Investment Confidence Returning To Russia In Wake Of Yukos Affair

by Tatiana Smolenskaya, Tax-News.com, Mosocw

18 January 2006

Russia saw a net inflow of capital into the private sector in 2005 for the first time in the post-Soviet era, suggesting that business confidence is slowly returning to the country after a period which saw the authorities become increasingly dictatorial in the business sector.

Preliminary data published by Russia's central bank last week showed that net inflows of private sector capital into Russia reached $300 million in 2005. This compares with a net outflow of capital of $8 billion in 2004 - up from a $1.9 billion outflow in 2003 - when a politically charged tax probe against the oil firm Yukos and its former chief executive Mikhail Khodorkosvky was reaching its height.

Deputy Prime Minister Alexander Zhukov told a televised meeting of the Russian Cabinet that the central bank data was evidence of a "positive change" in Russia's investment climate.

Confidence in the Russian business environment has taken a severe battering after the highly-publicised trial of former Yukos boss Khodorkosvky, who was jailed last year after being found guilty of tax evasion, fraud and embezzlement.

It is a widely held belief that Khodorkosvky was punished more for his political ambitions than for tax crime, and it is felt by many observers that the breaking up of Yukos following its $28 billion bill for back tax was a ploy by the Kremlin to exert greater control over the oil industry.

Despite the recently unveiled figures, a slew of back tax investigations against other firms, not only in the oil industry, has exacerbated the feelings of uncertainty and insecurity experienced by many investors in Russia over the past eighteen months.

Noting evidence of a "drift towards more interventionist, less rule-governed state behaviour," an OECD report published last year urged the Russian government to tackle a number of basic issues hindering the investment environment, such as strengthening of the rule of law and securing property rights, increasing the transparency and accountability of state institutions, and combating corruption.

"Russia’s long-term growth depends on checking such tendencies and reinvigorating market reforms," the report noted.

Russian President, Vladimir Putin has attempted on several occasions to reassure foreign investors that their input into the country's economy is welcome, but until his words are backed up by deeds, many investors are unlikely to be wholly convinced.

However, efforts are being made to improve administration of the tax system and curtail the power of tax inspectors to conduct repeat audits on the same firms, in new legislation which seeks to streamline tax audit procedures and introduce electronic accounting.

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