“Gazprom has about $40 billion (25 billion pounds) in capital investment each year, two-thirds of which is not producing value,” said Anders Aslund, senior fellow at Washington’s Peterson Institute for International Economics and a former economic adviser to the Russian government.

“It costs three times as much to build a pipeline per kilometre in Russia as it does in Norway.”

LACK OF OVERSIGHT

To address such concerns, Putin ultimately needs to do more than replace sticky-fingered managers and impose tougher rules on the ones that remain.

Although in principle the government has committed itself to reducing the state’s economic role through privatisation, in practice the large state companies have grown under Putin’s government. The state’s share of stock market capitalisation has leapt from 24 percent in 2004 to some 50 percent today.

Until these issues are resolved, many Russians and foreign investors will be unconvinced by Putin’s latest initiatives.

(Reporting by Jason Bush; Editing by Douglas Busvine and Paul Taylor)

Russia cbank holds rates, signals steady hand

Jason Bush — Fri, 03 Feb 2012 09:33:59 +0000

MOSCOW, Feb 3 (Reuters) – Russia’s central bank held
interest rates on Friday
and signalled a steady hand in the months ahead as it weighs
risks to inflation and growth and as the country elects a new
president.

Although inflation has hit a post-Soviet low of 4.1 percent
on delays to increases in household utilities bills and a
stronger rouble, price pressures are expected to kick in from
mid-year, making it tough to meet the bank’s 6 percent target.

The economy is unlikely to sustain the pace of last year’s
4.3 percent expansion, with strong consumption offset by weak
manufacturing, and external risks from a possible flare-up in
the euro zone debt crisis weighing on policymakers’ minds.

“Given current internal and external macroeconomic trends,
the level of interest rates … is considered by the central
bank as acceptable for coming months,” the central bank said in
a statement.

The bank left the fixed one-day repo rate – which has become
an effective ceiling for the money market as banks contend with
tightening liquidity – at 6.25 percent, as expected. The largely
symbolic refinancing rate was held at 8 percent.

The one-day deposit rate, a de facto floor for the market
when liquidity is abundant, was left at 4 percent.

Prime Minister Vladimir Putin, front-runner to win the March
4 presidential election, has sought to boost the feelgood factor
among Russian voters by delaying annual increases in their
electricity and gas bills.489

But the increases will take effect from mid-year, making it
tough for policymakers in calibrating policy at a time of
heightened domestic political uncertainty and potential risks
that the euro zone crisis could escalate again.

Although Putin faces no credible rival, his is under
pressure from opposition protests demanding electoral reforms
and a cleanup of corruption in the Russian government. The next
big demo will be held on Saturday.

“You have a definitely positive inflation trend, but this is
related to the pre-election period and may reverse after the
elections – so this is definitely not a reason to cut interest
rates,” said Natalia Orlova, chief economist at Alfa Bank.

The rouble showed no immediate reaction to the
central bank’s decision, which had been widely priced in by the
market.

EASING IN THE PIPELINE?

The bank’s first deputy chairman, Alexei Ulyukayev, told
Reuters in the past week that current rates were appropriate, as
was the interest rate corridor of 225 basis points that the
central bank uses to guide its policy.

The central bank narrowed that corridor in 2011 as part of
its medium-term shift towards targeting inflation and reducing
the scale of its market interventions to manage the exchange
rate.

Economic growth is expected to slow to 3.5 percent this year
from 4.3 percent in 2011, according to a Reuters poll, and
economists now suggest the central bank should consider cutting
repo rates to avoid a liquidity crunch and support lending, one
of the main drivers of internal demand.

“This shift in the balance is premature. Global risks are
still aplenty and domestic political concerns, despite having
somewhat faded away, remain prominent,” commented Ivan
Tchakarov, chief economist at Renaissance Capital.

The central bank effectively eased policy last September, in
response to a deepening of the euro zone crisis that caused a
heavy sell-off on global financial markets, by cutting its
one-day repo rate.

But, in response to accelerating capital outflows that were
exacerbated by protests over the parliamentary election in
December, the central bank effectively conducted a ‘stealth’
tightening at the end of 2011.

Although it held its one-day repo rate at 5.25 percent on
Dec. 23, it restricted funds available at that rate, forcing
banks to borrow more expensively at the fixed-rate repo window.

A Reuters poll of 21 economists this week forecast
the central bank would cut the one-day fixed repo rate to 6.00
percent by the end of the first quarter, while a deeper cut
would pose risks to an ambitious target to hit the 6 percent
inflation target this year.

