The basic legal body of work which governs taxes and fees in the Russian Federation is the Tax Code.1 It is a relatively new body of work, and has been the subject of much contention since its conception in 1998. The model of the current tax regime encompasses all basic components of any tax system one might be aware of such as (but not limited to): VAT (value added tax), corporate tax, excise taxes and tariffs.2 However it is the flat-rate personal income tax (PIT) – which has been fixed at 13% since the first of January 2001 – that originally piqued my interest in the Russian tax system. This fixed rate is uniquely low, and is in complete contrast to the tax rates of Western European countries. This was of great interest to me as it bore no resemblance to any taxation system that I personally was familiar with, and as Russia is a country with great disparity in wealth distribution, the introduction of a flat rate of Personal Income Tax seemed incomprehensible. There are numerous economic reasons for implementing a flat rate of 13%, the main of which is simple – compliance. From various studies of the effectiveness of the flat-rate PIT, the conclusive outcome has been that compliance has increased since its enactment.3 During the two years following the introduction of the flat-rate PIT, income tax revenue grew by an impressive 50%.4 The low universal rate is not only beneficial to those on low incomes, but is also greatly beneficial to the state. Although the natural instinct may be to tax the rich at rates higher than those on minimum wage, the flate-rate has only served to make honest taxpayers out of those who previously benefitted from tax avoidance strategies, whether it be offshore banking or living in tax-free havens. The exact rates of personal income tax can be seen in the following table5:
Before Reform
After Reform (2001)
Taxable Income
Marginal Rate
Taxable Income
Marginal Rate
Below 3,168
0%
Below 4,800
0%
3,168 to 50,000
12%
Above 4,800
13%
50,000 to 150,000
20%
Above 150,000
30%
I have chosen Gazprom as the company for this dissertation as it is one of Russia’s biggest providers of tax to the State, and it has, on several occasions, stabilised the State’s economy.6 Although Russia’s tax performance following the implementation of the tax codes has been quite stable, much of its tax revenue comes from distortionary methods, such as the overtaxation of the oil and gas industry.7 The Tax Codes brought a level of transparency to the tax payments of Gazprom, as the company had previously implemented tax avoidance measures which ultimately led it to being fined 658 billion roubles as a result of missing tax payments due to a series of errors made by the company’s book-keepers.8 Although Gazprom evolved from being state-owned to shareholder-owned, the state still retained 51% of the company’s shares; as a result, Gazprom remained a major source of revenue. The tax codes also coincided with the sharp rise in demand for oil and gas in the early 2000s, which resulted in Gazprom being a key part of the country’s income. I will be dissecting the effects the new Tax Codes had on Gazprom, and to what extent the company’s tax profits aided the economy. The growth of Gazprom during Putin’s first term as president is exceptionally substantial given the lack of investment the oil and gas sector received during those years – on average between 1998 to 2004, investments amounted to roughly US $6 billion per year.9 I will be focusing primarily on the years 2000 to 2004, as these years showed the real taxation changes as the Tax Codes came into effect.
The dissertation is organised as follows: chapter one begins with a brief introduction to the Russian economy prior to the default of 1998. It then continues to give an overview of the 1998 default – the causes and impact on the economy. Chapter two begins with an introduction to the Tax Codes, after which there is a detailed outline of wat both parts of the Tax Code entail, their effect on the economy and the extent of their effect (namely Tax Code Part II) had on Gazprom. Chapter three: deals primarily with the tax reform of 2004 – causes and effects.
I will refrain from going into extensive detail on the tax system present in Russia before 1998 as it was a greatly complex system that had bore little similarity to the system that followed. I will, however, give a brief overview of the economic situation that was present prior to the default of 1998.
