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

How Don Trump Gave the Russian Economy a Leg Up

Brent-Crude

Buying Dollars No Way to Stop: Russian Finance Ministry Purchasing Foreign Currency at Record Pace in Aftermath of Putin’s Announcements
Alexander Pirozhkov
Delovoi Peterburg
May 10, 2018

As of today, the Russian Finance Ministry will be buying dollars at a record pace over the next four weeks. It will spend a total of ₽323 billion on these deals during the period. Since the start of the year, the Finance Ministry has spent nearly ₽3 billion on replenishing its foreign currency reserves. If we take into last year’s transactions, it has spent a total of ₽1.8 trillion.

High oil prices have made it possible to buy up foreign currency aggressively. This week, the price of Brent crude jumped above $76 a barrel, its highest price in three and a half years. Russian Urals crude, which is traded at a discount of several percentage points to Brent, exceeded $70 a barrel. The price rise has continued for several months, producing a huge surplus in the federal budget (₽344.35 billion in the first quarter of 2018), since budget revenues had been planned based on a Urals price of $40 a barrel. Thanks to favorable trends in extractive resources markets, both President Putin and Prime Minister Medvedev cheerfully announced earlier this week that finding an additional ₽8 trillion to implement the president’s so-called May decree would not be a problem.

In turn, oil prices have been conquering new heights not only due to the efforts of OPEC and the countries allied to it. Quoted prices for black gold flew up an additional five to seven dollars thanks to statements by US President Donald Trump, who has been trying to dissolve the nuclear deal with Iran while blaming OPEC for high oil prices on his Twitter acccount for appearance’s sake. The US’s exit from the nuclear deal means sanctions cancelled under the previous US leader, Barack Obama, would be reintroduced against Iran, thus removing from the market, according to various estimates, 500,000 to 700,000 barrels of Iranian oil a day.

While Trump has been bending over backwards to give the Russian economy a leg up, Putin has spoken of the need to “untie” it from the US dollar in order to boost economic sovereignty. Perhaps these are mere words, not backed by real intentions, especially since they are at odds with the Finance Ministry’s actions. However, Iran itself earlier took certain steps in the same direction as it faced the threat of renewed sanctions. There is a risk the example of our Middle Eastern neighbor will prove contagious.

Translated by the Russian Reader. Image courtesy of Business Eye

Opaque

Finance Ministry Deletes Info on Ministerial Salaries
Ivan Tkachov
RBC
December 31, 2017

Information on the salaries of federal ministers in 2016 has disappeared from the website of the Russian Finance Ministry. The information was deleted a day after RBC published the article “Finance Ministry Discloses Salaries of Ministers for First Time.” 

More than ten sets of publicly accessible information, including the number of employees and average monthly salaries at state ministries and agencies, the number of official vehicles, etc., was posted by the Finance Ministry on December 11. On December 27, RBC discovered the open data essentially disclosed the official average monthly salaries of the heads of federal ministries, except the Defense Ministry and the Interior Ministry, for 2016. Previously, information about the salaries of  ministers had not been disclosed.

On December 28, this information disappeared entirely from the Finance Ministry’s website without any explanation. As of December 31, it was still not listed in the ministry’s open data registry. Data on salaries at government ministries and agencies had earlier been located on this page, and information that this was the case has been saved in Google’s web cache.

Screenshot of Russian Finance Ministry website page that had previously listed the salaries of ministers. Now it reads, “Error 404: Page Not Found.”

The liaison officer at the IT Department for State and Municipal Finance Management and Budget Processs Informational Support has not responded to our request for information. The Finance Ministry’s press secretary also failed to respond to our request.

In the open data, now inaccessible, the Finance Ministry disclosed the average monthly salary of “employees holding public offices” at each of the federal ministries. Since only one person, the minister, occupies public office at each ministry, the data actually amounted to information about the salaries of ministers.

Accordingly, the finance minister was the highest paid minister in 2016, earning 1.729 million rubles a month [approx. 25,000 euros]. He was followed by the economic development minister, who earned 1.266 million rubles a month [approx. 18,000 euros] and the energy minister, who earned 1.155 million rubles a month [approx. 16,700 euros]. They earned from eleven to thirteen times more than the average staffer in their ministries. Twelve ministers listed their ministerial salaries as basically their only source of declared income, according to our calculations.

RBC has learned that publication of ministers’ salaries has provoked discontent in the ministries. Thus, a source in one ministry compared it with “sabotage.”

The information removed from public access had mostly been published on the Finance Ministry’s website in June 2017. The .pdf file contained information about the number of employees in federal ministries, the travel expenses of federal ministries and state agencies, and the number of official vehicles, but not the salaries of individual ministers, which was disclosed for the first time.