“From the middle of this year inflation will pick up because
of a low base effect resulting from last year’s good harvest,
and because of tariff hikes. So loosening policy substantially
here would not be the best thing to do,” said Alexandra
Evtifyeva, an analyst at VTB Capital.

The next interest rate meeting is scheduled for the first
half of March, the central bank said.

(Reporting by Andrey Ostroukh and Jason Bush, Editing by
Douglas Busvine and Susan Fenton)

For Putin, tax reform could be harder than winning

Jason Bush — Tue, 31 Jan 2012 13:27:31 +0000

MOSCOW (Reuters) – Winning Russia’s March presidential election could be the easy part for Prime Minister Vladimir Putin, who has called for a “decisive tax manoeuvre” to put the country’s increasingly oil-dependent public finances on a more sustainable footing.

Although Russia, the world’s largest energy producer, ran a fiscal surplus last year thanks to strong oil prices, the high and rising price at which the budget balances poses the real risk of a fiscal crisis in the next six-year presidential term.

“The Russian government needs to carry out a major budget consolidation over time,” said Odd Per Brekk, the International Monetary Fund’s resident representative in Russia. Without one, he warned, “Russia is much more exposed to an oil price shock.”

Since 2006, the volume of government expenditures has risen by an average of over 20 percent each year – double the rate of inflation. Their share of Russia’s gross domestic product has rocketed from 29 percent to 39 percent.

That now places Russia in the same league as relatively high-spending, high-tax European economies rather than low-tax emerging markets such as China and India.

The challenge for Putin, assuming he takes office in May as appears highly likely, will be to squeeze revenues out of an economy that is already stuttering under a mounting tax burden.

The so-called “tax manoeuvre,” aimed at reducing taxation on entrepreneurs by shifting it onto under-taxed sectors and activities, is one solution gaining favour among policy makers.

CRUSHING BURDEN

Putin stated the rationale for the tax manoeuvre in a 5,000-word newspaper article on Monday.

“We have reserves for increasing tax revenues in several directions: expensive property, consumption of luxury goods, alcohol, tobacco, the collection of rents in those sectors where it is currently low,” he wrote.

Putin has borrowed the idea from Business Russia, a lobby group for small and mid-sized businesses that backs selective tax hikes – on oil and gas extraction, tobacco and alcohol and property – to finance business tax cuts.

“In Russia, those taxes that hinder development are either very high or very uncompetitive, and those taxes that don’t hinder development are on the contrary very low,” Alexander Galushka, president of Business Russia, told Reuters.

Business Russia’s initiative reflects widespread discontent over high payroll taxes levied on employers to fund ballooning state outlays on pensions, healthcare and welfare benefits.

The government last year attempted to raise payroll taxes from 26 percent of employee salaries to 34 percent. Following a backlash from business, it scaled back the rate to 30 percent, but businesses complain that the tax is still crushingly high.

ROOM FOR MANOEUVRE

In contrast, some other taxes – such as the 13 percent flat-rate of income tax – are incongruously low.

Yet tax dodging remains a rampant problem, with around 40 percent of economic activity unreported to the taxman.

“If they set a higher rate for rich people, that will increase tax evasion,” said Evsey Gurvich, head of the Economic Expert Group, which advises the finance ministry.

Officials are focusing instead on consumption taxes that are harder to evade. According to Business Russia, were Russia to raise its low excise duties on tobacco and alcohol to the European average, the government could raise an extra $35 billion in tax yearly.

The taxman now takes only 51 roubles ($1.70) on a half-litre bottle of vodka and 9 roubles on a packet of 20 cigarettes.

Business Russia also backs higher taxes on Russia’s oil and gas sectors. “You’re simply taking away rent – unearned income – which is fair from the point of view of the economy, and politically and socially just,” argued Galushka.

Most analysts are sceptical over the potential to squeeze yet more tax out of the oil industry, where high taxes are widely blamed for curbing investment and stunting output growth.

But the case for upping the tax take from Gazprom, the state-controlled gas export monopoly, is more compelling.

Gurvich calculates that the gas sector’s share of value added paid as tax, around 35 percent, is less than half the 80 percent level paid by the oil sector.

Closing that gap would raise an additional 1.5 percent of GDP – around $25 billion dollars per annum – in tax.

