Russia Accused Of Inflating Tax Take In 2001

by Tatiana Smolenska, Tax-News.com, Moscow

25 January 2002

Two US economists, Michael Bernstam and Alvin Rabushka, have alleged that the Russian Government last year arranged a number of irregular international transactions to boost nominal tax revenues.

The murkiest deal is one involving Russian debts to the Czech Republic with a face value of $2.5bn which were settled at a massive discount through an intermediary company called Falkon Capital. Falkon bought the rights to the Russian debt last year for about $550m, then agreed to transfer them to UES, the Russia power monopoly, apparently for a similar sum, say people familiar with the transaction.

Finally, the Russian government acquired the Czech debt from UES, in exchange for writing off debts of $1.35bn that UES owed to the Russian federal budget. UES has been meeting with analysts to explain its part in the transaction, and is trying to play down the suggestion that it gained up to $800m, saying the true figure was much less. UES says it was required to settle trade debts with other creditors including Gazprom, the country's gas monopoly, and the nuclear power industry, enabling these companies in turn to settle tax debts to the treasury.

"I don't like the deal," said Bill Browder, a leading private investor in UES. "It's not clear who benefited from the transaction, who owns Falkon, and whether there is any connection between the decision-makers."

The Russian finance ministry refers enquiries on the issue to UES, which said it had legal advice that a direct deal between governments would breach Paris Club rules governing sovereign debt. But the Czech Republic is not a member of the Paris Club, and its published rules do not appear to present any obstacles.

"The government did not pay out any cash; it ran the money around, and in the end it may have been owed less in uncollectable debts," summarised one investment manager. Because of the secrecy, however, the suspicion remains that Russian taxpayers have made an involuntary contribution to the pension funds of major shareholders in Gazprom, UES and other major Russian companies.

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