What Else the Finance Ministry’s Data Told Us
In 2016, Russian federal ministries and agencies owned or used a total of 47,000 vehicles. The average monthly cost of maintaining each vehicle was 27,000 rubles [approx. 390 euros].

The Prosecutor General’s Office (its central administration and regional offices) had the most vehicles: 4,269. The Federal Bailiff Service was in second place, with 4,209 vehicles, followed by the Federal Tax Service, with 4,030 vehicles. The Emergency Situations Ministry had approximately 3,500 vehicles at its disposal, while the Investigative Committee, Federal Customs Service, and the Federal Service for State Registration, Cadastre and Cartography (Rosreestr) each had approximately 3,000 vehicles in their motor pools.

In 2016, the Health Ministry, which had only 47 vehicles at its disposal, had the most expensive maintenance costs per vehicle: 341,000 rubles [approx. 4,900 euros]. The Russian Government’s maintenance cost per vehicle was 327,000 rubles. It had a motor pool of 270 vehicles.

Last year, the federal ministries and agencies spent almost 7 billion rubles on official travel [approx. 101 million euros]. The biggest spenders were the Federal Customs Service and the Federal Tax Service, which spent 742 million rubles and 712 million rubles, respectively. If we talk only about official foreign travel, the biggest spender was the Foreign Ministry: it spent 200 million rubles on travel abroad in 2016. It was followed by the Finance Ministry and the Economic Development Ministry, which spent 57.9 million rubles and 51.8 million rubles, respectively, on official trips abroad.

Translation and photo by the Russian Reader

Russian Government Refuses to Allocate 70 Billion Rubles to Combat HIV

Government Refuses to Allocate 70 Billion Rubles to Combat HIV
Polina Zvezdina
RBC
January 26, 2017

The Health Ministry has sent the government a plan for implementing the national strategy for preventing the human immunodeficiency virus (HIV) until 2020. RBC has a copy of the document, whose authenticity has been confirmed by a source close to the government, in its possession. The plan does not stipulate allocating additional funds for combating the infection. In the financial feasibility study appended to the draft plan, officials noted the agencies responsible for its implementation, as well as the regions, would have to finance the plan’s implementation.

Additional financing of the plan was stipulated in a earlier draft, also examined by RBC. In the draft, the Health Ministry had indicated additional monies from the budget, 17.5 billion rubles per annum, would be required to meet the strategy’s targets. There were plans to spend 13.2 billion rubles of this money on treatment, 3.2 billion rubles on diagnosis, and 1.1 billion rubles on treatment oversight. This funding should have made it possible for all HIV patients currently registered at AIDS centers to undergo special treatment and increase to 35% the share of the population tested annually for HIV. In 2015, 19.3% of the population was tested for HIV, while 37.3% of infected patients were provided with medical treatment.

It was the Finance Ministry that did not approve allocating the 70 billion rubles, judging by a ministry review sent to the Health Ministry on December 22, 2016. First Deputy Finance Minister Tatyana Nesterenko did not support the additional allocation, because these funds were not included in the approved federal budget for 2017–2019. In the review, the Finance Ministry argued that budgetary allocations for new spending could be contemplated only at the beginning of the fiscal year and provided that the government had additional revenues.

The government will continue its discussion of the draft plan for HIV prevention, said Denis Godlevsky, an expert at the HIV Assistance Foundation. There is a chance the Health Ministry will succeed in obtaining the full funding, he said.

"Percentages of HIV infected people in Russia. The percentage of people infected nationwide is 0.72%." In the original article, this map is interactive by region.
Percentages of HIV infected people in Russia by region. The percentage of people under the age of 60 infected nationwide is 0.72%. In the original article (go to the link at the top of the page), this map is interactive by region. The figures for Crimea and Sebastopol reflect the percentage of infected residents among all age groups. Infographic courtesy of RBC

Testing 35% of the population annually for HIV and providing 100% treatment for all registered patients were goals the Health Ministry hoped to achieve only if it received the “requisite” financing, as outlined in the HIV prevention strategy adopted by the government. If this money is not provided, the ministry proposes focusing on a different set of figures. Under the current healthcare budget, the number of people undergoing testing would increase to only 24%, while 56% of infected patients would receive treatment.

The Health Ministry has not responded to RBC’s questions as to which set of targets the ministry would follow when implementing the strategy.

If government agencies would use the funds already available effectively and rationally, the situation would begin to change for the better anyway, said Alexei Lakhov, deputy director for public relations at E.V.A., a noncommercial partnership.

“And when the situation changes for the better, a financial feasibility study can be done requesting additional appropriations,” Lakhov suggested.

The HIV prevention strategy was approved on October 20, 2016. It contained no information about funding.

Translated by the Russian Reader