INSIDE FINANCE: Tolling Hurts Russia's Coffers But Isn't Likely to End Soon
- By Leonid Bershidsky
- Nov. 16 1999 00:00
Oleg Deripaska, who runs the Sibirsky Aluminum holding, is the only industry leader to have consistently advocated a ban on tolling. When billboards came up around Moscow carrying the message "Ban Tolling - Enough Ripping Off Russia," reporters who write about metals could not think of anyone except Deripaska who could have paid for the ads.
Sibirsky Aluminum steadfastly denied that it was behind the ad campaign. But then its bitter rival, Britain's TransWorld Group, also denied paying for very similar billboards with the opposite message: "To Ban Tolling Is to Bankrupt Russia."
Whoever placed those ads, Sibirsky Aluminum may end up benefiting from both of them if one concedes that the billboards have any influence at all on the fate of tolling in Russia.
Tolling, for those who have seen the ads but did not bother to look it up in the dictionary, is a way of providing raw materials to factories that have the capacity to process them but not the money to buy them. An outside company, almost always an offshore entity, buys the raw materials and hands them to the factory for processing, for which the factory is paid a fee. The finished product is still owned by the outside firm, which sells it for a handsome profit.
Needless to say, tolling - apart from giving work to Russian factories plagued by a chronic shortage of cash - is also an excellent way to avoid taxes if you own both part of the factory and the entity that provides the raw materials.
TransWorld has played a controversial role in Russia by using the scheme: The metal factories in which it invested awoke from their post-communist coma, but much of the proceeds from their work left the country.
Deripaska, whose group controls the Sayansky Aluminum Factory, Russia's No. 3 producer of the light metal, has won praise from the Tax Ministry, the State Customs Committee and the Finance Ministry for his anti-tolling stand. The aluminum tycoon has said his group was willing to stop the practice and thus pay more taxes starting next year.
But then news broke that OKSA, a Sibirsky Aluminum company, asked the Economics Ministry for permission to continue working under a tolling scheme in 2000. OKSA would take alumina from a company called Meteare Management S.A., Republic of Panama. The Panamanian company would sell OKSA's aluminum.
It looked like a stunning reversal of Deripaska's patriotic stand. But the president of Sibirsky Aluminum insists that he still wants tolling banned. "To change from driving on the left side of the road to driving on the right side of the road alone, unilaterally, is impossible," Deripaska wrote in a letter to Vedomosti.
Sibirsky Aluminum will only give up tolling on certain terms. In October, OKSA chief Alexander Bulygin wrote a letter to Prime Minister Vladimir Putin specifying these terms. They include no more export duties on aluminum and aluminum products, no import duties on alumina and a number of tax concessions.
Until these conditions are met, Deripaska's group has no intention to scrap tolling and start paying more taxes to the government. The Sibirsky Aluminum management may be progressive and patriotic, but its altruism only goes so far. You would not expect anything else from a group of hardheaded businessmen, would you?
On Nov. 30 the Russian government will consider the matter of whether tolling will be allowed in 2000.
Faced with tough conditions even from the only anti-tolling aluminum company, Sibirsky Aluminum, officials are hardly likely to get rid of tolling. The aluminum lobby is powerful and the industry is one of the strongest sectors of the Russian economy. Sibirsky Aluminum alone employs 35,000 people, and the cancellation of tolling without meeting the group's conditions would threaten to put many of these employees out of work.
According to Deripaska, some lobbyists for other companies are pushing for the gradual phasing out of tolling, which would mean cutting the tolling quotas for Sibirsky Aluminum. That is also unlikely to happen. Even in its zeal to collect more taxes, the government is wont to compromise with big business rather than try to strangle it.
Saint Augustine once prayed, "Give me chastity, O Lord, but not now." Sibirsky Aluminum's stand is similar, though modernized and industry-specific. Its prayer is, "Cancel tolling, O Mr. Prime Minister, but not now - or if now, then for everyone and on favorable terms."