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. Last Updated: 07/27/2016

Tax Proposals Seen Hurting Economy

The government's moves to raise excise and other taxes will help them meet the International Monetary Fund's demands for raising revenues, but they will also drive retail prices up without addressing key economic issues.

The IMF has urged the Russian government to boost tax collection by slapping higher excise taxes on gasoline and alcohol. A host of IMF-sponsored laws that includes such measures will soon be forwarded to the State Duma, Alexander Pochinok, the head of the Cabinet finance department, said Thursday.

Should these measures fail to win the Duma's approval, the IMF's promised $4.5 billion in loans over the next 18 months will not be disbursed, according to the agreement signed in Washington late last month by Russia and the IMF.

The state measures would raise excise taxes on alcohol by 10 percent to 20 percent, slap an imputed monthly tax of 7,000 to 10,000 rubles ($290 to $415), on every gasoline station and charge additional taxes on owners of expensive imported cars.

The new initiatives will increase budget revenues by 8 billion to 10 billion rubles ($320 million to $400 million), Pochinok said.

With gasoline making up for roughly 30 percent of the final retail price of goods in Moscow and elsewhere, that is likely to cause a hefty hike in inflation, analysts said Friday.

"Higher inflation is seen as a side-effect by the IMF," said Chris Weafer, head of research with Troika Dialog. "But the IMF is more concerned with Russia's fiscal policies and banking restructuring."

The government does not expect retail prices on gasoline to increase by more than 8 percent to 10 percent, with some officials apparently relying on the goodwill of gas station owners.

"Higher taxes will eat into the profits of retail traders but they could choose not to lift prices," said Oleg Rumyantsev, spokesman for the Fuel and Energy Ministry.

However, gas prices are already moving up. Fueled by rising world oil prices, they rose 6.6 percent in April.

Industry figures certainly do not share Rumyantsev's optimistic view.

A Yukos representative said gasoline prices could jump 40 percent if the government's package of laws gets pushed through the Duma, Prime-Tass reported Thursday.

Meanwhile, Andrei Volodarsky, deputy director of the Moscow Fuel Association, pointed out that filling station owners are not charities. "In Moscow the cost of construction alone for a gas station amounts to $800,000 to $900,000 and these guys want their money back," he said.

More than $1 billion has been invested in recent years in Moscow's retail gasoline market, which has annual sales of $3 billion to $5 billion.

Beverage traders were even more skeptical about state initiatives. "The government is creating additional incentives for companies to move in the shadow sector," said Vladimir Nikolayev, president of Guild VIP, which promotes provincial vodka brands in the Moscow market.

Nikolayev expects prices on vodka to increase 3 rubles to 5 rubles per bottle if laws are passed, up 10 percent to 15 percent.

Higher taxes on alcohol will also be accompanied by the midyear introduction of new excise stamps by the Foreign Trade Ministry and the Tax Ministry.

"The new holographic stamps will cost another 3 to 4 rubles per bottle of vodka," said Pavel Shapkin, president of the National Alcohol Association. "But stamps introduced by the Trade Ministry will be sold by Interstandart - a commercial enterprise close to the ministry," he added.

As a result, roughly 7.5 billion rubles ($300 million) will flow into private pockets rather than the state coffers, he said.

"You don't need to graduate from Harvard or Chicago Business School to invent higher taxes on alcohol as a remedy to the whole economy," said Nikolayev. "The IMF simply encourages the government to continue living on gas, oil and alcohol."

Pochinok also said Thursday that the owners of cars with engines 2.5 liters or greater in capacity will pay "a just and socially justified tax" of 1.2 rubles to 1.8 rubles per cubic centimeter. He estimated that owners of Mercedes-600 will have to pay 10,800 rubles a year.

However, the tax could prove difficult to collect.

"It costs very little to register the car as having a much smaller engine during customs clearance," said a car dealer who declined to be identified.