GOVERNMENT OPTS TO PLUG BUDGET GAPS WITH PETRODOLLARS

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MOSCOW, (RIA Novosti analyst Raisa Zubova) - Russia's parliament has raised the rate of the tax on the extraction of natural resources (the extraction tax) and oil export duties. From January 1, 2005 the extraction tax will be increased from 347 to 400 roubles per metric ton of oil. The increased oil export duty will enter into effect earlier, on August 1, 2004. The oil export duty will be 45% when world oil prices stand at $20-$25 per barrel and 65% when they exceed $25 per barrel.

This is bad news for Russian oil companies, but hardly a surprise. There has long been talk about the need to raise the taxes levied on the oil sector and the theme became a focal point for public discussion during the December 2003 parliamentary and the March 2004 presidential elections. Indeed, during the former the Rodina (Homeland) election bloc energetically promoted the slogan that oil barons were appropriating natural rent (revenues from the sale of mineral resources) that should belong to the nation, and thus enjoyed unexpected and significant success at the polls. The bloc's share of the vote was so large that even Vladimir Putin and the United Russia pro-presidential party, which convincingly won the elections, could not ignore public opinion. Russians' dissatisfaction with the unfair distribution of nation's wealth turned into a factor of political life. During a live TV question and answer session with ordinary Russians on December 18, 2003, President Putin confirmed that the government would take more revenues from oil companies, but would do so carefully to avoid "killing the goose that lays the golden eggs."

According to Deputy Finance Minister Sergei Shatalov, the new amendments to tax legislation will bring in an additional $5 billion per year to the state coffers. The money will go directly to the budget's stabilisation fund, which was specifically created within the Russian treasury system to plug budget gaps in the event of world oil prices collapsing. As Shatalov has stressed, these taxes will not affect domestic prices. The measures will involve only "super-profits from oil production, i.e. revenues whose receipt depends on external factors rather than on the activity of oil companies." According to the calculations, after these measures are adopted, the government will take 96% of oil companies' surplus revenues.

Interestingly, the overwhelming majority of deputies, 395 out of 450, voted for the bill. The oil barons will have to make sacrifices both for the sake of social justice and the development of Russia's manufacturing industry. The government has explained that the planned reduction of the single social tax from the current 35.6% to 26% will result in a budget shortfall, which it intends to eliminate with the help of oil revenues. Deputy Prime Minister Alexander Zhukov calls the single social tax "the most harmful tax for production." The government expects that after the uniform social tax cut, energetic economic growth will spread from the raw materials sector to the manufacturing industry, thereby prompting companies to emerge from the shadow economy.

The long-suffering oil companies will also help the pension reform, within the framework of which the government has decided to replace some personal privileges with monetary compensations. Once again, the funds for these will be taken from the oil barons.

Judging by the first reactions, both politicians and the business community approve of the amendments to the tax legislation adopted by the deputies. During their meeting on the same day that the deputies raised the taxes, chairman of the Russian Chamber of Commerce and Industry Yevgeny Primakov only advised Prime Minister Mikhail Fradkov to deal with the extraction tax carefully. "The decision to raise the tax without any differentiated approach or any assessment of each well," he said, "will affect small and medium-sized business in the oil sector." Accordingly, Yevgeny Primakov urged the premier to make wider use of the export duty mechanism. At the same time, Mr Primakov also believes that the decision will benefit the manufacturing sector.

Meanwhile, State Duma speaker Boris Gryzlov noted the social aspect of the innovation by stressing, "the revenues from the development of natural resources must be distributed among all the country's citizens."

Rich oil companies that are the leaders of economic growth in Russia today largely due to the exceptionally favourable world market situation will hardly dare to object to the government and the parliament. Now that talk about poverty reduction measures and business's social responsibility can be heard everywhere, big business will have to think about its new role in the Russian economy and society in the early 21st century.

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