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. Last Updated: 07/27/2016

Russia Scrambles to Fill Revenue Gap

As budget revenues continue to lag behind their projected level, Russia apparently admitted losing the war on tax collection and moved Tuesday instead to hike export tariffs on a wide range of goods.

A higher maximum tax rate aimed at squeezing more money out of the rich that came into effect Tuesday is unlikely to make much difference to tax collection rates because almost every tax return filed in Russia declares an income that falls in the lowest tax bracket anyway, Russia's tax officials said.

Admitting that the authorities had little hope of raising tax collection rates, the deputy head of the Tax Ministry's income tax office, Anna Komardina, said that more than 90 percent of individuals pay the minimum tax rate of 12 percent.

The new tax regime alters income tax rates to target the higher income earners, but the changes will have almost no impact on collection rates, according to both tax officials and analysts.

The top tax rate will also be raised to 45 percent from 35 percent on annual incomes of 300,000 rubles or more (about $1,000 a month) as of Jan. 1, 2000.

Despite a slight increase in tax collection from individuals, the government fell short of revenue targets in March, collecting 33.5 billion rubles, 11.6 percent below target.

On top of January revenues of 27.7 billion rubles and February revenues of 25.5 billion rubles, that means Russia has collected all of 86.7 billion rubles (about $3.5 billion) for the first quarter of 1999. Over the same period, Russia made $2.1 billion in debt repayments, mostly by drawing on its hard currency reserves.

Russia's finances still depend more on global oil prices than on revenues from the domestic economy, analysts said.

They pointed to the customs committee's increasing share of revenues to illustrate the point. In March, customs accounted for 43.1 percent of budget revenues, 6.4 percent above projections.

"The bulk of [revenues] should come from export tariffs on oil," said Nancy Herring, head of research with Regent European Securities.

"When they talk about a 2 percent [primary] budget surplus with IMF, they should be talking about a higher amount of taxes due precisely to the increase in oil prices," she added.

The International Monetary Fund and Russia recently initialed a deal where the fund agreed that it would provide Russia with some sort of credit program this year, in return for which Russia committed to a 2 percent primary budget surplus excluding debt servicing.

As long as world oil prices stay above the basement, Russia has an excellent chance of meeting that condition.The government in February introduced a floating tariff rate on exports of oil, metals and fuel. Under this regime, Russia should receive 5 Euros per ton of crude oil exports if export price averages above $12.50 a barrel.

If prices stay at their current level, this should bring in an extra $5.38 per ton exported, a tasty $45 million a month (roughly 1 billion rubles).

But realizing that such revenues may not be enough to satisfy both the IMF's desires and its own need for funds, the Russian government also moved Tuesday to raise or impose export tariffs on a range of commodities, Reuters reported.

The measures may well have been timed to coincide with the arrival of an IMF mission in Moscow to discuss an economic program to underpin any loans from the fund. Russia needs new cash from the IMF if it is to keep up with its currentcommitment to pay about off about $2.7 billion in debts to the IMF, the World Bank and Eurobond holders by mid-summer.

With Central Bank chief Viktor Gerashchenko saying that reserves will shrink as low as $10 billion by the end of the month f of which about $4 billion is in gold f Russia can no longer go on calling on Central Bank reserves to pay off debts, making export revenues more vital than ever.

But even as economists said that export revenues were Russia's only real hope to get its books in order, they warned that Russia's methods were far from perfect.

"The government makes ad hoc adjustments," said Roland Nash, chief economist with MFK Renaissance. "They do not seem to be doing a great deal of planning."

Others warned that the state was leaving itself open to external stocks as long as it refused to change its basic approach. "I do not see radical changes in the tax system," said Boris Bolotin, professor with Institute of World Economy and International Relations.

"Recent increase in oil prices were not caused by fundamental changes," he added. "My guess is that in two months the oil price will decline to its previous level." The price for benchmark Brent crude surged to $15 per barrel at the end of March from under $11 in January.