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BOFIT Weekly
8 • 24.2.2012
Russia
Government prepares for major tax reform without
clear direction. At a meeting with representatives of the
national business association Delovaya Rossiya in late
December, prime minister Vladimir Putin announced Russian tax policy needs to be reformed to better encourage
investment in production and development of new hightech industries. The economy and finance ministries were
given until mid-February to submit ideas on reform of the
tax system. While the final proposals are not yet ready, it is
clear that experts have significant differences over what
changes are need. At the moment, there are no clear indications on whether the reform will cut or raise taxes.
Tax revenues will need to increase if the budget is to
cover already agreed hikes in defence spending and keep
Putin’s recent promises to increase social sector spending
(including large wage hikes for teachers and doctors). On
the other hand, the finance ministry argues that there is no
need to raise taxes as long as growth in spending is restrained and budget money is used wisely.
The tax reform debate has included discussion on reduction of the corporate property tax, the size of the employer’s
social security contribution, functioning of the VAT system
and the VAT tax rate as well as taxation of luxury goods.
The size of social security contributions are related to
changes in the pension scheme that should be decided this
year. The pension scheme was completely overhauled in
2002, but financing of the system has never been on a sustainable basis. The social security contribution paid in by
employers has been adjusted several times over the past few
years. The contribution was increased 8 percentage points
to 34 % in 2011 and then lowered to 30 % this year. The
latest plan is to again raise the contribution, even if many
experts oppose the hike. The 2011 hike led to an increase in
wages paid under the table and lower than expected tax
revenues. One alternative discussed this time around has
been to return the social security contribution to 34 %, but
make workers pay for the increase. Employers currently
shoulder the full burden of social costs.
Russia’s general value-added tax rate is 18 %. The problem with the VAT system is that in a corrupt business environment evading the tax is fairly simple and it is even possible to receive reimbursement for nonexistent VAT payments by using false documents. VAT scams have brought
increased scrutiny by tax inspectors on how VAT is determined and tightened the acceptance of tax refunds. This has
made VAT administration more burdensome for companies. In many cases, VAT refunds are today only effected
with a court judgement. As to the VAT rate, the new proposals call for boosting it 2–4 percentage points.
A tax on luxury goods has been proposed in the name of
social equality. The latest proposal would tax pricy vehicles
Bank of Finland • Institute for Economies in Transition, BOFIT
P.O. Box 160 • FI-00101 Helsinki
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at a higher rate than the standard vehicle tax, and high-end
apartments would also be subject to a new property tax.
From the social justice standpoint, such taxation hardly
touches the assets of the super-rich, as such assets are typically sheltered off-shore.
The task of the new government installed after the
March presidential election will be to decide on reform to
the tax system using the government’s recommendations as
basis.
Cabinet ministers at odds over divesting state-owned
enterprises. Igor Sechin, the deputy prime minister with
the energy portfolio, has proposed holding off on government efforts to sell stakes in state-owned companies, particularly energy companies and banks. Sechin has advised
postponing sales in the face of uncertain market conditions
and demanded that shares in companies should not be sold
at a price below the original listing price. After the 2006
and 2007 IPOs of Sberbank, VTB Bank and Rosneft, shares
in these companies tanked. The proposal of Mr. Sechin
would mean postponement of important divestitures into
unknown future. Economy minister Elvira Nabiullina dismissed Sechin’s argument, countering that shares in the big
state firms need to remain on the privatisation block and
preparations for their divestiture must continue. She says
consistency is needed to assure markets that Russia is
committed to its privatisation plans. Sales should be allowed as soon as market conditions permit.
The dispute reflects a more general differences of opinion in the government. One group of ministers favours state
ownership, while liberal ministers stress the need for privatising state assets to achieve efficiency.
At the end of last year, the government responded to
president Medvedev’s request by providing a new extended
list of major state companies considered for sale. The ownership share remaining with the state was also reduced as
compared with the previous privatisation list. In many
cases, the state would significantly reduce its holdings,
retaining only a “golden share” that allows the state to veto
any major company decision. The golden share list includes
oil company Rosneft, hydropower company Rusgidro,
Russia’s international oil company Zarubezhneft, Yakut
diamond producer Alrosa, state grain cooperative OZK,
Sheremetyevo airport and Aeroflot.
The state would retain its majority position (50 % plus
one share) in Sberbank, shipping company Sovkomflot and
aircraft manufacturer OAK. It would retain a 75 % stake in
Russian Railways, oil pipeline operator Transneft and electrical grid operator FSK.
The divestitures are expected to take place in increments
through 2017. Last year, only one sale of stake in a large
state-owned company took place: in February a 10 % stake
in VTB Bank was sold. A planned issue of Sberbank shares
was cancelled due to poor market conditions.
Editor-in-Chief Seija Lainela
The information is compiled and edited from a variety of sources.
