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Moskovski Komsomolets, August 3, 2004

Windfall Tax
Operation "Vacuum Cleaner"

By Mikhail Romanov, Alina Keshokova, Natalia Shipitsyna and Yelena Zvereva
While the authorities have been completing the dissection of Khodorkovsky's empire, broad political circles have been discussing the new ideas for emptying the pockets of other oligarchs. A year ago the natural rent was considered the best remedy. All such talks have subdued by now, however, a new topic was introduced by Grigory Yavlinsky. And now not only YABLOKO, but also the Motherland faction have become calling to introduce a special "windfall tax".

The measure is very simple in the essence. Last year oligarchs bought state property for a penny. And now the price of this property is extremely high. Why should not the "privateers" be made cover at least partially the difference between the purchasing and the new price?! The nice thing about this tax is that it can not be called "anti-market". As such a thing has been recently implemented in such a citadel of the Western capitalism as Great Britain.

Can all of this be implemented in Russia?

How to wind up the oligarchs' pockets for USD 8 bln?

When in spring 1997 a newly elected British Prime Minister Blair appeared for the first time at the Downing Street an unusual reception was in store for him. One of the cleaners devoted to the ex-resident of the building John Major not only went into tears but also poured angry reproaches onto the new premier. However, the bulk of the British proletariat, on the opposite, welcomed Blair's coming into power. The new Premier at once imputed a special "windfall" tax onto the owners of former state property.

The leader of the British left-wing Blair managed to return his party into power after an eighteen years interval mainly due to his complete abolishing of socialist ideas. However, Blair did not manage to say a "farewell" to the socialist ideas. A part of his party co-members were still the people condemning Margaret Thatcher for privatisation of state property she held in the 1980s.

Therefore Blair and his Finance Minister Gordon Brown devised a sly move. They announced that the new owners of the privatised state enterprises received unexpectedly high additional profit. First, in the 1980s they managed to purchase property at quite moderate prices. Second, the latest economic development was so rapid that the shares of former state enterprises brought simply unbecomingly high dividends. That is why Blair and Brown announced the introduction of a new one-off "windfall" tax. It amounted to 23% from the difference between the purchasing price of the state property and its new price in 1997.

As the Labour constituted an absolute majority in the Parliament, this initiative was welcomed by the MPs. And it turned out to be economically efficient as well. However, due to the new tax, the Hyder utility services company, Wales, got almost bankrupt. But all the other privatised giants like the "British Telecom" and the "British Gas" paid the tax quite painlessly. And the British Treasury obtained GBP five billion (about USD eight billion) of additional revenues. As Blair proudly announced, this money was spent on vocational re-training courses for young unemployed.

However, not all the experts shared the opinion that the "windfall" tax was a great idea. Several economists said that it was not the oligarchs who suffered due to the introduction of the new tax. They stated that allegedly the owners of the privatised companies lowered wages to the employees and raised tariffs on their services for the citizens so that to compensate for their losses.

In addition, most of the experts agreed that the "windfall" tax can be introduced only once. And if the government will do it systematically, investors will refuse to invest into the economy of the country. As here there emerge the risks that if today one can purchase something cheaply, he may get an astronomical additional bill to pay several years later.

It seems that the British authorities found this very argument exceptionally convincing. When in 2001 local oil companies obtained record high additional profit amounting to almost USD 20 bln, trade unions at once demanded introduction of the "windfall" tax. At first Finance Minister Brown said that this was possible in general. However, later he said a firm "no."

Thus a very important lesson can be derived from the British experience. There is nothing criminal or anti-market in the "windfall" tax. However it should not be abused. Whether Russia will be able to adopt this lesson? As we love to reduce any reasonable idea to the absurd.

How It Developed

The state obtained USD 600 mln from the loans-for-shares privatisation

In the beginning the privatisation scheme was held in accordance with the so-called "voucher" auctions. A series of such auctions was held in 1994 and 1995. The goal was noble: the state sells to the private owners its packages of shares and the buyer undertakes to invest into the further production development. But it went out the usual way: the legislative base was developed poorly and a multiple "gaps" in the documents gave rise to snowballing violations.