The discrepancy is even more obvious when looking at the taxes paid by the metals and mining sector, where the average tax take represents around 25 percent of profits.

“Oil is overtaxed, metallurgy is undertaxed, and the gas sector is in the middle,” said Kingsmill Bond, chief strategist at Citigroup in Russia.

STIFF OPPOSITION

Russia may in practice have less wiggle-room than appears on paper.

Higher excise duties could backfire by hurting the pockets of ordinary Russians. They also face stiff opposition from the tobacco and alcohol lobbies, which argue that higher taxation would encourage counterfeit production.

Proposals to bring taxation of the gas and metals sectors closer into line with the oil sector would entail challenging even more powerful lobbies with good connections in government.

“There is substantial potential to increase taxation of the gas sector, but the political feasibility is not substantial,” said Gurvich.

When it comes to metals, he said “only a minor increase is politically realistic,” which would be “insignificant from the macroeconomic viewpoint.”

Nor would property taxes produce a bonanza. Russia’s slow-moving bureaucracy has struggled for years with the complicated preparations needed to register and value property holdings.

“It costs more to administer this tax than the tax collects. It collects very, very little,” said Galushka.

FISCAL CONDUNDRUM

A more basic problem is that simply shifting the tax burden will not address the root cause of Russia’s fiscal conundrum: ever-rising government spending.

“The government should focus primarily on raising the efficiency of public expenditure,” said Gurvich. “It concerns everything: public investment, public procurements, more focused social support, and pension reform.”

Without a convincing answer to such problems, businesses are wary about planning more than a couple of years ahead, said Alexei Shestoperov, a researcher at Moscow’s National Institute for System Studies of Entrepreneurship.

“The budget demands more and more resources and where are they going to come from? It’s hard to understand,” he said.

(Reporting by Jason Bush, Editing by Douglas Busvine)

Analysis: For Putin, tax reform could be harder than winning

Jason Bush — Tue, 31 Jan 2012 13:25:51 +0000

MOSCOW (Reuters) – Winning Russia’s March presidential election could be the easy part for Prime Minister Vladimir Putin, who has called for a “decisive tax maneuver” to put the country’s increasingly oil-dependent public finances on a more sustainable footing.

That now places Russia in the same league as relatively high-spending, high-tax European economies rather than low-tax emerging markets such as China and India.

The challenge for Putin, assuming he takes office in May as appears highly likely, will be to squeeze revenues out of an economy that is already stuttering under a mounting tax burden.

The so-called “tax maneuver,” aimed at reducing taxation on entrepreneurs by shifting it onto under-taxed sectors and activities, is one solution gaining favour among policy makers.

CRUSHING BURDEN

Putin stated the rationale for the tax maneuver in a 5,000-word newspaper article on Monday.

Business Russia’s initiative reflects widespread discontent over high payroll taxes levied on employers to fund ballooning state outlays on pensions, healthcare and welfare benefits.

ROOM FOR MANOEUVRE

In contrast, some other taxes – such as the 13 percent flat-rate of income tax – are incongruously low.

Yet tax dodging remains a rampant problem, with around 40 percent of economic activity unreported to the taxman.

“If they set a higher rate for rich people, that will increase tax evasion,” said Evsey Gurvich, head of the Economic Expert Group, which advises the finance ministry.

The taxman now takes only 51 roubles ($1.70) on a half-liter bottle of vodka and 9 roubles on a packet of 20 cigarettes.

Most analysts are skeptical over the potential to squeeze yet more tax out of the oil industry, where high taxes are widely blamed for curbing investment and stunting output growth.

But the case for upping the tax take from Gazprom, the state-controlled gas export monopoly, is more compelling.

Gurvich calculates that the gas sector’s share of value added paid as tax, around 35 percent, is less than half the 80 percent level paid by the oil sector.

Closing that gap would raise an additional 1.5 percent of GDP – around $25 billion dollars per annum – in tax.

The discrepancy is even more obvious when looking at the taxes paid by the metals and mining sector, where the average tax take represents around 25 percent of profits.

“Oil is overtaxed, metallurgy is undertaxed, and the gas sector is in the middle,” said Kingsmill Bond, chief strategist at Citigroup in Russia.

STIFF OPPOSITION

Russia may in practice have less wiggle-room than appears on paper.

Proposals to bring taxation of the gas and metals sectors closer into line with the oil sector would entail challenging even more powerful lobbies with good connections in government.

