Putin in Search of New Revenue Streams 10/29 06:04

   With Russia's invasion of Ukraine intensifying the strain on state finances, 
President Vladimir Putin is reaching for cash to fund his government and the 
war, squeezing tax revenue from an economy that's increasingly skewed toward 
the military -- while civilian needs take a back seat.

   (AP) -- With Russia's invasion of Ukraine intensifying the strain on state 
finances, President Vladimir Putin is reaching for cash to fund his government 
and the war, squeezing tax revenue from an economy that's increasingly skewed 
toward the military -- while civilian needs take a back seat.

   The country's 2027-2029 state budget, which will be taken up Thursday in the 
rubber-stamp parliament, is accompanied by a string of tax hikes announced 
after the September parliamentary elections.

   While last year the Kremlin went for a broad tax increase, raising 
value-added taxes at the cash register and making more small businesses pay 
VAT, this cash grab hits a narrower segment: mining companies and better-off 
citizens with investment income, property sales and bank accounts.

   The budget deficit this year has swelled beyond forecast s due to lavish 
military spending and tepid economic growth amid sanctions, high interest rates 
for non-military companies, labor shortages and Ukrainian strikes on oil 
refineries and export terminals.

   The deficit hit 5.8 trillion rubles ($72 billion) through August, almost 50% 
higher than last year's figure and above the already revised target of 4.8 
trillion rubles, according to the Kyiv School of Economics.

   New taxes will hit mining companies and bank interest 

   The government proposes a 20%-30% windfall profits tax on mining companies 
that have benefited from prices that have risen since last year. That will hit 
companies producing iron ore, nickel and gold. Another measure imposes higher 
rates of 13% to 22% on income from interest, dividends and proceeds from 
selling property. Such income is currently taxed at 13% for amounts under 2.4 
million rubles ($29,800) and 15% above that.

   Other proposals to take effect Jan. 1 include a 100-ruble per parcel charge 
and 22% VAT on formerly tax-free foreign goods worth less than 200 euros that 
are bought online. There's also a 35% tax on dividends paid into restricted 
accounts for foreign investors from "unfriendly countries."

   People asked about taxes and finances on the street in Moscow responded with 
a mix of complaints and resignation. "They need money for state coffers, they 
need to collect more from people, from ordinary people," said Denis Bystrov, 39.

   "What can you do?" said Nelly Godunova, 92. "I've got four university 
degrees, they were all free, you know? True, I've given plenty to this country. 
But no matter... If you earned something, you've got to give back."

   "Everyone knows perfectly well that the money's going for the military 
operation, right?" said Sergei Sukachev, who gave his age as "almost 70." "I've 
suffered a little as a businessman, to be honest, but I clearly understand, 
it's best to hang on and to get our way."

   Russia is not facing a financial crisis, but a long-term erosion of public 
welfare 

   Russia has enough financing available to cover the deficit in 2027 and 
probably 2028, says Chris Weafer, CEO of consultancy Macro-Advisory Ltd. "But 
that is at the expense of raising taxes, of increasing costs for households as 
well as business," he said.

   "And it means that there is much less money available for normal economic 
development or infrastructure. Basically, the budget is now moving to a phase 
where it is primarily funding the military and the military operation."

   "So the economy is now becoming very skewed," he said. "While there's still 
modest positive growth, it is coming from the state spending into these ... 
state-linked industries, whereas the rest of the economy is struggling badly or 
even failing."

   German company Russian subsidiary looted for a billion rubles 

   A subsidiary of German retailer Metro was seized under a law permitting the 
temporary administration of firms from "unfriendly countries" and tapped for a 
billion-ruble ($12 million) contribution to the war effort.

   Metro AG headquarters in Germany said it had no role in the donation, which 
"does not reflect our position or the way we run our business."

   Metro Russia, no longer under the control of headquarters, said the 
contribution to the "National Front - Everything for Victory" fund would buy 
vehicles, communications devices and anti-drone equipment for soldiers in what 
Russia calls its "special military operation" in Ukraine.

   Weafer said Russia may be seizing control of foreign companies in 
anticipation of a deal to secure Russian assets frozen abroad. But the forced 
donation also raises the risk that the Finance Ministry may see foreign 
companies as sources of windfall revenue.

   Russia's limited sources of financing are being squeezed 

   Russia's economic numbers don't look that bad -- on the surface. The 
government predicts growth this year of 0.6% of GDP, not great but not a 
recession either. Unemployment is at a record low, and the government carries 
very little debt. Earnings from oil exports have held up thanks to higher 
global prices caused by the war in Iran. The revised deficit for this year will 
come in around 3% of GDP, according to Finance Minister Anton Siluanov. That is 
more than the 1.6% achieved last year, but smaller than in many other 
countries. For instance, the US booked 5.8% of GDP last year. Russia is roughly 
equal to the EU average of 3.1%.

   But that isn't the whole story. Due to sanctions that forbid banks and 
investors from dealing with Russia, the Kremlin can't tap international bond 
markets. And Russia's domestic financial resources have already been 
extensively drawn down.

   One way is to borrow from Russian banks through bond sales. But that came 
under stress this summer when banks balked at the low interest rate. Sales 
resumed after the government offered better terms. The government has already 
tapped the banking system by having banks fund the war with loans to defense 
companies, shifting the true costs of the war off the federal budget and onto 
the balance sheets of banks and state-controlled companies, according to the 
Kyiv School of Economics.

   Another pot is the National Wealth Fund, a reserve built up from oil and gas 
export earnings. But the fund's liquid assets available for spending, such as 
Chinese currency and gold, have dwindled to 1.7% of GDP.

   The Kyiv School of Economics says that Russia's finances are stable -- for 
the moment.

   But "the room for maneuver is limited: an adverse shock such as a drop in 
global energy prices or an erosion of confidence in the financial system could 
quickly destabilize the fragile equilibrium."