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Putin in Search of New Revenue Streams 10/29 06:04
With Russia's invasion of Ukraine intensifying the strain on state finances,
President Vladimir Putin is reaching for cash to fund his government and the
war, squeezing tax revenue from an economy that's increasingly skewed toward
the military -- while civilian needs take a back seat.
(AP) -- With Russia's invasion of Ukraine intensifying the strain on state
finances, President Vladimir Putin is reaching for cash to fund his government
and the war, squeezing tax revenue from an economy that's increasingly skewed
toward the military -- while civilian needs take a back seat.
The country's 2027-2029 state budget, which will be taken up Thursday in the
rubber-stamp parliament, is accompanied by a string of tax hikes announced
after the September parliamentary elections.
While last year the Kremlin went for a broad tax increase, raising
value-added taxes at the cash register and making more small businesses pay
VAT, this cash grab hits a narrower segment: mining companies and better-off
citizens with investment income, property sales and bank accounts.
The budget deficit this year has swelled beyond forecast s due to lavish
military spending and tepid economic growth amid sanctions, high interest rates
for non-military companies, labor shortages and Ukrainian strikes on oil
refineries and export terminals.
The deficit hit 5.8 trillion rubles ($72 billion) through August, almost 50%
higher than last year's figure and above the already revised target of 4.8
trillion rubles, according to the Kyiv School of Economics.
New taxes will hit mining companies and bank interest
The government proposes a 20%-30% windfall profits tax on mining companies
that have benefited from prices that have risen since last year. That will hit
companies producing iron ore, nickel and gold. Another measure imposes higher
rates of 13% to 22% on income from interest, dividends and proceeds from
selling property. Such income is currently taxed at 13% for amounts under 2.4
million rubles ($29,800) and 15% above that.
Other proposals to take effect Jan. 1 include a 100-ruble per parcel charge
and 22% VAT on formerly tax-free foreign goods worth less than 200 euros that
are bought online. There's also a 35% tax on dividends paid into restricted
accounts for foreign investors from "unfriendly countries."
People asked about taxes and finances on the street in Moscow responded with
a mix of complaints and resignation. "They need money for state coffers, they
need to collect more from people, from ordinary people," said Denis Bystrov, 39.
"What can you do?" said Nelly Godunova, 92. "I've got four university
degrees, they were all free, you know? True, I've given plenty to this country.
But no matter... If you earned something, you've got to give back."
"Everyone knows perfectly well that the money's going for the military
operation, right?" said Sergei Sukachev, who gave his age as "almost 70." "I've
suffered a little as a businessman, to be honest, but I clearly understand,
it's best to hang on and to get our way."
Russia is not facing a financial crisis, but a long-term erosion of public
welfare
Russia has enough financing available to cover the deficit in 2027 and
probably 2028, says Chris Weafer, CEO of consultancy Macro-Advisory Ltd. "But
that is at the expense of raising taxes, of increasing costs for households as
well as business," he said.
"And it means that there is much less money available for normal economic
development or infrastructure. Basically, the budget is now moving to a phase
where it is primarily funding the military and the military operation."
"So the economy is now becoming very skewed," he said. "While there's still
modest positive growth, it is coming from the state spending into these ...
state-linked industries, whereas the rest of the economy is struggling badly or
even failing."
German company Russian subsidiary looted for a billion rubles
A subsidiary of German retailer Metro was seized under a law permitting the
temporary administration of firms from "unfriendly countries" and tapped for a
billion-ruble ($12 million) contribution to the war effort.
Metro AG headquarters in Germany said it had no role in the donation, which
"does not reflect our position or the way we run our business."
Metro Russia, no longer under the control of headquarters, said the
contribution to the "National Front - Everything for Victory" fund would buy
vehicles, communications devices and anti-drone equipment for soldiers in what
Russia calls its "special military operation" in Ukraine.
Weafer said Russia may be seizing control of foreign companies in
anticipation of a deal to secure Russian assets frozen abroad. But the forced
donation also raises the risk that the Finance Ministry may see foreign
companies as sources of windfall revenue.
Russia's limited sources of financing are being squeezed
Russia's economic numbers don't look that bad -- on the surface. The
government predicts growth this year of 0.6% of GDP, not great but not a
recession either. Unemployment is at a record low, and the government carries
very little debt. Earnings from oil exports have held up thanks to higher
global prices caused by the war in Iran. The revised deficit for this year will
come in around 3% of GDP, according to Finance Minister Anton Siluanov. That is
more than the 1.6% achieved last year, but smaller than in many other
countries. For instance, the US booked 5.8% of GDP last year. Russia is roughly
equal to the EU average of 3.1%.
But that isn't the whole story. Due to sanctions that forbid banks and
investors from dealing with Russia, the Kremlin can't tap international bond
markets. And Russia's domestic financial resources have already been
extensively drawn down.
One way is to borrow from Russian banks through bond sales. But that came
under stress this summer when banks balked at the low interest rate. Sales
resumed after the government offered better terms. The government has already
tapped the banking system by having banks fund the war with loans to defense
companies, shifting the true costs of the war off the federal budget and onto
the balance sheets of banks and state-controlled companies, according to the
Kyiv School of Economics.
Another pot is the National Wealth Fund, a reserve built up from oil and gas
export earnings. But the fund's liquid assets available for spending, such as
Chinese currency and gold, have dwindled to 1.7% of GDP.
The Kyiv School of Economics says that Russia's finances are stable -- for
the moment.
But "the room for maneuver is limited: an adverse shock such as a drop in
global energy prices or an erosion of confidence in the financial system could
quickly destabilize the fragile equilibrium."
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