Soaking the Public to Make Russia a Powerhouse

Russian Authorities Could Raise the VAT to 20%
Giving Them Two Trillion Rubles to Execute Putin’s May Decree
Yelizaveta Bazanova and Filipp Sterkin
Vedomosti
May 27, 2018

Prime Minister Dmitry Medvedev has promised to find the eight trillion rubles [approx. €110 billion] the government lacks to carry out Putin’s new May decree. We have learned the government and the Kremlin will go looking for a considerable portion of this sum in the public’s pockets. Approximately two trillion rubles could be collected over six years by raising the VAT from 18% to 20%. Our sources, three federal officials, said this option had been discussed and was one of the most likely options, although a final decision had not been made. However, one of our sources said the Finance Ministry had proposed abolishing the 10% preferential VAT rate and replacing it with an allowance.

Another two trillion rubles or so would be supplied by an increase in the retirement age, which Medvedev had announced, said two of our sources, without specifying how quickly it would be increased and by how much.

The final four trillion rubles would be provided by measures that have already been made public. The state would raise three trillion rubles for infrastructure projects by floating fixed and variable federal bonds, and establishing a temporary fund within the budget. The remaining one trillion rubles would be supplied by reforming taxation of the oil industry, nullifying export duties and raising the severance tax to offset them.

However, some of the decisions could still be revised, our sources said. As one of them noted, everything was in a state of rapid, constant flux.

Who Will Pay the VAT Increase?
Officials have long discussed an increase in the VAT, but as part of an overall taxation maneuver, as proposed by the Finance Ministry, that would have involved reducing pension deductions while raising the VAT to a flat rate of 22%. The Finance Ministry’s idea was to sanitize the economy and pump an additional 500 billion rubles into the budget. The idea was rejected, but several officials said it had proven impossible to find the money to carry out the May decree without raising taxes. Increasing the VAT without reducing pension deductions was a common trick, said a member of the board of the Russian Union of Industrialists and Entrepreneurs (RSPP).

The VAT was pegged at 20% until 2004, when it dropped to 18%. Returning it to 20% would be a less painful solution than the other options on the table—increasing the personal income tax rate and introducing a sales tax—argued two officials. Although, as one of them noted, if the state wanted to stimulate economic growth, it should not rob it of resources.

By increasing the VAT, the state would be primarily confiscating resources from the general public, which has experienced a four-year-long slide in incomes, while businesses would be able to compensate a considerable portion of their costs by embedding them in prices and thus passing them on to consumers.

As research by the UK’s statistical service has shown, companies raise prices ahead of time when an increase in the VAT is expected. Natalia Orlova, chief economist at Alfa Bank, has calculated that a two-percent increase in the VAT would accelerate a rise in prices of 0.8% to 1%, which would not be terrible during a period of low inflation. (In April, inflation was 2.4% in annual terms.) But along with abolishing the preferential rate, raising the VAT could deal a serious blow to the general public and have a knock-on effect on consumption, warned Alexandra Suslina at the Economic Expert Group. The preferential rate is currently valid for food products (except luxury items), children’s goods, books, textbooks, and medicines. In 2017, the preferential rate deprived the federal budget of an additional 550 billion rubles or about 0.6% of GDP.

According to a study by Alexander Isakov, chief economist at VTB Capital, when prices suddenly rise, people are less inclined to skimp on food, alcohol, and transportation. A one-percent increase in prices leads, most of all, to decreased spending on communications and medical care.

Business would pass on costs to domestic consumers, but the VAT for exports is zero percent, said the RSPP board member. There would also be victims, however. A tax increase would hit sectors where competition is intense the hardest, warned Vladimir Salnikov, deputy director of the Center for Macroeconomic Analysis and Short-Term Forecasting (TsMAKP). This was borne out by an IMF study performed in the wake of an increase in the VAT in Germany in 2007.  When competition is intense, companies find it harder to retain their market share after price rises. Retailers, who have already slashed their profit margin amid weak consumer demand, would suffer, said a tax consultant at a major retailer. Salnikov warned the structural effect would be bad, increasing the burden on manufacturing industries, not on raw materials exporters.

Most of all, it would increase the burden on the machine-building and transportation sectors (by 6.8% and 6.6%, respectively), the electricity sector (by 6.8%), construction (by 5.6%), the information sector (by 5.4%), and the hotel business (by 4.4%), according to Salnikov’s calculations. On the other hand, it would decrease the burden on chemicals manufacturing, wood processing, and agriculture.