“There is substantial potential to increase taxation of the gas sector, but the political feasibility is not substantial,” said Gurvich.

When it comes to metals, he said “only a minor increase is politically realistic,” which would be “insignificant from the macroeconomic viewpoint.”

Nor would property taxes produce a bonanza. Russia’s slow-moving bureaucracy has struggled for years with the complicated preparations needed to register and value property holdings.

“It costs more to administer this tax than the tax collects. It collects very, very little,” said Galushka.

FISCAL CONDUNDRUM

A more basic problem is that simply shifting the tax burden will not address the root cause of Russia’s fiscal conundrum: ever-rising government spending.

“The budget demands more and more resources and where are they going to come from? It’s hard to understand,” he said.

(Reporting by Jason Bush, Editing by Douglas Busvine)

Putin is on a collision course with change

Jason Bush — Thu, 29 Dec 2011 15:05:03 +0000

By Jason Bush
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

For 12 years, Vladimir Putin has presided over a Potemkin democracy. And everyone, especially Putin himself, seemed strangely convinced that he could keep up the charade indefinitely. But in 2011, Russians’ patience with Potemkin politics unexpectedly snapped. In 2012, the big question will be how Putin responds.

The recent mass protests against election-rigging reflect a deep yearning for change. Young Russians, and the growing middle class, are especially disgusted with the absurd parody of politics and the system’s flagrant corruption. The fledgling movement is still too immature to prevent Putin winning presidential elections in March 2012, in which he will probably run as the only credible candidate. The more salient question is whether Russia’s strong man will be able to reinvent himself in response to society’s demands for democratic reform.

No one should hold their breath. The next government, which is expected to be headed by outgoing President Dmitry Medvedev, may well have a more reformist flavour. But it’s hard to believe that this reconfiguration of the same old “tandem” heralds any breakthroughs. The changes will be superficial and disappointing – just as they were after previous Russian elections.

Old autocrats seldom learn new tricks. And Putin has already wasted too many years, during which he could have built a modern political system. If anything, his methods of manipulation and control have become more crude and desperate. The Russian prime minister’s first, Pavlovian reaction to popular protests was to blame the West.

Faced with rising popular discontent, the Russian government will react not with outright repression, but with its usual tactics of legal chicanery, political manoeuvres and disinformation. But these Soviet-style methods are rapidly losing their power in the face of 21st Century technology. The rapidly-spreading internet has provided the opposition with a potent tool for bypassing the state’s smothering control of information.

Having exposed electoral fraud to such devastating effect, it will turn its attention to the corruption of the ruling elite. Putin’s third term will be punctuated by scandals that will create a vicious circle of mounting public anger, declining investor confidence, and stagnating economic growth. Only with Putin’s departure will real modernisation in Russia become possible.

Predictions: Breakingviews is publishing a series of articles over the holiday that look ahead to 2012. The pieces will be collected together in the annual ’Predictions Book’, produced in print and electronic form early in the New Year.

Russia withstands euro zone contagion but risks rising

Jason Bush — Tue, 13 Dec 2011 09:51:35 +0000

MOSCOW (Reuters) – While rising internal political risks in Russia have grabbed the spotlight, the most serious economic threats are external and a shock would complicate Prime Minister Vladimir Putin’s bid to return to the Kremlin.

Russia is showing economic resilience amid international financial turmoil, which it is better able to withstand than in the past. But contagion effects from the euro zone threaten an already shaky recovery through weakening exports and capital flight as banks cut exposure to Russia.

If the euro zone does not get its house in order and an economic slump leads to a sharp and sustained drop in oil prices, Russia will feel much more than a chill.

“Europe is extremely important for Russia,” said Vladimir Tikhomirov, chief economist at Otktitie Securities in Moscow.

“The consensus is that the euro zone will manage to muddle through. But the reality is that we’re being gradually dragged into a crisis that could become deeper and deeper.”

So far, Russia’s economy, which is expected to grow by around 4 percent in 2011, has shrugged off the euro-zone blues. But it has been helped by temporary factors, including a much-improved harvest and a boost in election-related expenditures.

Most economists anticipate slower growth next year. In its most recent economic forecast for Russia, the International Monetary Fund anticipates “subdued” growth of 3.5 percent, with “significant downside risks”.

Even a relatively modest downturn will be highly unwelcome to Putin’s government — now facing open public discontent driven in part by disappointment over living standards. A harder landing could be in store if the fragile situation in the euro zone deteriorates further.