Issues present with the Russian Tax System following the collapse of the USSR
Following the dissolution of the USSR, Russia was lacking a comprehensive taxation system, as it had simply adopted the Soviet tax laws as it joined the newly formed Commonwealth of Independent States.10 However the framework required for Soviet tax laws to function were not in place and as a result, a complete rework of the tax system was urgently needed.11 The state was left with rising budget deficits, spiraling inflation and declining tax revenues.12 From 1991 to 1998, the absence of clear tax legislation allowed for a haphazard compiling of numerous tax laws, with little importance given to relevance, order and clarity. Although the Russian economy was able to remain fiscally viable for a short term period without any clear structure, the amounting debts and bonds in negative equity were rapidly gaining momentum, and the economy was struggling to remain intact. A major weakness in the Russian economy was the low level of tax collection.13 This caused the public sector deficit to remain at a high level, and whilst the economy was able to temporarily survive due to short term foreign capital, the delayed repayments and difficulty in the ruble pegging the dollar led to a catastrophic collapse. In order to gain control of rising debts and budget deficits, the creation of a new tax regime became one of the first tasks of post-communist Russia, however the government was met with many legal constraints that had not yet been abolished.14 In addition to this, due to elite bargaining and specialist deals, the tax system in place before the Tax Code was inefficient, overcomplicated and convoluted due to the piecemeal way in which it was composed.15 Russia was also limited by a narrow revenue base, that occurred as a result of the command economy design, and the distributution and redistribution of revenue across industries was severely restricted.16 This became a difficult economic set-up in post-USSR Russia, as it became dependent on a small number of large companies for revenue.17 The administrative tax system that was present in the USSR functioned as a ‘bookkeeping appendage of central planning’, and although tax administrations were quite familiar with the economic activities of the large enterprises, they were unfamiliar with much else.18 As a result, all of the necessary factors for economic calamity were present, and finally culminated in the default of 1998.19
Chapter one: The Default of 1998
The default of August 1998 was singlehandedly the most detrimental crisis to affect the Russian economy since 1991, and it confirmed the need for urgent reform, particularly in terms of taxation policy.20 Thus as a result of the default, Russia was forced to restructure the tax system so it would allow for the allocation of spending and revenues between central and regional governments, support the government, and legitimise enterprises.21 Towards the end of June 1998, the Russian Government unveiled an anti-crisis program, that was geared towards bolstering tax revenue, cutting expenditures and quickly implementing structural reforms.22 The following month, the official signing of the new Tax Code Part I was brought into law on the 31st of July, as Federal Law No. 146-FZ.23 The factors that caused the default were largely out of Russia’s control. According to the IMF,24 the crisis was brought on by a combination of factors: weak economic fundamentals particularly in the fiscal area, and the contagion effect from the Asian financial crisis.25 The Asian financial crisis had an insurmountable effect on the Russian economy. The collapse of the Thai baht and subsequent economical crises of several East Asian countries (including China, a major trading partner) contributed to a severe drop in demand for key export commodities such as oil and gas, which had become a major source of revenue for Russia.26 Asia had been an established major trading partner of Russia, and the Russian economy was, at that point, heavily dependent on its trade with the Far East. However, this crisis was not unforseeable. The IMF had previously warned that the progress made in improving the tax systems was insufficient, and that there had been little to no change in tax collection and control expenditures, clarifying intergovernmental fiscal relations, and ensuring transaprency at all levels of government relations.27 Put simply, the reasons for the severe delay in implementing a competent tax system were due to the abundance of low-cost bonds available, and the pegged28 exchange rate between the ruble and the US Dollar.29 This allowed for a system that was temporarily sustainable and attractive to investors, but had no possibility of subsituting a comprehensive tax system that would meet the standards set by the IMF. Although the signing of the new Tax Code into law brought some relief to the economic despair that had arisen in the country, it nevertheless was a severely flawed body of work. The month of August proved contentious in terms of the proposed reforms, which, rejected by the State Duma,30 led the President, Boris Yeltsin to introduce more favourable measures by decree.31 In addition to this, the government defaulted on GKO Treasury Bonds32, imposed a ninety day moratorium on foreign debt payments and abandoned the ruble-dollar exchange rate policy.33 By September of 1998, Russia became the IMF’s highest borrower with a combined debt total equal to $18.8bn.34 There was little improvement in economic terms during the final quarter of the year, with inflation rising to 84%.35 However, with the new year the Russian economy was once again due to thrive again, and this was greatly aided by the official implementation of the Tax Code Part I on the first of January 1999.36