This type of privatisation was replaced by the "loans-for-shares" privatisation concept. The author was the current president of the ONEXIM-Bank and the present oligarch Vladimir Potanin. He proposed to grant the Government a loan under the collateral of the state's shares in the leading companies (44 of such companies made the final list). And in the conditions of a large budget deficit in 1995 it was absolutely clear that the state treasury is unlikely to get available money for returning of the credit. Thus, it comes out that privatisation of state companies rather than their mortgage was initially in question.

Naturally potential buyers are very enthusiastic about the idea of "loans-for-shares" privatisation. As the new owners were already not bind by the obligations and grasped in their hands the most "tasty" pieces of the state property without investing anything. In addition, no one was in the way if the new owner decided to quickly sell such property on real market price rather than on the understated auction price.

The deal passed quickly. The government obtained a loan amounting to USD 600 bln under the mortgage of the most "tasty" Russian companies. And no one felt uneasy that most of the money remained on the accounts in the same banks: as they are the "plenipotentiary" treasurers of the authorities. And getting the money the banks sold the most profitable Russian companies to themselves (via specially and urgently created stock share companies) at extremely understated prices. Such was the Russian way of privatisation.

1. Is it possible to introduce a windfall tax in Russia?
2. How much should Russian oligarchs pay?

Neftyanoi Bank CEO Boris Nemtsov:

1. In fact, we already have such a tax. It is included in the laws on natural resources rent, gas duties, and so on. Do they want more than that? I'd say that a new tax would only affect the investment climate and business atmosphere in Russia. Moreover, I'm not at all confident that the authorities would use the money effectively and properly.
2. The percentage rate of the tax cannot be set in a fair manner. Such a tax would only boost corruption, because tax payments will differ (after all, we have different sectors - gas, chemistry, oil, and so on - with different conditions), and it will be up to officials to decide at what rates different companies should be taxed. They will never miss a chance to line their own pockets.

Leader of the Motherland faction Dmitry Rogozin:

1. The tax is essential if we want to normalize the situation in the privatisation sphere. Those people who organized the loans- for-shares auctions in the 1990s - what were they thinking? Suddenly it dawned on them that there was a colossal gap in the budget, and they urgently sold some assets. Everything was done in haste, and even the most competent auditors could not calculate how much was paid for which assets. The assets produced revenue for their owners, and that was how the oligarchs arose. We must put an end to this state of affairs!
2. It should be a reasonable interest rate, determined by economists. Confiscating absolutely everything doesn't make sense. Businesses are not to be blamed for having seen their chance and making the most of it. Consider the Norilsk Nickel company - it was sold for $170 million, but its revenues amount to $3 billion. Yes, the company is successful. But do you remember that when the mortgaging auctions were taking place, it was decided that a part of the sum was to be returned to the state in 1998? Everybody has conveniently forgotten all about it. Besides, when economists calculate the size of the windfall tax, we should see to it that there are no favourites and preferences.

Deputy of the State Duma Sergei Glazyev:

This tax is collected in many countries. I don't think, however, that it is possible in Russia. The financial market is not stable yet.

Irina Khakamada, Chairperson of the organisational committee of the Free Russia party:

1. In theory, introducing such a tax is possible. It would be much better than the endless court battles between the state and private companies that cost the latter dearly. These days, everybody interprets the law as they see fit. There should be only one condition, however- the tax should be levied once and only once. It is not to be revised afterwards. This would put an end to the so- called redistribution of property.
2. The rate should be established by economists, guided by two principles:
- it should be sufficient to implement some part of social programs, and
- the tax must not be damaging the companies themselves.