The international uncertainty comes in the midst of a tense election cycle. Parliamentary elections on December 4 have provoked mass street protests against alleged electoral fraud, three months before an election in which Putin aims to return to the office of president.

Whatever the endgame, Russia can hardly ignore the fate of the euro. Out of its $514 billion (329 billion pounds) in forex reserves, 45 percent is invested in euro instruments, mostly sovereign debt.

The European Union also accounts for 50 percent of Russian exports, which would be hit in the event of a euro zone slump.

In the nightmare scenario — bank runs, sovereign defaults and even a break-up of the single currency — Russia would inevitably be caught up in the general panic.

“There would be a significant decline in sentiment and a massive flight to quality,” said Alexei Moisseev, head macroeconomist at VTB Capital in Moscow. “All investors, Russian included, will just sell the rouble and buy U.S. Treasuries.”

For now, most Russian analysts assume this nightmare can be avoided. “I don’t think there will be a major impact on Russia unless something catastrophic happens, such as a complete collapse of the financial system,” said Evgeny Gavrilenkov, chief economist at Troika Dialog in Moscow.

OIL HOLDS UP

Crucially, the oil price — now hovering close to $110 a barrel — has been holding up. Its resilience is a sign of Europe’s relatively minor role in influencing oil demand, which is driven by continuing rapid growth in Asia.

Members of the OPEC oil export cartel, many struggling with their own domestic discontent, now more than ever share Russia’s interest in keeping oil prices at historically high levels.

Nevertheless, a serious deterioration in the euro zone would ultimately have knock-on effects on demand in emerging markets.

“The crucial question for Russia is not the direct impact, but whether the European crisis becomes big enough to have an impact on China,” said Jacob Nell, chief economist at Morgan Stanley Russia.

While most analysts see a fall in the oil price as the primary risk, Russia also has other forms of contagion to fear.

In the last crisis, the cutting off of international funding for Russian banks and companies, many with short-term debts to repay, greatly exacerbated the severity of a slump in which the economy shrank by 8 percent in 2009.

OUTFLOWS ACCELERATE

The financial squeeze in the euro zone has caused an acceleration of already large net capital outflows from Russia — forecast to more than double this year to $85 billion.

Russian companies and banks, which borrowed an additional $48 billion from abroad in the first half of 2011, slashed external debt by $17 billion in the third quarter.

“The strongest sign I see of the European funding stress on the Russian economy is the fall in external debt. That’s a big number,” says Nell.

Analysts nevertheless see the risk of financial contagion as milder than in 2008-2009.

“Overall, both the corporate and financial sectors in Russia look stronger than they did three years ago,” said Alexander Morozov, chief economist for Russia at HSBC in Moscow.

Whereas in the previous credit crunch, a third of Russia’s private external debts had a maturity of less than one year, that figure today is around 10 percent. Russian banks, which had net foreign liabilities of $100 billion in 2008, have since become net international creditors to the tune of $45 billion.

Another reason for optimism is simply the fact that, compared with the huge swings in investor sentiment seen in previous crises, Russia has less room for deterioration.

“It’s hard to expect too negative a surprise because capital outflow — around $7 billion a month — is already very high,” says Natalia Orlova, chief economist at Russia’s Alfa Bank.

But that is rather cold comfort for a country already facing relatively low levels of investment and a long-run decline in economic growth, attributed by most analysts to problems such as legal uncertainty and high corruption.

Fix that, and Russia should attract capital seeking higher returns than those available in stagnant European economies, argues Sergei Guriev, rector of Moscow’s New Economic School.

“It’s the investment climate in Russia that is the problem rather than the European recession,” Guriev said.

(Reporting by Jason Bush; Editing by Catherine Evans)

Analysis: Russia withstands euro zone contagion but risks rising

Jason Bush — Mon, 12 Dec 2011 12:34:35 +0000

If the euro zone does not get its house in order and an economic slump leads to a sharp and sustained drop in oil prices, Russia will feel much more than a chill.

“Europe is extremely important for Russia,” said Vladimir Tikhomirov, chief economist at Otktitie Securities in Moscow.

“The consensus is that the euro zone will manage to muddle through. But the reality is that we’re being gradually dragged into a crisis that could become deeper and deeper.”

Whatever the endgame, Russia can hardly ignore the fate of the euro. Out of its $514 billion in forex reserves, 45 percent is invested in euro instruments, mostly sovereign debt.