Russian Economic Reform


Medvedev pushes things along!

Published on June 27 2011
Posted by: jeff

President Medvedev’s speech to the St. Petersburg Economic Forum just over a week ago clearly ruffled a few bureaucratic feathers. Contrary to what some people seem to think, he is not just making pretty speeches.

His comments about widening the boundaries of Moscow were “impromptu”, according to some officials quoted by “Vedomosti”, with little yet decided as to “how and in what direction”.

Medvevdev also arguably jumped the gun on an even tougher task. He said that he would “soon set up a special high-level working group to draft proposals on decentralising powers between the different levels of power, above all in favour of the municipal authorities. This will include proposed adjustments to the tax system and principles for relations between the budgets at the different levels.”

This issue is already causing public disagreements. The regions and municipalities have very few powers to directly levy tax. Medvedev’s assistant on economic issues, Arkady Dvorkovich, says that he is in favor of giving the regions (and possibly municipalities) power to impose a sales taxes. One of the reports prepared for Expert Group 12 calls such proposals “radical”, but also concedes that there are not many other options for significantly increasing tax revenues at the lower levels of government.

Sales taxes were removed in 2004 and Finance Minister Alexi Kudrin makes it clear that he oppose a re-introduction – saying that Russia cannot have “VAT and sales tax together”. In my view Kudrin has a good point because having two taxes “on consumption” would seem to be administratively cumbersome and unnecessary.  

Kudrin says it may be possible to transfer to the regions some excise and taxes on profits. However, he seems to prefer a new regional “quasi-tax” – without specifying, as far as I know, what this might be!

As I note in my “post” on “Russia’s Vertical Fiscal Imbalance”, it is very unlikely that Russia will find a really satisfactory solution to this issue of few regional and municipal taxing possibilities.

Medvedev’s comments about privatization also caused some gritting of teeth. According to “Vedomosti”, one “top manager” of a “natural resources” company (presumably one that is slated for privatization), said that officials really need to decide what they want. Do they just want to get big companies out of the state sector and not think too much about selling prices (as in the 1990s); or do they want to get good prices for these assets, in which case they should wait for appropriate market conditions and not try to sell everything at once (at least 5 years may be needed, according to this view). Medvedev, he said, is talking about both aims at once.

I think it is clear that Medvedev is actively pushing along his reform agenda with a sense of urgency, and is being quite insistent.

His push to reduce the compulsory 34% “insurance contribution” (combination of pension contribution, unemployment and medical insurance) on payrolls is another case in point. Medvedev is, in my view, undoubtedly right in saying that this rate is too high. But reducing it would mean less money flowing into the national pension fund unless it was to be compensated with funds from the Federal budget – and, not unexpectedly, Kudrin is strongly opposed to this. Numerous meetings at the inter-departmental level and between ministry officials and the Kremlin have failed to resolve the issue, but Medvedev is insisting on a reduction – and he is likely to prevail.

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