Officials have little time to decide who will pay for Putin’s May decree. The cabinet has drafted proposals for the tax system, and final decisions would have to be made during the State Duma’s spring session, Anton Siluanov, appointed first deputy prime minister and finance minister, said earlier. Currently, no decisions had been made, his adviser Andrei Lavrov confirmed, but in the near future the government would be deciding on measures for adjusting the tax system. Natalya Timakova, the prime minister’s spokesperson, would not comment on the subject, while Dmitry Peskov, the president’s press secretary, was unavailable for comment on Sunday.

fullscreen-1tqbPerformance of actual pensions and wages vis-à-vis the same period during the previous year. Red line=actual amount of allocated pensions; blue line=actual paid wages; *=lump-sum payments taken into account. Source: Rosstat. Courtesy of Vedomosti

Working for the Decree
Saving two trillion rubles over six years would mean raising the retirement age by at least one year annually for both women and men, noted Yuri Gorlin, deputy director of RANEPA’s Institute for Social Analysis and Forecasting. This would make it possible decrease transfers from the federal budget by two trillion rubles, agreed Tatyana Omelchuk, senior researcher at the Finance Ministry’s Financial Research Institute (NIFI). This option for increasing the pension age was tabled by the Center for Strategic Research when it was headed by Alexei Kudrin, who has now been tapped to chair the Accounting Chamber. Annually, around 40% of the Pension Fund’s income is provided by the federal budget. In 2018, 3.34 trillion rubles will be transferred from the budget to the Pension Fund.

The pension age should be raised not only to save two trillion rubles for executing Putin’s decree but also to generate resources for increasing pensions at the same rate as salary increases, said an official. There was the danger the government would try to minimize the transfer as much as possible, and then there could not be enough money to step up the indexing of pensions, Gorlin noted.

Options for raising the pension age were discussed even before Tatyana Golikova was appointed deputy prime minister for social issues. In an interview with RBC, she said the government had only discussed the decision. The final parameters had not been agreed. Her spokesperson declined to comment.

Gorlin said the main goal of raising the retirement age was to ensure a more acceptable increase in pensions. An excessively radical approach to the problem would significantly increase the danger of unemployment’s rising, while also spurring the demand for disability pensions, he argued. Referring to the findings of a sociological survey, experts at the Higher School of Economics have claimed the most acceptable option for raising the retirement age would be sixty years for women and up to sixty-three years for men. Gorlin argued the most rational option would be between sixty-two and sixty-three years for men, and between fifty-nineand sixty-one years for women.

Translated by the Russian Reader

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“You, Grandpa, are still not old. / You’ll live without indexation. / It’s not the same for our friend Assad / Who can’t live sans our aviation.” Courtesy of Ivan Ovsyannikov and the Russian Socialist Movement (RSD)

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State Duma Rejects Indexation for Working Pensioners
October 9, 2015
Lenta.Ru

Photo: Alexander Kozhokhin/RIA Novosti

The pensions of working pensioners will not be indexed for inflation. Olga Batalina, head of the State Duma’s Committee on Labor, Social Policy and Veterans Affairs, made the announcement on Twitter.

batalina
“Despite the Finance Ministry’s ideas, the pension will be preserved for all working pensioners, but will not be indexed [while they are still working]. You quit work, indexation kicks in again.”

She noted that all working pensioners would continue to receive payments, but the payments would not be raised while they are employed.

“You quit work, indexation kicks in again,” added Batalina.

Earlier, on October 9, she announced that the government had to decided index pensions twice in 2016. Batalina explained this would be done so that pensions would increase to the level of inflation for 2015.

On October 8, however, Deputy Prime Minister Igor Shuvalov noted that the possibility of a second indexation next year would depend on the Russian economy’s growth.

On the same day, the government approved the draft budget for 2016. It is expected that revenues will reach 13.58 trillion rubles, expenditures, 15.76 trillion. The deficit is projected at 2.8 percent of GDP (2.18 trillion rubles).

A part of the treasury’s expenditures will be covered by a freeze on pension savings. Another cost-saving measure is reducing the indexation of pensions (to 4 percent at an expected inflation rate of 12 percent). Moreover, the idea of terminating pension payments to working pensioners was considered.

Translated by the Russian Reader

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Balancing Russia’s Budget Could Cost Pensioners $46 Billion
Anastasia Bazenkova
June 24, 2015
The Moscow Times

Russia’s roughly 40 million pensioners receive on average 12,900 rubles ($240) in state pension payouts. Photo: Denis Abramov/Vedomosti

Russia’s economic crisis is forcing the government to consider sweeping savings on pension payouts, a move that could go down badly with a core part of President Vladimir Putin’s electorate.

The Finance Ministry this week floated a proposal to save more than 2.5 trillion rubles ($46 billion) over three years by raising pensions at less than the rate of inflation.

The measure comes as the ministry struggles to slash spending amid an economic recession that is eroding budget revenues.