The Bank of Finland assumes no responsibility for the completeness or accuracy of
the information, and opinions expressed do not necessarily reflect the views of the
Bank of Finland.
BOFIT Weekly
8 • 24.2.2012
China
China loosens monetary policy. Effective today (Feb. 24),
the People’s Bank of China is lowering the minimum reserve requirement for commercial banks 0.5 percentage
points. In practice, this means large commercial banks must
hold 20.5 % of deposits as cash in their own vaults or deposits with the central bank. Smaller banks have a 17.0 %
requirement.
The PBoC started relaxing its stance in early December
with a half-percentage-point cut in the reserve requirement.
Key reference rates, inflation and reserve requirement, %
25
Inflation
Lending rate
20
Deposit rate
Reserve requirement
15
10
5
0
-5
2006
2007
2008
2009
2010
2011
2012
Sources: Bloomberg and PBoC
The easing of monetary policy reflects the slowdown in
economic growth and lower inflationary pressure. While
consumer price inflation picked up in January to 4.5 %, it
was due largely to the impact of Chinese New Year on food
prices. Inflation is expected to cool in coming months.
Credit expansion and money supply growth were both
lower than expected in January.
Housing prices appear to be falling. The National Bureau of Statistics January survey of apartment prices in 70
major cities found apartment prices in about two-thirds of
cities surveyed were lower than in December. Not one city
showed a rise in prices. In four of the largest cities, prices
are down at the most 3 % from last summer. Official figures for housing price trends are notoriously unreliable; in
recent years they most probably understated actual price
increases in the market and now likely tend to understate
the price drop. Many observers expect apartment prices to
decline a further 10–20 %.
Chinese monetary policy is to a great extent based on reserve requirements and “window guidance” from the central bank. Interest rate policy, in contrast, still plays a minor
role. As China’s currency and money markets develop and
the variety of financial instruments grows, monetary authorities should find it increasingly difficult to control the
economy without active interest-rate adjustment. A year
ago, related to discussions concerning the Twelfth FiveBank of Finland • Institute for Economies in Transition, BOFIT
P.O. Box 160 • FI-00101 Helsinki
Phone: +358 10 831 2268 • Email: [email protected] • Web: www.bof.fi/bofit
Year Plan, the PBoC laid out an initiative to give interestrate policy a higher profile. The threshold for introducing
interest rate-based monetary policy is high, however, as
officials worry such policy could lead to reckless risktaking as banks compete for deposits. There is also concern
of the distortionary effects of state-owned banks from their
dominant market position.
Improved NBS data collection should be seen already in
March. China’s National Bureau of Statistics (NBS) has
adopted a new system that streamlines data collection and
improves the quality and reliability of statistical data. Under
the new regime, a total of 700,000 companies in the industrial, manufacturing, retail and wholesale trade, real estate
and service sectors will submit their data directly to NBS
officials. Thousands of NBS employees have fanned out
across the country help firms on site and assure a smooth
roll-out of the new statistics system.
Information previously went through as many as four
layers of aggregation before it was submitted to the NBS.
This messy approach let local officials tamper with their
figures; a tempting opportunity as the career prospects of
regional leaders have long been tied to meeting economic
targets. The NBS has been monitoring statistical data from
local administrations through e.g. spot checking and independent surveys, and adjusting national figures accordingly.
For example, last year’s reported figures for provincial
GDP when added together gave a figure for China’s GDP
that was over 4.6 trillion yuan (€520 billion) higher than the
NBS figure for national GDP. The error corresponds
roughly to Turkey’s entire GDP.
The first figures collected and compiled under the new
system will be published in March.
Shanghai has big plans to develop its financial sector. At
the end of January, Shanghai and China’s National Development and Reform Commission (NDRC) released a plan
to increase access of foreign entities to Shanghai’s financial
markets and make the city the global centre for yuan-based
trading by 2015. During the changeover, trading volumes
should triple and more headquarters of major financial
sector businesses move to Shanghai. Beijing-based Bank of
China, one of the China’s largest banks, will open a sister
head office in Shanghai in March.
Shanghai’s plans assume China will continue efforts to
internationalize yuan through such measures as phasing out
currency controls and liberalising interest-rate regulation.
Prices on the Shanghai exchange and the number-two
Shenzhen exchange have risen since the start of the year.
The A-share indexes of both exchanges are up about 8 %
from the turn of the year. The rise in Chinese share prices,
however, has lagged relative to other emerging markets.
For example, Russian share prices are up 20 % this year,
India 17 % and Brazil 16 %.
Editor-in-Chief Seija Lainela
The information is compiled and edited from a variety of sources.
The Bank of Finland assumes no responsibility for the completeness or accuracy of
the information, and opinions expressed do not necessarily reflect the views of the
Bank of Finland.