Yukos Affair Will Weigh On Russia’s Economic Growth Rate, Says OECD

by Tatiana Smolenskaya, Tax-News.com, Moscow

27 May 2005

The Russian government's treatment of the oil firm Yukos and a subsequent wave of arbitrary and aggressive tax inspections of firms in strategically important sectors has contributed to a marked decline in Russia's business climate, according to the OECD.

In its semi-annual report on the Russian economy, the OECD warned that the behaviour of the government and the tax authorities during the Yukos affair has affected business confidence to the extent that economic growth will be slower over the next two years.

Despite showing robust growth of more than 7% last year, the OECD noted that overall performance of the Russian economy was disappointing, and the organisation predicted that growth will slow to 6% in 2005 and 2006, well below the average 10% growth rate seen in the other ex-Soviet states.

Observing that Russian business confidence has suffered "considerable damage", the OECD stated that: "The slowdown appears to have resulted from a policy-driven deterioration in the business climate."

The Organisation also said that the Yukos affair has contributed to slower investment growth due to capital flight from Russia: In the first half of 2003, Russia reported a net inflow of capital for the first time since the collapse of the Soviet Union, but the trend was reversed in the third quarter after the government began to target Yukos for tax evasion and fraud, and more than $7 billion left the country. Capital flight grew to $7.9 billion last year.

Meanwhile, delivery of the verdict in the trial of Yukos Chief Executive Mikhail Khodorkosvky continues to drag on, with several hundred pages yet to be read by the judges at Moscow's Meshchansky Court. It is generally accepted that Khodorkosvky will be found guilty of fraud, embezzlement and tax evasion, with only the severity of the sentence in doubt.

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