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. Last Updated: 07/27/2016

Taxes Will Make or Break Wage Promise

The Russian government, its room for borrowing limited, will be able to fulfill its bold promise to pay off all budgetary wage arrears by Jan. 1 only if it cracks down on tax evasion, economists said Thursday.

First Deputy Prime Minister Boris Nemtsov said Wednesday that the government would pay a massive 25 trillion rubles ($4.3 billion) in budgetary arrears by the end of the year. Half of the 25 trillion rubles is in the form of back wages, while the rest consists of social and other extra-budgetary funds.

The government also has promised to pay 5.4 trillion rubles in back wages to military personnel by Sept. 1. But Lieutenant-General Georgy Oleinik, who heads the armed forces finance department, said servicemen were owed 8.1 trillion rubles, Reuters reported.

Nemtsov gave few details of how the government would raise the money, but Economics Minister Yakov Urinson said Thursday that eliminating public sector wage arrears could only be accomplished by boosting tax collection.

"The debt will be paid above all by, as the last two-and-a-half months have shown, an improvement in tax collection," Reuters quoted him as saying in Salzburg, Austria. He said the government did not plan to borrow to pay the wages. Economists agreed that the government has few choices but to keep up the pressure on enterprises to pay back taxes.

"If they control the total amount of tax arrears ... they will have a very good chance of paying off back wages," said Alexander Morozov, an economist at the World Bank in Moscow. "But it will not be easy," he said, adding that the government currently has few ways of forcing regional authorities to use budget transfers to pay off wage arrears.

Morozov said Russia has almost reached its self-imposed ceiling on foreign borrowing, which makes the issue of another Eurobond this year unlikely.

The Russian government fulfilled its pledge to wipe away pension arrears by July 1, mostly by forcing giant monopoly Gazprom to pay up $2.6 billion last month. It hopes to raise additional cash this fall when Unified Energy Systems issues convertible bonds worth 5 trillion rubles, which Nemtsov said would go toward paying off back wages.

Targeting major companies for tax collection is clearly the government's top priority. The State Tax Service has said 14 out of the 15 major tax debtors are now regularly paying their debt, and it has blacklisted another 50 enterprises, including Nizhnevartovskneftegaz, the Tyumen oil company, and the Moscow and Ryazan oil refineries.

Revenues from privatization could also help to raise the necessary cash to pay off wage arrears, with the upcoming sale of a 24 percent stake in telecommunications holding company Svyazinvest expected to fetch $1.18 billion alone.

Economists noted, however, that the government's track record on raising revenues through privatization has not been good. "The government has consistently missed the target on privatization revenues," said Yaroslav Lissovolik, an economist at the Russian-European Center for Economic Policy.

But paying off public sector wage arrears is only part of the problem, economists said. Many believe the government is entirely responsible for the payments crisis, but private sector arrears are estimated at 25 trillion rubles.

Brigitte Granville, an economist at the Royal Institute of International Affairs in London, said the government needs to push forward more aggressively with enterprise restructuring and bank-ruptcy proceedings if it wants to keep wage arrears under control in the long term. "The wage arrears are partly a sign of hidden unemployment," she said. "Some enterprises will have to go bust."