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. Last Updated: 07/27/2016

Taxes Discourage Insurance

Until recently, only one company in Russia was allowed to claim property insurance as a tax deduction. Now there are two.

In an anomaly in Russian tax law that businesses say is seriously holding back the development of an insurance market, most companies here cannot claim non-compulsory insurance as a cost for tax deductions. Money spent as insurance is considered part of gross profits and is taxed.

So far, the Russian government has chosen to grant only two exceptions to this rule. Last year it allowed the Russian state electricity monopoly United Energy Systems to treat up to 1 percent of its costs as insurance.

A few months ago, Gazprom, the state gas monopoly, was granted a similar exemption.

Russian and foreign insurance companies have been eager to cash in on the business that is now expected from Gazprom, Russia's biggest company, with 1993 hard currency sales of $7 billion. One percent of this would amount to $70 million in premiums.

At the moment, Gazprom does not have any obvious insurance provider to reap the huge premiums it is now likely to pay. "There is a lot of interest in the market as Gazprom has not made any moves yet," said Mikhail Vorobiev, deputy president of Rossiya, one of Russia's biggest insurance companies.

Industry sources, however, are skeptical about how much of this money is likely to go to the open insurance market. In the case of United Energy Systems, all premiums have gone to two insurance companies closely connected to the energy industry itself.

Both companies, Energia and Energogarant, are "captive" insurance companies of the electricity industry, controlled by the companies they are supposed to insure.

Last month, Yevgeny Minasbekov, president of Energogarant, was shot dead while being driven to work in what police say was a contract killing. Police are still investigating. But insurance industry sources, asking for anonymity, pointed out that both companies received premiums of many billions of rubles from directors of state-owned companies -- money that could have attracted the interest of organized criminals.

The sources said that since Energo-garant and Energiya are captive insurers, no real market exists to determine the terms of the insurance. They speculated that criminals might have seen an opportunity to divert money intended for insurance premiums to other uses. "This money would be attractive for anyone to get their hands on," one insurance industry source said.

Whatever use Gazprom and the electricity industry make of their insurance premiums, the fact that the two huge energy sector monopolies had been granted special tax rules on property insurance is seen as proof of their political lobbying power.

The rest of Russian industry has been unsuccessfully asking for similar tax treatment for over a year.

Sergey Protoklitov, director of Sedgwick Insurance Brokers of Russia, said that the tax problem is a major factor contributing to the slow development of property insurance in Russia. "It is a major technical problem facing risk managers in Russia," he said.

He said that Russian firms did not have an insurance mentality, and that property insurance is still largely the domain of Western companies or Russian companies looking to attract credits from the West.

In a landmark deal, the American Re insurance group recently completed what is believed to be the biggest property insurance deal in Russia covering the KamAZ truck factory.

A consortium of 52 insurance companies, including five Russian companies, issued coverage to the truck factory with a $500 million maximum first loss limit and a $5 million deductible.

Part of the reason the KamAZ truck factory was eager to take out property coverage was that it is negotiating for a credit line from several Western companies to rebuild after a fire that devastated the plant last year.

Nevertheless, Dmitry Blagutin, deputy president of the Russian Insurance Company, one of the co-participants in the deal, said that KamAZ could be the start of a trend. "It has tremendous political significance," he said.

Stewart Naunton, a partner for accountants Coopers & Lybrand in Moscow, said that while many countries did not offer deductibility for political risk insurance, Russia was almost unique in restricting deductibility on property insurance. "It is a significant factor retarding investment," he said.

He said, however, that losing a deduction on $20,000 of property insurance was annoying, but was a relatively small cost compared to other anomalies in the Russian tax system.