Leader of YABLOKO Grigory Yavlinsky:

1. We need it, regardless of whether it is possible or not. Why is building communism considered possible and unjust privatisation considered possible - but measures amending the situation are not? At the same time, the tax alone cannot be expected to fix the situation. The same legislation should specify the ceiling for concentration of capital in one person's ownership, transparent lobbying and transparent funding of political parties, public television. It should also specify separation of business and government at all levels, and must recognize the validity of the deals made in the 1990s.
2. The tax is not a punishment. The whole system of measures should aim to make the citizenry, robbed once in 1992 and then again in the privatisation of 1995-97, feel that justice has been restored, at least to some extent. It is necessary in order for the public to recognize major private property in Russia as legitimate.

Political scientist Andranik Migranyan:

1. In theory, it is possible even in Russia. Introducing such a law means that certain strict rules will be set. Once the tax is paid, all business owners will be cleared in the eyes of the general public, regardless of how they actually made their fortunes. It will resolve relations between business and government, once and for all. Many business tycoons would greatly like to do that - to become legitimate. The only question is whether the state is ready. What will it choose: letting Russian tycoons off the hook, or leaving them there? Britain is an advanced country with an established party system. Introduction of such a tax there posed no problems. It didn't change anything in relations between business and government. It is different in Russia. In Russia, big business controlled the state for a long time. We are witnessing movement in the opposite direction now. Are the authorities prepared to fix these relations permanently? There is more to it than application of the law. Equal forces ready to control and maintain this parity must exist on both sides.
2. The sum should be different in every individual case. There are some rich people who started from scratch and made their own fortunes. They should not face any extra tax payments at all. But when some tycoons bought companies for much less than their actual value (natural resources companies that is), they should pay between 25% and 50% of the company's value. And the payments should be gradual. If they are made all at once, companies may find themselves insolvent, the way it happened with YUKOS.

Igor Bunin, general director of the Political Techniques Centre:

There is no difference between Surgutneftegaz, YUKOS, or an apartment measuring 200 square meters. If we introduce this tax in this country, we will have to demand payment from everybody who has any private property. And that will lead to a minor civil war.

Economist Mikhail Delyagin:

The public is certain that major assets and chunks of property have been acquired unlawfully. This point of view is not without merits: many laws were bent in the course of privatisation. Moreover, even some property owners do not consider what they possess to be their own property: they mercilessly exploit factories and mineral wealth deposits. Something should be done about this state of affairs, because it impedes economic development. A simple solution is confiscation - that will not do. The authorities are corrupt. The halls of power are full of people like Roman Abramovich, not Alexei Kosygin - less efficient but much more hungry. That is why the redistribution will end in chaos and deterioration of the economic situation.
The idea of the windfall tax is simple. Comrade Tycoon, you've acquired something for free or for a fraction of its value - so pay for it. How much? It will take some experienced auditors to calculate the value of companies at the moment of privatisation and now. It should be noted, however, that some of our companies are undervalued, while others are overvalued. That should be kept in mind as well.
Finding these specialists is easy - they are major international companies that value their reputation. There are, however, some technical problems here. The companies bought in loans-for-shares auctions have changed over the past few years. When it turns out that owner of some major company paid less than the company's value, he will have to pay now - but not the whole sum at once. Otherwise his business will crumble, and the state will find itself without the compensation and even without the tax revenue it used to collect. The allotted time will vary from sector to sector.
The Auditing Chamber claims that the state missed out on $2 billion during privatisation in the 1990s. I don't believe that. The actual damage may exceed $2 billion for the privatisation of Sibneft alone. That company was sold for $1.86 billion, when its value was estimated at $3-4 billion.


See also:

www.yavlinsky.ru, July, 2004.

"It is time for Putin to make up his mind" by Grigory Yavlinsky - a complete version (an abbreviated version in "Forbes", No. 4, July 2004)

Compensation Instead of Revision The Oligarchs Should Share the "Windfall" Profit with the State By Sergei Mitrokhin, Nezavisimaya Gazeta, July 27, 2004

Moskovski Komsomolets, August 3, 2004

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