It is now some months since President Medvedev directed that some way be found to lower the 34% “insurance contribution” on wages up to the threshold – in 2011 – of 463,000 rubles per year.
How to achieve this has turned into a protracted dispute between ministers and officials from the ministries of “Health and Social Development”, “Economic Development” and “Finance”. The latter has finally gained the support of Deputy Premier Igor Shuvalov and Vladimir Putin for its variant, and a report has been prepared for Medvedev.
The Ministry of Finance, under Alexi Kudrin, suggested a new scale with the general rate being lowered from 34% to 30%, and with the introduction of a new 10% rate for wage payments about the threshold limit (which will rise to 512,000 in 2012 because of indexation for inflation associated wages growth). “Small business” will get a “discount”, in the form of a general scale of 20%, and a 7% rate above the threshold.
The Ministry of Economic Development had opposed the addition contribution and wanted this amount to be compensated from the Federal Budget. The Ministry of Health and Social Development had opposed the additional contribution by small business, but not for medium and large business.
The president’s assistant for economic issues, Arkady Dvorkovich, has reportedly “promised to fight to the bitter end” against the Ministry of Finance idea of the additional contributions of 10% and 7%. (He earlier had accepted, it was reported, the idea of an additional 5% contribution as part of a variant that included compensating the Pension Fund from, among other ways, privatization receipts.)
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Published on July 31 2011
Expert Group 15 has prepared a very good interim report on “Managing government property and privatization” which will be included in a interim consolidated report by all the Groups to be discussed by the Government in August.
The Group 15 interim report only appeared on the “2020Strategy.ru” internet site on 26 July, but parts of it were reported in “Vedomosti” on 25 July. On 26 July “Vedemosti” reported that First Deputy Premier Igor Shuvalov had already sent a report to President Medvedev with suggestions for widening the privatization program in the period to 2017. Medvedev has been pressuring the government (headed by Putin) to quicken the privatization process (and had set a deadline of 1 August for new proposals).
It could be that the advisory work of Group 15 has struggled to keep up with the government decision making process and that the early appearance of its interim report in the media was an effort to compensate for this. However, the 27 page report of this Group is generally in sync with what has been reported about the Shuvalov report (which is, in any case, probably much shorter), and with its considerable detail can be seen as a “how-to-do” as well as “what-to-do” document.
Shuvalov’s report seems to contain few surprises.
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Published on July 31 2011
President Medvedev has expressed his indignation about the hidden ownership structure of Domodedova Airport which handled 2.3 million passengers in 2010, and which is supposedly valued at around $5 bn. Even after the January terrorist attack which killed 37 people, the “management” of the airport have refused to divulge the ultimate owners.
What should the Russian authorities do about this?
Aside from doing nothing, one option is to resume state ownership (ie nationalization). But, there are probably some more appropriate steps between these two extremes that could be taken.
Some issues to consider are:
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Published on July 24 2011
Expert Group 2, which is concerned with “Budgetary and monetary policy and macro-economic parameters for developing the Russian economy”, has been one of the least active of the 21 Groups. Budgetary and monetary policy can be quite technical issues and it is essential to get these right, but Group 2 might also consider helping the Ministry of Finance understand the PR side of macro-economic policy – after all, isn’t the idea of managing “inflationary expectations” really based on a PR stunt?
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Published on July 23 2011
President Medvedev is trying to give further privatization a hurry-up, but perhaps he should ease up a little.
In 1992, after my second visit to Russia as Chief Economist of HSBC (Australia) I wrote about the reform plans then contemplated: “The pace of privatization is unachievable because of the lack of an existing market and institutional framework to support it. … The other danger with rapid privatization of larger enterprises is that its lack of control may deliver many state assets into the hands of only a few groups who will then exercise monopoly powers and control over the economy.” (See left hand-side of page for full article.)
The institutional framework is obviously now much better, but possible impediments to competition enhancing transactions which give the state a decent price remain. Moreover, some of the suggested sales in the “natural monopoly” area are possibly counter-productive.
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Published on July 18 2011
Group 19 says that the “most capital-intensive and socially-conflicted issues of Russian federal transport policy are in the areas of railways and roads”. It makes a number of suggestions including: very significant increases in taxes related to road transport and the possibility of a Dutch-style GPS based road tax system; better management of road building contracts; and possible introduction to Russian Railways of a freer “wholesale market” system.
Jeff says that ….
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Published on July 17 2011
The basic idea of the work of Group 21 is that the Customs Union of Russia, Belarus and Kazakhstan should gradually become some sort of “Eurasian economic area” – and over the “longer term” become part of an eventual Eurasian economic and free trade area stretching from the Atlantic to Pacific Ocean. That is, it would eventually include the EU. There are several shorter-term goals, including some sort grouping mainly involving “CIS” countries which allows for macro-economic (including monetary policy) coordination, and regional reserve currency status for the Russian ruble. A series of steps are set out to achieve both shorter term and longer term goals.
Jeff says that ….
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Published on July 13 2011
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.
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Published on July 11 2011
This Group has been very busy and considered a large number of detailed reports, surveys etc, one of which has striking estimates of the costs of “poor institutions”. “Badly functioning institutions” are said to be responsible for 25-30% of the cost of residential and commercial real-estate (in Moscow up to 60%); about 15% additional mark-up in retail trade, and about 10% in communication services. There are also reports of a round-table on “Business Associations and their role in the process of modernization in Russia”, and a report titled “Development and Application of Anti-Monopoly Legislation in Russia: Results and Problems” where the main identified issues are: too much emphasis on a “regulation” approach (for example cost plus) when considering the extent of monopoly price behavior rather than a more “protection of competition” approach; and a lack of independence of anti-monopoly authorities and courts.
Jeff says that ….
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Published on July 11 2011
Nearly 20 years ago, after my second visit to Russia as Chief Economist of HSBC (Australia) I wrote about the reform plans then contemplated:
“there is too little emphasis on the need for rapid and vital reforms in the accounting, banking and legal spheres, including anti-monopoly legislation. It is almost as if this very important component of an effective market economic system will rise by itself”. (See left hand-side of page for full 1992 article.)
For two decades Russian economic policy makers have too often sought big game-changing moves – and then made a mess of the details to the great disadvantage of ordinary citizens. The various “privatizations” of the 1990s are the most obvious manifestation of this. We have yet to see how what the results will be for the new round of privatizations, Sochi 2014, the APEC Summit, or Skolkovo.
Nevertheless, there are many reasons to be optimistic about Russia.
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Published on July 03 2011