A steep devaluation of the ruble has meant that prices have grown much faster over the past year than salaries, and since payroll taxes are the main source of income for the pension system, the Finance Ministry has said continuation of inflation-linked pensions could threaten the country’s state-run pension fund.

In May, average nominal incomes were 7.3 percent higher than in May 2014, while prices were on average 15.8 percent higher, according to the Rosstat state statistics service.

“If the income of the fund continues to grow slower than its payouts, it could break the entire pension system,” the Vedomosti newspaper quoted Deputy Finance Minister Maxim Oreshkin as saying last month.

The government is already subsidizing a 3.3 trillion ruble ($60 billion) hole in the pension fund, said Pavel Kudyukin, an associate professor at Moscow’s Higher School of Economics.

“This is no longer affordable for the state,” he said.

Pre-Crisis Thinking

According to documents for a government meeting on Monday obtained by news agency RBC this week, the Finance Ministry has drawn up plans to curb planned pensions increases from 7 percent to 5.5 percent in 2016; from 6.3 percent to 4.5 percent in 2017 and from 5.1 percent to 4 percent in 2018.

That means that payments will be increased not in the line with the actual inflation, which is expected to fall back into single digits early next year, but according to inflation forecasts made in early 2014, before Western sanctions over the Ukraine crisis and a sharp decline in global oil prices pushed Russia’s economy into recession. Russian GDP is expected to shrink by around 3 percent this year.

These changes, together with cuts to some other undisclosed social spending items, would save around 2.5 trillion rubles over 2016-2018, RBC reported, citing the Finance Ministry documents.

The government has said no decision has yet been taken.

The changes may require changes to legislation, which requires that Russian pensions are indexed twice a year in line with inflation.

Political Consequences?
Spending on pensions has risen rapidly in recent years as President Putin has sought to use booming oil revenues to raise living standards of pensioners and low-paid state employees.

Pensions were raised even in 2009, during Russia’s last economic crisis, Kudyukin said.

Russia’s roughly 40 million pensioners receive on average 12,900 rubles ($240) in state pension payouts, according to the data from Russia’s pension fund.

The Finance Ministry’s proposal to abandon the link between pensions and inflation aroused sharp criticism from other ministries.

Maxim Topilin, the labor minister, demanded that money be found for the indexation of pensions for next year and the following years and for an analysis of the effectiveness of spending, news agency RIA Novosti reported Tuesday.

Analysts polled by the Moscow Times doubted that the measure would be implemented, as pensioners provide a bedrock of support for President Putin ahead of planned elections in 2018.

“Pensioners are the current government’s main electoral support,”said Pavel Salin, head of the political science center at the Financial University. “The authorities will not reduce pension payments on the eve of the election period.”

Unwillingness to alienate voters is why another Finance Ministry proposal, to cut government expenses by increasing the retirement age of civil servants from 60 to 65 years, has little chance of approval, analysts said.

Hiking the retirement age has been on the agenda for several years — the idea has been repeatedly promoted by former Finance Minister Alexei Kudrin — but has never gained traction.

But even if the Finance Ministry succeeds in making savings on pensions, any discontent would not lead to dramatic political consequences, experts said.

The move could cost Putin a few percentage points off his rating, but not dozens, Salin said.

Putin could afford that — the president’s approval rating is at a record high of 89 percent, according to a poll by the Levada Center released Wednesday.

Given the political apathy of Russians and a surge in patriotic feeling that followed Moscow’s annexation of Crimea from last year, people will bear less generous pensions, Kudyukin said.

“The question is, for how long will they bear them?” he added.

Ivan Ovsyannikov: Russia’s Welfare Chainsaw Massacre

Russian President Dmitry Medvedev holds

Welfare Chainsaw Massacre
Ivan Ovsyannikov (Russian Socialist Movement)
September 30, 2013
anticapitalist.ru

A “welfare chainsaw massacre” is exactly what we might call the government’s actions and statements over the last few months. The ruling class is once again attempting to pay for the latest uptick in the economic crisis from out of the pockets of workers.

On September 1, while speaking to students at the Far East Federal University, Putin announced the transition to a policy of austerity and reduced social spending. “The world economy has slumped a bit, and ours is hunkering down behind it,” the president said in his typical manner by way of explaining the upcoming unpopular measures. And he supported an earlier proposal, voiced by Minister of Finance Anton Siluanov, to replace the “maternity capital” program with “targeted assistance to poor families.”

However, a few days later, Dmitry Medvedev said that the maternity capital program would not be cancelled. “But it will be modified,” Minister of Labor and Social Affairs Maxim Topilin added in a whisper.

The fact that public opinion has been probed on such a sensitive point is quite significant. The maternity capital program is almost the only widely publicized social achievement of the Putin era. Putin has repeatedly stated it was his idea. And now this essential element of Putin’s social populism has been openly questioned.

