Russian President Mulls Tax Incentives For Investment

by Tatiana Smolenskaya, Tax-News.com, Moscow

13 January 2003

Addressing a Kremlin conference last week, Russian President Vladimir Putin said that he meant to focus his attention on improving the investment climate in the country, and believed that it was necessary to offer a preferential tax regime to encourage investment in the Russian economy. Saying that the government could take satisfaction in the good results of its economic actions so far, the President said it was now time for the government to think about preferential taxation as one of the levers that can encourage and direct the flow of investment.

At another conference, the World Bank’s director in Russia, Julian Schweitzer, supported the President's view, adding that it is particularly important to create a climate that is friendly for small- and medium-sized enterprises in Russia. He emphasized that “it is small- and medium-sized business that are the source and important branch of further development of the Russian economy.” However, the banker thinks that Russia’s large banks show little interest in small- and medium-sized business, and these enterprises themselves haven’t enough capital for self-financing and development.

Schweitzer warned the Russian authorities against excessive concentration on foreign investments. He thinks that domestic investments must also play a significant role in the economy. Foreign investments must only supplement domestic investments, introducing new technologies and business development methods.

Pravda.ru took up Schweitzer's implied criticism of the government's attempts to control and direct the inward flow of foreign investment: 'Russian officials who control the investment processes often try to transform their supervising functions in accordance with their own mercantile interests; they often represent, not the interests of the state, but of some political or economic clans, which drives investors into a corner. Then it’s no surprise that investments leave the country as quickly as they arrive here. And the process of investment withdrawal goes in two ways: money is taken out of the country by investors themselves, and by investment takers together with officials in charge of the investment supervision.'

However, Deputy Minister of Finance Andrey Petrov reported that the outflow of private capital from the country was just US$3 billion in the first 10 months of 2002, compared with full year totals of US$24 billion and US$16 billion for 2000 and 2001. Petrov said this showed that investors were becoming more comfortable with the country's economic regime.

Minister of work and social development of the Russian Federation, Alexander Pochinok, added his contribution to the debate, agreeing that the tax burden on the economy should be further reduced, and bureaucracy reined in, in order to improve the conditions for business investment. He pointed out the importance of sustaining good credit ratings, which would follow from economic growth. In fact, ratings agency Standard & Poor's recently raised the long-term rating of the Russian Federation to BB + for domestic debt, and to BB for foreign currency debt, with a stable outlook.

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