The Russian Federal Budget forecasts for the next three years were released last week and contained funding allocations to allow the 34% “insurance contribution” rate to be lowered. As noted earlier on this site, this has been a very controversial issue with Finance Minister Kudrin fiercely resisting a lower rate because it would – in the absence of some other source of money for the government pension fund – result in higher transfers from the federal budget (and thus a higher deficit).

From 2012 the “insurance contribution” will reportedly be lowered to 30 % on payments of annual wages up to 512,000 rubles, and there will be a new levy of 10% on additional amounts (with concessions for small business).

Kudrin was not impressed with this result, and has also been unimpressed with some other ideas coming out of the Kremlin – such as presidential assistant Arkady Dvorkovich’s support for sales taxes at regional level. As I have already noted on this site, I tend to agree with Kudrin on the sales tax issue because there is already a consumption tax on such sales (in the form of VAT).

However, I am presently agnostic on the “insurance contribution” issue because I am somewhat confused about the data being thrown about on international comparisons and do not know if 34% is really very high in international terms.

“Business Russia”, a lobby group, has claimed in a presentation to Expert Group 6 that World Bank data (published in 2010) indicates that the rate of “insurance contribution” in other countries is much lower than Russia’s 34%. This organization claims that for Germany it is 22%, Switzerland 17.6%, Japan 14.7%, England 10.8%, and for the USA 10%.

However, “Vedomosti” last week carried an article which included this paragraph: “In 30 countries of OECD, the ‘real effective rate’ for employers in Russia of 25.4% is exceeded only in France with 29.7%, calculate the Ministry of Finance. However, if account for “insurance contributions” which are paid by workers themselves, then aggregate tax on earnings of individuals is higher than in Russia (35.1%) in 19 countries.” 

 “Business Russia”, has recognized that the individual part of 34% “insurance contribution” (ie 16 percentage points) is of an “insurance” character because it has a direct relationship to each individuals pension. It claims that the remainder (18 percentage points) is “tax”.

“Business Russia” is mainly concerned about the aggregate 34%, and the Ministry of Finance has produced a similar number (35.1%). However, I do not know if this is just a coincidence or whether they are basically using the methodology – and then selectively quoting examples! 

In any case, it is clear that the Russian Pension Fund remains in deficit, and that lowering the 34% rate will not help (this subject is being considered by Expert Group 3).

Also during the week the Federal Duma passed, on third reading, amendments to the law “On Personal Data”. To safeguard data companies and government agencies will need to act in accordance with demands by the FSB and the Federal Service on Export Control. Some experts, including those from IBM and Cisco, claim that this could cost the country 4-6% of GDP. The legislation still needs to be passed by Federal Council and signed into law by the President.

Expert Group 4, which is looking at “strengthening market institutions, securing stable conditions for ownership and development of competition, and stimulation of small business” has been considering the introduction of a new system of “smart regulation” based on “regulatory impact assessment” (so as occurs in many countries, including Australia).

I have sometimes doubted the necessity and usefulness of such assessments, but they may be much more effective in Russia than places such as Australia. Such amendments as discussed above, and with such potentially huge impact, should never have got through a third reading in the Duma without more thorough examination – possibly via a “regulatory impact assessment”.

Also, this week the Moscow Times very prominently carried an article by Nina Khrushcheva (grand-daughter of Nikita) who lives and teaches in the US. She wrote:

“In June, speaking at the St. Petersburg International Economic Forum, Medvedev mesmerized his audience by simultaneously sounding avant-garde and hackneyed. He attacked corruption, vowed that Russia is not, in fact, ‘building state capitalism’ and promised legal and federal reforms. Decisions, he said, should be left to business or made locally, not in the Kremlin. The St. Petersburg forum is mostly for international consumption. If Western bankers and investors want to buy snake oil, that is their business. But no one should leave such events thinking that anything Medvedev says means that Russia is changing.”

Nina might well point to the influence of the FSB on the amendments to the law “On Personal Data” as part of her evidence. However, if the cost is anything like 4-6% of GDP they are very unlikely to ever make into law.

I think that the evidence is that Russia is “changing” and that Medvedev is playing a very significant role in this.