Chapter Two Part I: The Introduction of a new Tax Code
The compiling of the new Tax Code was a hectic ordeal and much of it was borrowed from advanced industrial market economies, whose tax systems had evolved incrementally over an extended period of time.37 The complexity of tax legislation, overlapping laws, excessive levels of taxation, and unregulated relations between tax payers and tax authorities, are to name but a few of the major issues with the tax system prior to the introduction of the Tax Codes.38 A radical economic reform was launched, with particular attention paid to the tax reform. One of the main changes in Russian law that had a direct impact on the implementation of the new Tax Codes is Decree 685 of May 1996, which gave the government power to change (including but not limited to the following): the accounting system, strengthen VAT (by way of requiring VAT taxpayers to use internationally standard invoices, develop a form of presumptive tax for small businesses and to develop simplified depreciation.39 By 1997, the existing tax code consisted of nearly 200 different taxes, yet the tax system was struggling to work effectively.40 This was certainly due to its composure – it was augmented by 1200 presidential decrees and government orders, 3000 legislative acts and 4000 regulatory acts and instructions from ministries and agencies.41 Furthermore, regional governments were allowed to add their own region-specific taxes, and these amounted to more than a hundred across Russia.42 The main features to be implemented were VAT, the replacement of old turnover tax on enterprises, personal income tax on households, unreformed profits tax on enterprises and new excise taxes on the business sector, with a specific emphasis on oil and gas exports.43 Tax administration became the starting point for the new Tax Code, as there was a distinctive lack in guidance from the laws that existed along with unclear use of instructions by the State Tax Service.44 The new Tax Codes gave the State Tax Service heightened level of authority in allocating income, and strived to give a clearer outline of how tax administration could be beneficial to the economy in a simplified way. Some important changes to the tax system were very much business focused – it gave businesses the right to restructure in a tax-free manner, it allowed businesses to claim losses, and notably, placed the burden of proof on the tax authorities in the case of disputes.45 The codification of tax legislation was instrumental in the development of a modern market economy which would bring economic profit, and attract investors.46 Prior to its implementation, the economy was lacking orderly tax regulations, and despite the 200 or so tax legislations established between 1991-1998, the legislations were void of any systemic development and efficiency.47 The contagion effect of the Asian crisis and subsequent rapid fall in oil prices were the catalysts for the new Tax Code, and it was promptly drawn up with the help of the IMF, with much of the tax law being borrowed from other jurisdictions. As a result of its quick execution, the body of law and regulations within the document were peripheral and often ambiguous. Although it did provide a base for a comprehensive taxation system, it consisted of vagueness in the legal terminology, and uncertainty in how to effectively tax properties and organisations.48 It also suffered from a large quantity of references that created complexities in its use for both the taxpayer and tax authorities.49 However, the most detrimental aspect of the new Tax Code was the lack of a conceptual structure – although there was a system of tax collection, the financing of necessary expenses in its execution was unclear.50 In addition to this, as with any large body of new legislation, the Tax Code was the subject of much modification following its implementation.51 Although this is the natural course for legislation as it should reflect a developing economy, the modifications to the Tax Code only served to highlight the inconsistencies of its contents, and did not provide the stability needed of an efficient tax system.52
Tax
% before Tax Code
% after Tax Code
PIT
12, 20 and 30%
13%
VAT
Export tax
Excise tax
Mineral extraction tax
Chapter Two Section II: Tax Code Part I