No less provocative looking are the experiment with introducing social norms for electricity consumption (see Andrei Zavodskoi, “Cruel Economy”) and the de facto raising of the retirement age, which has long been discussed and is today closer than ever to realization. According to Deputy Primer Minister Olga Golodets, “We are not discussing raising the [retirement] age for any category of workers. We’ve gone another direction by promoting voluntary postponement of retirement. That is our principled position, and the government’s position.” However, such tricks are unlikely to mislead anyone.

The most scandalous revelations, however, are the statements made by government officials concerning labor relations. If, until recently, Mr. Topilin based his ministry’s decision not to index Russia’s penny-ante unemployment benefits on the fact that “at present there remains a high probability of finding employment in the labor market,” Mr. Medvedev has now said the exact opposite. He argues it is time to get away from the policy of preserving employment at all costs and not be afraid of cutting inefficient jobs: “The times all of us now face are not the easiest. […] Some people—perhaps a significant portion of the population—will have to change not only their jobs but also their professions and place of residence.” There is no doubt we have fallen on hard times, but the Prime Minister is clearly disingenuous when he talks about “all of us.” Russia’s ruling elite has no intention of depriving itself of jobs and handsome profits. So, in a conversation with François Fillon, Mr. Putin elegantly hinted that he would “not exclude” the possibility of seeking a fourth term as president.

But has the Russian economy “hunkered down” badly enough to warrant such painful experiments on the population? Isn’t “stagnation” only a plausible excuse for implementing the longstanding plans of the gentlemen from the Russian Union of Industrialists and Entrepreneurs?

As was reported in late August, the Ministry of Finance planned to save 1.1 trillion rubles [approx. 25 billion euros] over three years by eliminating the maternal capital program and reducing expenditures on pensions. At the same time, federal and regional budget expenditures on preparations for the 2018 World Cup should amount to 438 billion rubles, that is, almost half a trillion. The mass protests and riots in Brazil, sparked by excessive government spending on the 2014 World Cup, are still fresh in everyone’s minds. Russians could learn a lesson or two from Brazilians.

But maybe massive sports venue construction projects will generate many new jobs and return the taxpayer money spent on them? No, they will not. Unlike the great construction projects of the Soviet era, when funds were invested primarily in developing production, Olympiads, Universiades, and World Cups are, by definition, loss makers for national governments. Many analysts trace the current economic disaster in Greece to the 2004 Summer Olympics, which enriched transnational corporations while depleting public finances. The London Olympics have also been declared unprofitable. As for the 2014 Sochi Winter Olympics, its unprofitability has been recognized by nearly all serious experts, including Vnesheconombank chair Vladimir Dmitriev, who said in an interview with Vedomosti newspaper that “a serious percentage of [Olympics-related construction] projects are calculated to make a loss.” According to Dmitriev, “Given the current model and market trends, there are big problems with returns on investments. For example, one million square meters of hotel space are being built in the Imereti Lowland. When this space goes onto the market after the Olympics, a sixty percent occupancy rate will be hard to achieve. The costs of many projects have seriously risen as they have been implemented. […] For many sites, there is no complete project documentation or confirmed cost estimates. All this confirms our doubts.”

As for jobs, they really will be generated—for thousands of migrant workers. Federal Law No. FZ-108, adopted specifically for the World Cup, leaves no doubt about that. First, the law establishes special lightweight entry requirements for foreign workers involved in preparations for the World Cup. Second, it limits the applicability of a number of existing labor laws, effectively legalizing slavery. As the Confederation of Labor of Russia (KTR) declared in their statement on the subject, “The potential for runaway importation and recruitment of cheap labor, undermining the national labor market, and leading to a decrease in wages and legal guarantees in the area of labor relations, and an increase in the level of unemployment among the population, has been legally enshrined in the Russian Federation.”

The government could not care less about the fortunes of workers during the crisis, and it does almost nothing to hide it. How else can we account (to cite just one example) for Mr. Topilin’s proposal to deny free health care to all informally employed and unemployed people not registered with an employment bureau?

In light of the foregoing, the Kremlin’s actions aimed at reconciliation with the liberal opposition also become intelligible, as do unexpected initiatives to put the “against all” option back on voting ballots. The authorities fear that public discontent will grow and want to channel it in a direction that presents no danger to the ruling elite. Whether this political maneuver succeeds depends in part on the willingness of leftist political forces and trade unions to win over public opinion and make the fight against austerity measures as much of a mobilizing factor as it has been in Greece, Spain, and other countries facing the consequences of the capitalist system’s crisis.

Translated by the Russian Reader. Photo courtesy of deviantart.net