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. Last Updated: 07/27/2016

Tax Woes to Drive Privatization Push

Saddled with an unrealistic budget and woeful tax revenues, the Russian government will try to raise almost twice as much revenue from privatization as originally planned for 1997, Deputy Prime Minister Alfred Kokh told a news conference Thursday.

Kokh, who heads Russia's privatization efforts, said First Deputy Prime Minister Anatoly Chubais told a cabinet meeting that the original privatization revenue target of 6.5 trillion rubles should be increased to at least 10 trillion rubles ($1.7 billion) for the current year.

"The government has sharply criticized the State Property Committee for failing to meet the budget targets in 1996," Kokh said.

Word of plans to boost privatization revenue comes as the new government is scrambling to make up for huge shortfalls in tax collection, which is running at about 60 percent of targets so far this year.

Under the 1997 budget law, the government must submit proposed spending cuts to the State Duma when revenue falls below 90 percent of quarterly budget targets.

Duma Deputy Speaker Alexander Shokhin said Thursday that the government's spending cuts would face staunch opposition from the communist-dominated lower house of parliament.

"This actually means a new budget because it is very difficult to simply reduce financing," he said, explaining that in order to leave "protected" budget items untouched, including wages and pensions, the government will have to eliminate some programs altogether and reduce funding for other "important" items to about 40 percent or 50 percent.

"Many deputies will propose that we should print more money to achieve the required level of spending," said Shokhin, a member of the pro-government party Our Home is Russia. "It is possible that during the discussion a no-confidence vote in the government will be proposed."

Given the revenue crunch, there is mounting pressure to get a new tax code passed before the 1998 budget is drafted, but both Shokhin and Kokh said this was unlikely to happen. Shokhin suggested the Duma may be able to pass parts of the new tax code this year, making 1998 a "transitional year."

Putting forward an even gloomier assessment, Kokh said there was "no hope" for a new tax code by the start of 1998. Even if the Duma approves all four sections of the tax code this year, it would most likely enter into force only in 1999, he said.

With a new tax code nowhere in sight, privatization revenues have grown more important.

Kokh said the government plans to raise revenue in 1997 by selling state shares in telecommunications holding company Svyazinvest, oil firm Rosneft, insurance company Rosgosstrakh, and national electricity utility Unified Energy Systems.

Kokh said the government's priority is to sell a 25 percent stake in Svyazinvest through a tender open to foreign investors. "Major foreign and Russian banks have expressed interest, so we expect the competition to be quite intense," he said, adding that the starting price would be $1.1 billion.

Foreign investors, however, may not be allowed to buy shares when the government sells another 24 percent stake in Svyazinvest, said Kokh, who did not name a date for sale of the second package. The government had originally planned to sell a 49 percent stake in Svyazinvest to the Italian telecom company STET in 1995, but the deal collapsed over financing.

The government's plans to sell 2 percent of its 53 percent stake in UES would not mean forfeiting control, Kokh said. "We believe the government should keep the controlling interest, 51 percent, for a long time," he said.

Kokh said the government plans to "drastically reduce" the number of state-owned enterprises by selling shares, but would maintain control over monopolies and defense enterprises.