The first instalment of the Tax Code was created to give the country a comprehensive taxation system for federal, regional and local taxes.53 It offers the basic elements of a taxation system, and focuses on (1) regulating relationships among tax payers, tax agents, tax collecting authorities and legislators, (2) tax audit procedures, (3) resolution of disputes, and (4) enforcement of law.54 The Tax Code reduced fines and penalties for tax violations, however the list of tax violations was considerably increased.55 A section differentiating between premeditated tax violations and honest violations was also established.56 The Tax Code Part I is separated into two sections. The first outlines general principles of taxation and fee collection, and the second deals primarily with particular taxes.57 Although the Tax Code Part I solved many of Russia’s immediate taxation difficulties, much of the borrowed tax law was difficult to impose over a transitionary economy.58
Chapter Two Section III: Tax Code Part II
The second installment of the Tax Code followed in 2001, and restructured the tax system even further by implementing (not limited to) the following: a 13% flat-tax rate (PIT), partial integration of the corporate and individual tax, aided by withholding tax on dividends, further reform on VAT, further simplification of the depreciation proposals outlined in Decree 685, initial reform of the social tax with a cap on contributions, and extensive use of withholding on interest, and other payments such as capital gains on certain securities.59 It also bears significant relevance to business organisations. It provides an outline of taxes payable by organisations and businesses: determines VAT (Chapter 21), excise duty(Chapter 22), and profit tax of the organisations and businesses (Chapter 25).60
Chapter Three Part I: Gazprom – Russia’s leading gas and oil supplier
Gazprom currently controls all Russian natural gas exports.61 According to P. Rodionov, who served as the Deputy Chairman of Gazprom, Gazprom was the most attractive company to invest in in 1998.62 Gazprom’s exceptional productivity comes as a result of its ownership over six oil fields, three Cenomanian fields in Western Siberia that are gigantic (Urengoy, Yamburg and Medvezhe) and three smaller fields (one of which is in Siberia).63 The decline in production at existing fields was compensated by the procurement of an immense field in Siberia (Zapolyarnoe).64 In addition to what is basically a monopoly over Russia’s oil fields, Gazprom quickly became Russia’s leading oil and gas supplier. This was largely due to convenient deals with the government, and the changes in the new Tax Code which allowed Gazprom to finanically aid the state whilst continuing to bolster its own profitability. The reserves owned by Gazprom are staggering: by the late 1990s, Gazprom had acquired nearly 70% of Russia’s gas reserves.65 The contribution from the gas and oil sector was instrumental to the post-crisis growth in Russia. Starting at 1999, the oil sector began to grow at a tremendous rate.66 Although Gazprom is a major supplier of both oil and gas, gas had continued to be the more stable resource of the two, and this is seen in the high fluctuations of economic profit in oil compared to the more stable profits from gas [Insert table].67 Although the implementation of the first Tax Code dealt primarily with general taxation rules and guidelines, it is extremely relevant to the financial dealings of companies such as Gazprom, as it increased the amount of taxes and revenues payable to the government from oil and gas companies whether privately, state, or quasi-state owned.68 The second part of the Tax Code is also of relevance in terms of Gazprom, as it dealt with how corporate taxation shaped the way profits were attained. The Tax Code also included the replacement of three taxes (STATE THREE TAXES)on natural resource extraction with one unified tax, and a reduction in corporate profit tax from 35% to 24%.69 Tax collection was one of the main areas that needed to be simplified and the conditions clearly explained, as there were inconsistencies in payments of tax from Gazprom, and unpaid gas bills to Gazprom owed from government organisations.70
Chapter Three Part II: Gazprom and Taxation
Prior to the implementation of the tax codes, Gazprom faced numerous difficulties in relation to taxation. The Russian government was desperately trying to raise income to cover the rising fiscal debts.71 However the changing of Gazprom from a state-owned company to a joint-stock company greatly increased the profitability and power Gazprom could yield over the Russian gas market. In mid-1998, Gazprom’s payments to the State Tax Service amounted to 25% of Federal tax receipts, however this figure dropped to 20% in 2003.72 This for me is an exceptionally interesting fact, as the government involvement in Gazprom can be clearly seen through the taxation ‘pardons’ Gazprom received as it became more profitable. As much of Gazprom’s rent (economic profit) was streamlined towards the state (much of which was used to pay off the state budget), it made economic sense to alter taxation rules to be more favourable for companies in the oil and gas sector. As Gazprom’s worth as a company rapidly increased, the losses in tax payable were offset by the immense profits the company continued to make.
