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. Last Updated: 07/27/2016

Low Tax Haul Prolongs Financial Woes

As the April 1 deadline draws nigh for filing Russian income taxes, foreign and Russian delinquents can reflect with vindictive glee upon the sorry state of tax collection for Russia's 1996 budget.

But economists say it is a serious problem that needs to be resolved, and quickly.

"It's been a kind of vicious circle, in that the government wasn't paying its employees on time, and wasn't paying a lot of its suppliers, and suppliers were not paying taxes," said Thomas Wolf, head of the Moscow office of the International Monetary Fund.

"All of these things just kind of played on one another, and I think taxpayers have said, 'Look, if that guy over there isn't paying his taxes ... and the government isn't paying me, why should I pay my taxes?'"

The result has been soaring internal debt and continued reliance on external funding sources, such as the IMF, which loaned Russia $6.5 billion last year and just approved a new three-year, $10 billion credit.

Although some analysts tout the drop in inflation and expected rise in gross domestic product this year, everything Russia has gained under tight monetary policies implemented as part of the IMF loan program could be lost if the state can't collect taxes that are due. "The situation is not too good, and there is no sense denying it," said Alexander Polonsky, deputy head of the Finance Ministry's Macroeconomics Department.

Reductions have brought Russia's federal budget in line with expenditures for many like-sized economies. Yet despite spending cuts equivalent to about 10 percent of GDP since 1993, the 1996 deficit is expected to be 3.9 percent of GDP, 1 percent over last year's level.

"What is really the driving force behind the worsening fiscal performance is the decline in revenues," said Yaroslav Lissovolik of the Russian-European Center for Economic Performance.

Compared with other transitional economies, Russia's is lagging far behind. In 1995, the Czech Republic reported revenue as 50 percent of GDP, and Poland as 47.7 percent, according to the European Bank of Reconstruction and Development.

Russia clocked in at just 27.3 percent for its consolidated budget -- a combination of federal and regional spending plans..

In the federal budget, the scene looks even worse, with revenue expected to be 15.2 percent of GDP this year, compared to 13.7 percent in 1995, 13.5 percent in 1994 and 14.5 percent in 1993, according to Russian Economic Trends.

Solutions are elusive in a land where taxes widely regarded as oppressive clash with a society unaccustomed to taxation and inherently distrustful of the government.

"There's a chicken and egg problem," said Edwin Dolan, president of the American Institute of Business and Economics, referring to the question of whether Russia should lower taxes to promote payment, or keep them at current levels so that it can afford to reduce them later.

Under a presidential decree signed in January, the government is trying to do a little of both -- allowing corporate tax-dodgers from previous years to reschedule their payments over 7 1/2 years, but only if they stay current on their 1996 taxes.

The IMF's Wolf ran down a list of measures that could help, including an end to tax exemptions for industrial groups such as Gazprom and social groups like the National Sports Foundation -- both conditions of the current IMF loan.

Other steps, Wolf said, involve raising certain taxes -- most notably on gasoline and electricity -- and paying off wage arrears to workers, which the government currently is attempting.

"By paying off its own arrears ... the government will to some extent enhance its own moral authority," Wolf said.

Despite the government's efforts, statistics so far this year do not bode well. Finance Minister Vladimir Panskov said earlier this month revenue collection for the first quarter would be 30 trillion rubles (about $612 million), well short of the 54 trillion rubles projected.

Figures for January vary from 7.9 percent to 6.1 percent of GDP, but regardless, analysts say it is too low.

"This is the lowest percentage of any January or any other month over the past four years," said Andrei Illarionov of the Institute for Economic Analysis.

The causes, Illarionov said, range from macroeconomic peculiarities to a sense of invulnerability among certain tax-dodging groups on which the government is relying for election-year support.

But he noted another historical rise in tax revenue, somewhat ominous given the current political instability.

"Immediately after the October 1993 events, after the shelling of the White House by tanks, tax collectability in the Russian Federation soared," he said.

"Even such republics as Bashkortostan, Tatarstan and Sakha-Yakutia were paying taxes," he added.

Federal budget financing, as a percentage of GDP, end of period.

1993 1994 1995 1996

actual actual budget actual budget

Revenues 14.5 13.5 18.8 13.7 15.2

Expenditures 29.2 24.6 26.7 16.6 19.1

Deficit 14.7 11.1 7.9 2.9 3.9

Source: Russian-European Center for Economic Policy