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Russia Threatens Higher Oil Company Taxation

by Tatiana Smolenska,, Moscow

29 December 2003

A court in Moscow extended the incarceration of Yukos bosses Mikhail Khodorkovsky and Platon Lebedev until after presidential elections in March, as President Vladimir Putin and senior tax officials stepped up their threatening rhetoric over oil and gas sector taxation. Khodorkovsky and Lebedev have been charged with tax evasion measured in the billions of dollars.

At a meeting with businessmen at the Russian Chamber of Commerce last week, the President asked big business to contribute to help the state resolve the country's social problems and threatened to undo fraudulent privatizations, clearly linking great wealth with possible criminality. "Those who were involved in deliberate fraud" should not enjoy more favorable conditions than those who obeyed the law and "did right," he said. "The latter may not have earned as much money, but now they sleep soundly."

On Friday, the Audit Chamber said it planned to analyze the results of the 1990s privatization process, and will also consider what is the best level to set taxes for oil companies, including Yukos, Lukoil Holdings and Sibneft. Auditors will also evaluate investment and restructuring plans for United Energy Systems, Russia's electricity monopoly, although this may have more to do with corralling UES head Anatoly Chubais, who emerged as a near-opponent of the President during parliamentary elections. He has been thought close to Vladimir Putin in the past. Auditors will also check development plans for the state's gas monopoly, Gazprom, which was a favourite target of the Yeltsin administration for extra tax roubles, but has had a less torrid time under Putin so far.

Putin said that the government is considering how to redistribute oil company windfalls. "One of the mechanisms would be an export duty, another would be a tax on the extraction of natural resources," he said. Putin had previously said that the government should tax oil fields based on their individual characteristics rather than through the existing flat-rate system.

The energy sector companies may present a soft target to tax collectors, especially in the present climate of fear, but in reality the government has no need of extra tax revenues to formulate its social programs, with surpluses in all directions. Growth this year at 7% will exceed the government's 5.2% budget forecast, and the current account surplus should top US$60bn as a result of high oil prices.

It must also be remembered that politicians say a lot in advance of elections which they don't always exactly perform afterwards . . .

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