As Russia was the benefactor of many valuable natural resources, the state did not attempt to increase revenue by cultivating a growing and solid private sector.73 It instead focused on the large enterprises of the energy sector, with Gazprom being a main target.74 This resulted in conflict between the state and the regional elites from the previous command economy, and forced cooperation between the two for the new regime to succeed.75
The Russian government was also put under great pressure in terms of tax collection from the IMF, and needed immediate cash in order for loans to be granted.76 In order to raise the amount of cash urgently needed, the government ordered the Federal Tax Service to confiscate properties at Gazprom’s subsidiaries who owned significant amounts of tax.77 However due to both parties being indebted to each other, it was agreed upon to carry out a monthly mutual cancellation procedure between the government’s gas debt and Gazprom’s tax bill.78 This leads us to ask, what were the reasons being for Gazprom to avoid taxation? It is a universal fact that companies – and especially large ones – often use tax evasion strategies to lessen the economic burdens of high profits, and tax evasion in Russia is an exceptionally significant issue.79 Tax evasion in Russia during the 2000s was estimated to be no less than 40% of the GDP.80 Gazprom is not an exception to this rule. However, the non-payment crisis was particularly tough on Gazprom’s income, as it was under severe political pressure to not disconnect customers, and was also ordered to continue paying taxes on sales, irrespective of whether the monies owed were paid.81 These tensions continued when the government proposed taxing Gazprom’s European exports, which were the company’s most profitable exports.82 In 2004 the government owned 38.4% of Gazprom.83 In 2004 taxes (other than income) payable by Gazprom increased by 118% – from RUR9.6bn to RUR20.8bn due to changes in tax legislation implemented on the 1st of January 2004.84 These changes included the natural resources production tax rate changed from 16.5% of the value of natural gas produced to a fixed rate of 107 roubles per mcm (USD3.7/mcm).85 In addition to this, gas condensate taxes changed from 16.5% if producing from gas condensate fields and RUR 340 per ton if producing from oil and gas condensate fields to a single rate of 17.5% of the value of gas condensate produced.86
The main taxation issue faced by Gazprom before the new Tax Codes were implemented were excise duty taxes on gas. Before the implementation of the Tax Code Part I, excise duty stood at a substantial 30%.87 The first part of the new Tax Code brought some relief to this issue, as excise duty was lowered to 15% for domestic sales and exports to Belarus.88 It did, however, remain at 30% for sales to the rest of the CIS and Europe.89 Further taxation on exports to Europe was introduced at 5% in 2000, and this became a signifier of future trends.90
Tax
Before 2004 export
After 2004 export
Domestic
Excise tax
30.00%
abolished
15.00%
Mineral Extraction tax
RR107/mcm
RR135/mcm (jan 2005)
N/a
VAT
20.00%
19.00% (jan 2005)
chapter three (2500): Gazprom and the effects of tax reforms on Russia’s largest company
The tax reforms had an exceptional effect on Gazprom, as they allowed the company to grow substantially during a time when profits for oil and gas had reached exceptionally high levels. What sets Gazprom apart from many other large companies is its inextricable governmental ties. During the late 1990s and early 2000s, the ownership of Gazprom was opened up to external shareholders (those who had not previoulsy held shares in Gazprom due to governmental ties), however the percentage owned by the state e relies ventually leveled at 51%. As a result, the taxes introduced in the new Tax Code had a doubly significant effect on the government – as Gazprom was a major source of finance for the state, it had to tread the fine line between paying higher taxes, whilst remaining a significantly profitable company. The new Tax Code sought to bring transparency to the tax payments of the gas and oil giant, and this was in stark contrast to the previously undisclosed policies that Gazprom favoured as a way to reduce its tax payments over a number of years.91 One of the main ways Gazprom aimed to implement lower tax payments was through minimum payments (from Gazprom’s central funds) to it’s production companies that would cover only basic requirements – salaries and minimal production costs – and this in turn would leave the production companies to pay either salaries or taxes. This in turn would affect the local tax base, which would be greatly reduced as it on the value of the output of the respective production organisations measured by the internal transfer prices paid by Gazprom to it’s affiliated companies.92 This system was by no means the only way Gazprom attempted to avoid extra taxation, however it is a prime example of the measures the company undertook to increase profitability. Gazprom, like many large companies, has tried to implement measures that would allow it to pay less tax for future profits.93
