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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 Phone: +358 10 831 2268 • Email: [email protected] • Web: www.bof.fi/bofit 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.