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. Last Updated: 07/27/2016

Duma Set to Give Nod to Austerity Plan

With financial markets and the International Monetary Fund watching, the State Duma is expected to give preliminary approval Wednesday to key parts of President Boris Yeltsin's anti-crisis package.

But Yeltsin -- and the IMF -- may not get everything they are looking for when it comes time for final approval of the tax and budget legislation the government says it needs to fend off looming economic collapse.

Duma Speaker Gennady Seleznyov said Tuesday that the lower house would probably say yes to "most of the bills" on first reading Wednesday and predicted a definitive up or down vote on all of them by the end of a special session July 15 to 16.

The legislation is intended to address the government's yawning budget gap by cutting government spending, boosting tax revenue and in the longer run spurring the lagging economy by lowering tax rates. In the short term, passage would help persuade the IMF to loan Russia billions of dollars to restore investor confidence and fend off the collapse of the ruble.

The treasury-bond and stock markets have fallen steadily while investors wait to see what the Duma and the IMF do.

If the Communist-dominated Duma does what it often does with tax and budget legislation -- amend it to death or pass it months late -- the government could see its hopes for a $10 billion to $15 billion IMF bailout go down the drain.

But the lower house of parliament has responded with unaccustomed speed. Its leaders scheduled special sessions and quickly moved the bills through the budget committee this week.

Deputies have even agreed to take up the long-delayed new tax code on second reading Thursday. But it remains to be seen how much of the crisis program will be enacted before the deputies go home for the summer.

Tax cuts are likely to pass, but left-wing deputies will balk at cuts and freezes in pensions and social benefits, while deputies from the provinces will try to block what they view as attempts by the center to take their tax revenues.

Roland Nash, an economist at MFK Renaissance investment bank, said that the deputies appeared persuaded by Finance Minister Mikhail Zadornov, a former deputy who has warned of a possible devaluation of the ruble if parliament does not act quickly. "The Duma is likely to be sympathetic to the tax legislation, I think partly because Mr. Zadornov has explained the seriousness of the situation," Nash said.

Vyacheslav Nikonov, who heads the Fond Politika research institute, said many deputies would do their utmost to make Yeltsin take most of the responsibility in the eyes of voters for the plan, parts of which are sure to be unpopular.

"They will simulate intensive work, pass something on first reading, and then disappear for the summer," said Nikonov. "They do not want to reject the package, but they also do not want to take responsibility for its implementation, so they will do their best to make the government and the president act by decree."

Yeltsin has vowed to take "other measures" if the deputies do not act. That has been widely interpreted to mean implementing his program by signing presidential decrees. The constitution, however, limits what Yeltsin can do by decree to filling in gaps in existing laws, which he cannot overturn or contradict.

Some of the opposition may come from the centrist Russia's Regions and Our Home Is Russia factions, where regional leaders hold considerable clout.

Both factions say they will oppose a proposal to charge value-added tax on goods when they are delivered, rather than when they are paid for. That would hit influential enterprises such as the natural gas and electrical utilities, which let customers run up debts but can avoid paying tax until deadbeat customers pay their bills.

"It's clear this was designed to take the lion's share of taxes from the fuel and energy sector," said Oleg Morozov, head of the Russia's Regions group. "We should find another way."

Morozov also attacked a proposal to give 40 percent of income tax revenue to the federal government. Currently it all goes to regional governments.

"This is unacceptable for the regions," said Morozov. "Here, there will be a serious fight and in the end I think it will be changed."

Deputy Speaker Vladimir Ryzhkov, a leader of the generally pro-Kremlin Our Home Is Russia party, said that they would support the rest of the package "to avoid the financial collapse of the country."

The government has offered to compensate the regions by permitting them to enact a 5 percent sales tax and keep the money.

In general, the tax package closes loopholes and ends special privileges while lowering rates. Theoretically, that should broaden the tax base while encouraging compliance, helping tax collection in the short term and stimulating growth in the long run.

For instance, the top income tax rate for individuals would be cut five percentage points and the number of rates reduced to three: 12 percent on income up to 20,000 rubles ($3,225), 20 percent on the next 80,000 rubles of income up to 100,000 rubles ($16,129), and 30 percent after that.

Currently, there are six rates, from 12 to 35 percent, with the top bracket starting at 100,000 rubles.

At the same time, the income tax legislation would eliminate loopholes employers can use to help employees keep from paying tax, such as buying them short-term life insurance policies, which as a social benefit aren't taxed and which the employees can later cash out.

Similarly, the profits tax ceiling would drop from 35 to 30 percent and a lower VAT rate of 10 percent for children's goods and food, instead of the usual 20 percent, would be eliminated.