However the importance of Gazprom to Russia is not solely economical. It has inherited an obligation to maintain that national gas network and supply Russia with gas; as a result of this the company’s corporate freedom is restricted.94 The second main function that Gazprom deals with is the development of the domestic gas market, where it has more independent control over its dealings.95 Domestic consumption is greater than what one might think, as it accounts for 70% of consumption, with the remaining 30% exported, however these figures take into account consumption due to power production, which amounts to roughly 40% of domestic consumption.96
Gazprom currently holds its place as the largest company in Russia, and the biggest provider of gas in the world. The progression of Gazprom during the post-USSR period from a large company to Russia’s conglomerate was initially helped by Victor Chernomyrdin, former Prime Minister of Russia. Chernomyrdin served as Prime Minister from XX to XX, and his role as chairman of Gazprom was instrumental in the contracting of satellite companies of Gazprom to lay pipelines across Russia.97 Although Gazprom faced several rapidly emerging competitors such as XX and XX during the early 2000s, in exchange for a continued social and economic role Gazprom played for the government, it was awarded with extensive monopoly privileges, and resulted in its competitors often relying on Gazprom for pipeline access.98 Gazprom was 38% owned by the government during 2000 .99 The state gradually became a majority shareholder in the following years, with a 51% stake.100 The early 2000’s brought about many changes to Gazprom – the emergence of a dual gas market coincided with the implementation of the Tax Codes.101
Chernomyrdin was often at the centre of these allegations, which amounted to Gazprom giving favourable deals, asset transfers, and below-market share prices to Gazprom-connected companies and family members.102 The year 2000 was a difficult one for Gazprom on several levels. Suffering from underinvestment, production was projected to fall to a ten-year low.103 This followed the $10 billion in losses suffered during 1998-1999.104 The regulatory measures allowed the focus to be kept on the quantities of gas, rather than costs, prices, or profitability criteria which led to an inexpensive and consistent supply of gas.105 The management of the gas sector is regulated through delivery quotas, which Gazprom negotiates with different consumers at prices set by the state.106 Gazprom however only holds 70% of the country’s gas reserves, and as a result has never had complete monopoly over gas production.107 Alongside Gazprom, there are two other categories of gas producers. The first are independent producers such as Itera, Severgaz and Novatekh, and the second category are Russian oil companies – these companies hold significant power over the gas production sector as they control many oil fields with associated gas production.108 These two types of gas producers accounted for 6% of all Russian gas production in 1996, and this figure continued to grow in the early 2000s.109
Just how important is Gazprom in terms of the total GDP (gross domestic product)? According to national accounts, the oil and gas sectors account for 11% of the total GDP and are also the source of nearly two-thirds of the country’s total export revenues.110 In addition to this, they account for almost half of federal budget revenues.111 From these figures, it is clear to see to what extent Gazprom has an importance in the Russian economy. Although Gazprom alone does not account for all these figures, it remains the main source of oil and gas output in the Russian Federation. Exports of Russian oil and gas to the Commonwealth of Independent States (CIS) countries are made at below market prices.112 There is great disparity between the prices charged for gas to countries of the former USSR and Western Europe – the former USSR countries pay roughly one-fifth of the price charged to Western clients.113 After Putin became president in 2000, state policy regarding the management of several oil companies changed. Gazprom was appointed with a new management