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. Last Updated: 07/27/2016

Kudrin: Capital Must Pay Own Debt

Finance Minister Alexei Kudrin poured cold water on Mayor Yury Luzhkov’s suggestion that the federal government should help Moscow cover its debts in return for depriving the city of tax revenue and told Luzhkov to end tax breaks if he felt strapped for cash, Interfax reported Wednesday.

Luzhkov had said at a city government session Tuesday that he had nearly convinced Kudrin to shoulder part of the city’s debts, which include two Eurobonds totaling $500 million due in spring 2001.

The 2001 budget is still pending in the lower house of parliament, but the Tax Code was passed despite protests by Luzhkov and other leaders of wealthy regions, who will be forced to share their revenues with their poorer counterparts.

The city budget currently lists 17.4 billion rubles ($544 million at the budgeted exchange rate of 32 rubles to the dollar) for debt servicing — more than enough to cover the Eurobond.

But city authorities estimate the city budget will lose about 20 percent of the 210.6 billion ruble 2001 city budget. The budget, which appears to ignore the new tax provisions, was sent to the city legislature Tuesday for approval.

Luzhkov said that in addition to the threat of derelict roads and increased unemployment, by redistributing tax revenue, the federal government had "created a force majeure for us." He also said he had convinced Kudrin to transfer part of the city’s debts to the federal government, Interfax reported Tuesday.

On Wednesday, Kudrin said he had met with Luzhkov the day the new Tax Code had passed. Luzhkov, he said, told him that Moscow and other regions with foreign debts would lose out on the redistribution of revenues. But he denied agreeing to shoulder Moscow’s debts.

"The Moscow government has been whipping up panic over the passing of the new Tax Code," Kudrin was quoted as saying by Interfax.

"We are ready to help Moscow find reserves by improving tax collection," Kudrin added, saying that of 700,000 legal entities registered in Moscow, only about a third of them filed tax returns and about a sixth actually paid taxes. He said tax breaks for industry amounted to about 10 billion rubles for the first half of 2000.

Luzhkov, however, decided to compensate for losses to the budget by hiking the local sales tax from 4 percent to 5 percent and levying a 5 percent profit tax. A regional profit tax provision will be considered by the State Duma in September, said Natalya Orlova, an economist at Alfa Bank.

Luzhkov also ordered his deputy, Valery Shantsev, to extract the 6 billion rubles owed to the city by the federal government as payment for hosting the federal government. The city government threatened a court case if the federal government didn’t pay up.

Yevgeny Shubanov, a spokesman for the city finance department, said the 6 billion rubles was usually paid in kind with shares in local enterprises still held by the state. He did not know whether Luzhkov was seeking to extract cash instead.

Orlova said the tax reform did not put the Eurobond payment at risk, but would require "belt-tightening" by the Moscow authorities — in part by lowering social support, which accounts for 40 percent of the city budget.

"Even if social payments are reduced, even if part of the population loses income, it will have no serious effect on the economy because the tax burden on companies will be lower," she said. "To a significant degree, this is a political game."