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. Last Updated: 07/27/2016

Incomplete Solutions

The Putin administration ought to be careful about how it carries out its latest initiative to help the media. Last week Finance Minister Alexei Kudrin announced an impending expansion of tax deductions that businesses can take for advertising expenses. At first glance, this is a welcome move. If advertising were fully tax deductible, there would presumably be more advertising revenues on which media outlets could sustain themselves. Now, too many newspapers survive by printing paid public relations stories masquerading as news, or by reporting distorted news to protect the interests of their sponsors or owners. It’s a resourceful strategy. But it’s hardly a good solution for the long haul.

But the danger in this new tax deduction initiative is that it is an incomplete solution. What if it does make more advertising revenues available? Newspapers would be limited in how much they could partake legally. That’s because the Law on Advertising caps a newspaper’s ad content at 40 percent — not enough to run a really profitable newspaper.

That limitation won’t stop many resourceful newspapers from raking in the new ad revenues, though. Let’s see. They could boost ad rates beyond what the space is really worth. Then they could make the deal worthwhile to advertisers by throwing in some "hidden advertising" as a value-added feature! Hmm. That’s the kind of street survival tactic to which businesses will resort when up against unworkable regulations.

I know this isn’t the result that President Vladimir Putin wants to achieve. Indeed, in his first state of the nation address, he commented on the awful situation that now exists in the media sector. Press Minister Mikhail Lesin repeated this sentiment in a Komsomolskaya Pravda interview in December. But the incomplete solution of simply expanding tax deductions will only worsen the problems that Putin and Lesin lament.

This wouldn’t be the first time an incomplete attempt to help the media did more harm than good. In 1995, media companies were granted an exemption from taxes on profits. When that law was passed, I thought it was a good idea. With a tax exemption, I expected, media companies would have an easier time restructuring themselves into profit-making businesses. The exemption would be helpful during this transition period.

But there was no transition. Too many media outlets still operate in the same old, ineffectual way. But because they became tax exempt, they also became sitting ducks for acquisition by non-media businesses looking for a tax dodge. The exemption backfired!

One might think that the expansion of tax deductions for advertising would at least benefit advertisers themselves. But because media outlets serve their financial overlords, not their audiences and advertisers, they don’t focus on acquiring readers who have demographic and psychographic characteristics that would make them good customers for the advertisers. Instead, audience acquisition is done rather randomly, or even dictated by political needs. This means ads are exposed to audiences with little or no ability to buy. It’s irrelevant to the overlords, but quite relevant to the advertisers. Expanding the tax deduction, without fixing the other fundamental problems with the media, isn’t going to make advertising in poorly positioned newspapers look any better. Indeed, it’s more likely to send the money toward the better-targeted advertising-only publications.

So, how can the advertising tax exemption be implemented effectively? It must be done within the context of other initiatives and in accordance with a strategic plan. Over the past few months, some Russian and American colleagues and I have been developing such a plan and have offered to present it to the Putin administration (some details appear at www.publishinghelp.com/RussianMediaFund). This plan aims to remedy fundamental problems like: the subjugation of the media by sponsors who seek to distort the news, the practice of "hidden advertising," the control of regional media outlets by governors and mayors for advancing their rivaling political agendas and the inappropriate ways by which media audiences are assembled.

This plan calls for (1) a withdrawal of the profits tax exemption for the media; (2) granting full tax deductions for legitimate advertising expenses; and (3) greatly increasing the allowable advertising content in a publication. The plan outlines the macroeconomic policies needed for legitimate, profitable media businesses to emerge in Russia. The still-significant role of state enterprise in the economy and lingering monopolies — state and private — also inhibit media profitability and independence. These factors retard competition. Advertising is needed, after all, only when competition exists.

Beyond that, our plan includes a massive educational program to realign the media industry along more civilized lines. It would offer independent media operators and advertisers alike the business plans and skills-training necessary to switch from the present paradigm of subjugation and dependency to one of honest and legal self-sufficiency and profitability. With this kind of help, the new breed of consumer-responsive newspapers will by far out-compete the tired, self-absorbed, sponsored and partisan press to which Putin rightly objects.

Current state policies, even including the new Kudrin initiative, quite simply do not give the media an even break at breaking even. How will the Putin administration confront this long-standing problem? Will it be to seek a comprehensive solution? Or will it merely throw a sop to the media, perhaps an insufficient relaxation of the restrictions on advertising deductions — a measure that, like a bottle of cheap vodka, may make the media feel good momentarily, but only to awake in due time with yet another headache.

William Dunkerley is a media business consultant who works extensively in Russia and other post-communist countries. He contributed his comment to The Moscow Times.