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.
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.
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