Russian Union of Industrialists and Entrepreneurs

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-1tqb Performance 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

iuf.ru
Migrant Labor in Russia: From Golyanovo to the 2018 World Cup

On July 11, 2013, the Russian Federal Law “On the Preparation and Staging of the 2018 FIFA World Cup and 2017 FIFA Confederations Cup in the Russian Federation and the Amendment of Certain Russian Federal Legislative Acts” came into force without any uproar, something inadmissible in such delicate matters. (Hereafter referred to as FZ-108 for brevity’s sake, the full text of the law in the original Russian can be found here.)

While the name of the law might not sound too promising, its content opens up truly outstanding prospects for any Russian employer even tangentially connected with the 2018 World Cup. FZ-108 establishes special conditions for the employment of “foreign nationals and stateless persons” (i.e., migrant laborers) involved in the preparations and staging of the World Cup and Confederations Cup.

Article 9 Chapter 4 generously eliminates the need to obtain permits for the employment of migrant labor and notify the relevant authorities of the conclusion or termination of contracts with foreign workers, or of their arrival or departure. Nor are migrant workers themselves required to obtain work permits. Quotas for the issuance of visas and work permits are waived for those employers involved with the 2018 World Cup. Article 10 is even more interesting: it abolishes all regulation and control over the recruitment of foreign nationals and stateless persons as volunteers—that is, it practically and plainly permits employing migrants without remuneration. Article 11 exceeds all limits of generosity. It allows employers to set long working hours right in the contracts of all workers “employed in the preparation and staging of the events” (with no explanation of what that phrase means) and waives the requirements for the compensation of night work, the compensation of work on weekends and holidays, and the duration and compensation of overtime (as stipulated by Articles 154, 113, 153, and 152, respectively, of the Russian Federal Labor Code). The icing on the cake is Article 56 Chapter 14, which exempts all payments made to migrants under labor, civil, and volunteer contracts from obligatory social security and insurance deductions.

This simplified hiring procedure is a clear incentive for employers to employ foreign workers on the widest possible scale.

Here we should stop and ask ourselves to whom FZ-108 applies. The answer: any entity that is a “FIFA business partner.” By law, this means any legal or natural person in a contractual relationship with FIFA or its subsidiaries and involved in “events.” This might be a commercial partnership agreement or an agreement for provision of services, but in any case the provisions of the law apply to the subsidiaries and subcontractors of all these “business partners.”

Thus, the list of organizations with special rights vis-à-vis workers employed in preparing the “events” is very broad. We can safely include in this list the general contractors and subcontractors involved in building the stadiums, suppliers, FIFA sponsors (all thirty-four of them!), FIFA licensees (i.e., companies that have the right to use the World Cup logo on their products), firms providing security at the World Cup, and so on. Of course, all these companies have subsidiaries and contractors—personnel and temp agencies, construction and security companies, manufacturing facilities, cleaning and catering companies, firms involved in maintaining equipment and buildings, supplying brand-name goods, producing and placing ads, and so on and so forth. By the way, the recruiting agency Kelly Services is among the official suppliers of the 2014 Winter Olympics in Sochi. In light of the new law, we can easily imagine the consequences if this or any similar firm signs a contract with FIFA.

It is reasonable to assume the Russian authorities understand they will be unable to get ready for the World Cup employing only Russian citizens and are thus counting on migrant workers. Employers in construction, residential building maintenance, cleaning, retail, and other sectors where the skill requirements are low and cheap labor is the source of profits have long ago discovered this magic wand.

But we cannot help noticing that all these measures have been proposed and ratified by the same government that is literally right now organizing actual raids on migrants and imprisoning them in special camps in Moscow, Saint Petersburg, Yekaterinburg, Volgograd, Samara, Rostov-on-Don, and Kaliningrad. Does this mean that the right hand of the Russian state doesn’t know what the left hand is doing? Not in the least.

All the above-named cities are hosting the 2018 World Cup.

In accordance with FZ-108, any migrant worker needs to do just one thing to obtain legal status: become involved with the preparation and staging of the World Cup or Confederations Cup, that is, enter into an employment, civil or volunteer agreement with one of the organizers of the events, or with their contractors or subcontractors. Thus, for example, a migrant from Vietnam now being held at the camp in Golyanovo, after signing a contract with some subcontractor of a World Cup licensee manufacturing mascot dolls for the championship, will be legalized de jure. De facto, however, he or she will go back to another semi-underground workplace, but now no one will be able to exercise any oversight or supervision. Now the migrants who are liberated from slavery or buried after they burn to death in sweatshops locked from the outside will be absolutely legal. It’s a sleight of hand, as they say.

The anti-migration campaign of the authorities stokes openly racist attitudes in society, shifting public attention from societal and labor issues (which had recently come to the forefront) to the search for scapegoats. Meanwhile, there is no guarantee that the practice of stripping migrant workers who are employed in the preparations for the 2018 World Cup of their rights will not be extended to all foreign workers tomorrow, and incorporated in the Russian Federal Labor Code the day after tomorrow, thus fulfilling the most cherished dreams of the Russian Union of Industrialists and Entrepreneurs.

The fight against xenophobia, the persecution of migrants and the violation of their rights must, therefore, become one of the main issues on the agenda of the trade union and labor movement in Russia.

__________

The name Golyanovo had been linked with migration even earlier, however. In the photo we see the liberated “slaves of Golyanovo,” who had been held for years in the basement of a grocery store, and their saviors from non-governmental organizations. Despite the best efforts of human rights activists, the criminal case against the slave owners has fallen apart. Photo courtesy of the LiveJournal blog Living Tomorrow.

During a fire at a garment factory in Yegorievsk, fourteen migrants from Vietnam perished. They were locked in the factory and thus could not escape to safety. A year later, punishment for the perpetrators of this crime is still a distant prospect. Photo courtesy of 1.tv.ru.

Tag: Russian Union of Industrialists and Entrepreneurs

Soaking the Public to Make Russia a Powerhouse

Migrant Labor and the 2018 World Cup in Russia