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. Last Updated: 07/27/2016

Norilsk May Be in Line for Tax Holiday

Plans by the Russian government to provide tax relief to the tune of $1 billion to Norilsk Nickel could help the Arctic mining giant's new management in a massive reinvestment program.


Pummelled by high taxes and high social costs, the company may well be receiving the kind of preferential treatment the government often reserves for Russia's industrial elite, the likes of which include mammoth energy concerns LUKoil and Mosenergo.


"[They] get special treatment because they're more or less well-run," said one Western analyst who declined to be identified. "It's good [for the government] to have these companies look good."


Uneximbank and Norilsk officials confirmed the presidential decree was under consideration, but would not provide details as to when Yeltsin might sign it. Company executives, Krasnoyarsk region officials and Uneximbank of Moscow drew up a draft of the decree, which according to an Interfax report is under ministry and agency review.


Uneximbank, which acquired 38 percent of the metal giant's stock from the government in last fall's widely criticized loans-for-shares privatization scheme, had been seeking ways to stem the bleeding on Norilsk's balance sheet as part of a $1 billion reinvestment program.


The federal government does not have funds to give direct cash infusions to favored corporate entities, but a tax holiday amounts to about the same thing. Under the proposed decree, Norilsk could put off or even be "relieved" of some of its tax liabilities, according to Interfax.


The proposed decree would delay, or possibly even forgive, Norilsk's compulsory payments to the federal budget until the mining company's debt is restructured and other measures are taken to narrow its yawning financial problems.


Norilsk has serious and multilayered problems to resolve before the non-ferrous and platinum metals company steps back from financial crisis.


Norilsk Nickel has been accumulating debt to the government for some time. One Western securities analyst placed the difference between Norilsk's revenues and expenses at 11 trillion rubles, citing a figure mentioned recently by Alexander Kazakov, appointed head of State Property Committee. Others estimate that Norilsk's federal debt alone adds up to 7 trillion to 8 trillion rubles.


But analysts say that despite the government relief, speculation on how long it will take Norilsk to be freed of it's balance sheet fetters ranges from months to years.


And balance sheet aside, Norilsk's cash flow problem may also be one of timing: The Arctic giant can't deliver ore shipments during from May to July, when the spring thaw floods its main shipping port.


Norilsk still pulls in annual revenue of about $2.5 billion, supplying about a quarter of the world's nickel, 40 percent of all metals in the platinum group and 70 percent of Russia's copper.


One analyst contends that Norilsk is already profitable on an operating basis, but "enormous" taxes and the frozen winters prevent the company from logging consistent profits throughout the year.


The heavy cost of supporting the city's 155,000 Norilsk employees and all the needed social services may be shifted to the regional government. But "a lot more" of the shortfall may have to do with questionable practices of the recently ousted Norilsk management, said the analyst, adding that the firm could see a profit turnaround in a year.


Just weeks before the second round of presidential elections, Norilsk's tax holiday may also be the government's way of admitting how ineffectual it has been in enforcing proper accounting of privatized companies. Moreover, as a major shareholder and lender to the federal government, Uneximbank was able to ask for Yeltsin's backing ahead of Norilsk's shareholders meeting scheduled for Friday.