COMMENT: Russian budget thirsty for more taxes

By bne IntelliNews April 4, 2011

Alexandra Evtifyeva of VTB Capital -

Russia's Ministry of Finance is calling for RUB1.9 trillion ($61bn, 3% of GDP) of additional taxes in 2012-14 to meet the commitment to ramp up spending on various items, from reforming the MVD (Interior Ministry) to providing housing for veterans. As the government faces increasingly stringent budget constraints after five years of a progressively lax spending stance and 2012 is the presidential election year, the Ministry of Finance's bargaining position on tax hikes is stronger than ever.

Key sources are consumers, natural gas and monopolies. The main components of the tax proposal, as published by Vedomosti last Thursday, are radical hikes in the natural gas mineral extraction tax (MET), as well as the alcohol and tobacco excises, the abolition of the property tax break on pipelines, electric grids and railways, and the elimination of accelerated depreciation. Even though the exact distribution of incremental taxes between these groups will be determined through protracted horse trading (and will only unfold over the coming months), it is unlikely that any of them will be spared from having to shoulder a fair proportion of the extra tax burden.

Gas targets

From the top down perspective, the sheer magnitude of the tax "call" to be tabled by the MinFin is an indication of the mounting spending commitments in the face of the hard budget constraint of the structural fiscal deficit (the exact size of that deficit is open to a debate, as it depends on one's view of mid-cycle oil prices). Our economics team estimates the incremental permanent spending commitment/social tax cuts for small and medium-sized enterprises at RUB855bn over 2011-12 ($29bn, 2% of GDP). This obviously leaves the MinFin no option but to search for additional sources of revenue. Thus, it is safe to assume that the aforementioned headline number for additional tax revenues is unlikely to be reduced significantly.

The draft proposal gives a good idea about the dominant vectors along which the MinFin's wants to search for those additional revenues. Of the key initiatives, the most prominent are consumers (alcohol and tobacco excises), natural gas producers (a radical increase in the MET) and, to a lesser extent, natural monopolies (the staged abolition of the property tax breaks for pipelines, electric grids and railways; this, however, in some cases might eventually be passed into the regulated tariffs, but not in 2012).

We note that neither oil producers nor metals & mining companies are among the direct targets of this year's tax proposals. This strongly supports the view that the government thinks the tax take from oil and oil products is already excessive, while implementing an economically sensible scheme of progressive natural resource rent taxation for steels is fraught with difficulties.

From the practical perspective, we see Novatek and Gazprom as the stocks which are most directly exposed to downside risks from this year's tax initiatives, and to the greatest extent. Were these to be implemented in full, we would be looking at 12% and 7% downgrades to our current 2012-14 Ebitda projections for these companies. Otherwise, the scale of the proposed alcohol excise hikes (almost quadrupling over three years) creates a new dimension of uncertainty about the structure of the Russian spirits market (namely, the split between legitimate and counterfeit producers). That said, the ultimate impact on Synergy and CEDC might well be rather muted, as the higher tax take boosts the incentive for the government to strengthen the enforcement of anti-counterfeit measures. As for FSK, MRSKs, and Transneft, it is entirely possible that the removal of the property tax breaks will eventually be passed through into the regulated tariffs. That said, the tax uncertainty does not strengthen their investment cases in the meantime.

The policy debate on these tax proposals is likely to unfold in April-June and might well last through August (when the government is due to submit the 2012 budget to the Duma). Even though there could be bright spots on the newswires during these debates, we expect that the ultimate result will be downgrades to consensus 2012-14 earnings expectations relative to the current baseline. Stay tuned, but do not hope for a miracle, as Russia's fiscal balance does not allow for the latter.

Related Articles

Drum rolls in the great disappearing act of Russia's banks

Jason Corcoran in Moscow - Russian banks are disappearing at the fastest rate ever as the country's deepening recession makes it easier for the central bank to expose money laundering, dodgy lending ... more

Kremlin: No evidence in Olympic doping allegations against Russia

bne IntelliNews - The Kremlin supported by national sports authorities has brushed aside "groundless" allegations of a mass doping scam involving Russian athletes after the World Anti-Doping Agency ... more

PROFILE: Day of reckoning comes for eccentric owner of Russian bank Uralsib

Jason Corcoran in Moscow - Revelations and mysticism may have been the stock-in-trade of Nikolai Tsvetkov’s management style, but ultimately they didn’t help him to hold on to his ... more

Register here to continue reading this article and 2 more for free or 12 months full access inc. Magazine and Weekly Newspaper for just $119/year.

If you have already registered, enter the information below with the same email you used previously and you will be granted immediate access.

IntelliNews Pro subscribers click here

Thank you. Please complete your registration by confirming your email address. A confirmation email has been sent to the email address you provided.

Thank you for purchasing a bne IntelliNews subscription. We look forward to serving you as one of our paid subscribers. An email confirmation will be sent to the email address you have provided.

To continue viewing our content you need to complete the registration process.

Please look for an email that was sent to with the subject line "Confirmation bne IntelliNews access". This email will have instructions on how to complete registration process. Please check in your "Junk" folder in case this communication was misdirected in your email system.

If you have any questions please contact us at

Subscribe to bne IntelliNews website and magazine

Subscribe to bne IntelliNews website and monthly magazine, the leading source of business, economic and financial news and commentary in emerging markets.

Your subscription includes:
  • Full access to the bne content daily news and features on the website
  • Newsletters direct to your mailbox
  • Print and digital subscription to the monthly bne magazine
  • Digital subscription to the weekly bne newspaper

IntelliNews Pro subscribers click here

bne IntelliNews
$119 per year

All prices are in US dollars net of applicable taxes.

If you have any questions please contact us at

Register for free to read bne IntelliNews Magazine. You'll receive a free digital subscription.

If you have already registered, enter the information below with the same email you used previously and you will be granted immediate access.

Thank you. Please complete your registration by confirming your email address. The confirmation email has been sent to the email address you provided.

IntelliNews Pro offers daily news updates delivered to your inbox and in-depth data reports.
Get the emerging markets newswire that financial professionals trust.

"No day starts for my team without IntelliNews Pro" — UBS

Thank-you for requesting an IntelliNews Pro trial. Our team will be in contact with you shortly.