team, and the new board of directors was filled with government representatives.114 The relationship between the Russian government and Gazprom has always been opaque, and it is widely known that Gazprom benefited from several concessions allowing it to effectively monopolise the gas market.115 Some sources will contest that Gazprom is a monopoly, and this is understandable as technically it is not. However when it was transformed from a state to a joint-stock company it it was given the rights to all main gas fields.116 Although a concession to the State Committee for Property ensured that there was access for other companies to the gas transmission system, it remained virtually impossible for independent companies to break into the gas market due to Gazprom’s ownership of all major fields.117 The Gazprom shares failed to sell at open auction, and so were sold at closed-auction to people who had proof of residency in the regions where the main production and transportation organisations of Gazprom were located.118 The restructuring of Gazprom allowed for the strengthening of the amount of control management at the top had over the company.119 Gazprom represented 5% of the GDP in the year 2003, along with roughly 15% of foreign currency earnings.120
Chapter Four Section I: The gas industry taxation overhaul of 2004
Intro – environmental tax of 2003
Following the implementation of the Tax Code, the overhaul of the taxation of the gas industry in 2004 was the most significant change in taxation for Gazprom. The new taxation rules brought several changes: export tax was increased from 5% to 30%, VAT was reduced from 20% to 18%, excise tax was abolished, and mineral extraction tax was increased from 16.5% to a flat rate of RR107/mcm.121 The reasons for these changes were primarily due to the huge increases in European export prices in the early 2000s which arose due to extremely high oil prices, coupled with rising domestic prices.122 Gazprom was, however, a beneficiary of these tax changes. Many independent suppliers fought against the change from excise tax to mineral extraction tax, as this threatened their businesses.123 As a result of continuous lobbying from independent companies, the mineral extraction tax was set at RR107/mcm, a much lower figure than the initially proposed RR197/mcm.124 The gas and oil sector contributed to industrial production growth, at its peak, around 70% during 2001-2004.125 The sharpest rise in Russian growth as a result of oil extraction and export was in 2001.126
Informal Taxes:
Along with the two Tax Reforms, there was also the issue of informal taxes, that companies (often happily) were obliged to pay. Informal taxes, by definition, are any taxes payable outside of formal tax obligations, such as bribes, payments in kind, or padded contracts.127 These taxes to government organisations or communities have no legal obligation, but are often described as ‘compulsorily voluntary’.128 The informal taxes sector, according to a recent study on corruption in Russia, found that between the 2001-2004 period bribes paid through the form of informal taxes increased ninefold.129 Another important part of the informal taxes are excess costs, as the economic profit garnered from excess costs are exclusively allocated to production enterprises in the non-gas and oil sector.130 The second Tax Code introduced in 2001 had an exclusively fiscal orientated approach, and flexibility to take in varying conditions in different sectors was visibly absent.131 The Tax Code gave little incentive in terms of taxation for companies to develop fields in new regions and as a result, the majority of production continued to take place in the old regions.132 Oleg Vyugin (research more) was one of the people who was thoroughly involved in Putin’s tax reform plans.133
Conclusion (1500)
Although Gazprom remains Russia’s largest company and the largest exporter of oil and gas, it is facing an increase in competition from new gas companies both domestic and foreign.134
The implementation of the new Tax Code had an enormous effect on the Russian economy. The opening up of the market economy allowed Russia to experience an exceptionally high rate of growth following the default of August 1998, and allowed it to become one of the world’s leading gas and oil suppliers. The effect of the new Tax Code on Gazprom was acute, however it permitted to company to restructure internally, whilst retaining its profitability. It is important to note that although the Tax Code enabled the system to become more transparent, by no means did it successfully eradicate sweetheart deals between the authorities and profitable state-linked businesses.