Putin has made it clear that for big business, all tax bills are due. Most famously, his government has jailed Russia’s richest man, Mikhail Khodorkovsky of Yukos Oil, on fraud and tax-evasion charges. Other top Yukos shareholders are also either in jail or waiting out the storm in Israel and the United Kingdom. Prosecutors froze 40 percent of the company’s shares in November and then slapped it with a $3.3 billion bill for back taxes. And late last year the legislature closed down loopholes that billionaires had openly exploited to cut the official corporate tax rate of 24 percent to an effective rate of 12 percent. At the end of December the government’s Audit Chamber pledged to spend 2004 both searching for other alleged tax dodgers and coming up with a better way to tax Big Oil.
In outlining the next phase of his campaign to rein in the big-business oligarchs, Putin is talking about increasing total annual oil-export duties by nearly half, from $6.5 billion in 2003 to $9.5 billion in 2004. This time he is sure to win. Last June the Russian oil majors cowed a peculiar coalition of communist and free-market parliamentarians into defeating a similar tax increase. That vote, by some accounts, infuriated Putin and inspired his campaign against Yukos. Then last month Putin’s United Russia party scored an overwhelming victory in parliamentary elections, partly at the expense of two pro-business parties. Putin can now count on a two-thirds majority for an economic agenda topped by higher oil taxes.
The oil industry believes it is being unfairly targeted. Like Yukos, many of Russia’s new oil companies were born of questionable privatization deals in the 1990s, and were especially aggressive in using loopholes, including three legal tax havens in underpopulated provinces of Russia. Now those havens are closed, and oil barons including Khodorkovsky have been at the forefront of efforts to clean up Russian corporate governance. They insist their taxpaying and accounting practices are now closer to international standards than the Russian average. And they complain that they are effectively being punished for clean books, which make them easy to tax, complains Yukos spokesman Hugo Erikssen. According to the oil majors, the government should instead go after companies that keep double books and squirrel away profits abroad.
In fact, Putin is on a relatively moderate course. The December elections included calls to raise oil-tax revenues to as much as $50 billion and even to renationalize some industries like oil. Putin has not endorsed any of these more radical proposals, but the rhetoric nonetheless alarmed the big-business community, both Russian and foreign. “This is the first time they are facing these questions, and that is why a lot of people are nervous,” says Daniel Witt, president of the International Tax and Investment Center, a Washington-based NGO funded by multinationals working in the former Soviet Union, including Nestle, BP and Citibank. “Recent events have fueled a ‘soak the oligarchs’ mentality.”
The coming tax hike is already seen in Moscow as a symbolic end to the political clout of the oil barons. Its economic impact is a good deal less dramatic. The $3 billion hike will increase oil-tax bills by up to 17 percent, something Russian companies can readily afford. Aton Capital Group’s Steven Dashevsky says Russian oil companies are “among the most profitable in the world,” with margins of 20 percent–nearly double the margins of big Western oil companies–owing to low capital costs. They didn’t have to pay full price for oil plants and pipelines, which they essentially inherited from the Soviet state.
Putin is not expected to push oil taxes much higher than he has already proposed. To do so could undermine the economic boom that supports his political grip on Moscow. The tax prosecution of oligarchs is another story. The Audit Chamber Commission has vowed to keep combing the records of privatized oil companies, and Putin recently sent a chill through the industry with a backhanded reference to “five or seven or 10 people” who might have broken the law. Sibneft Oil is especially vulnerable, analysts say. Not only did the company creatively–if legally–avoid taxes, but it was hugely undervalued at the time of its 1995 privatization, at $200 million. Now it’s worth $12 billion. And the aim of reclaiming some of those gains for the Russian state is more popular than ever.
