Global Policy Forum

By Valeria Korchagina

Less than a week after winning re-election in a landslide, President Vladimir Putin announced the primary economic mission of his second term -- fighting poverty -- and gave the Cabinet its orders. The share of Russians living below the poverty line should be halved in three years, Putin demanded. The means to achieve this goal, he said, include increasing taxation on the oil industry and reducing the tax burden on other sectors to help the economy diversity and grow faster.

"The tasks that are being set should be more ambitious," Putin told Economic Development and Trade Minister German Gref at a meeting Friday with staff from his ministry and the Finance Ministry. Other government officials also attended the meeting, parts of which were shown on state television.

Putin quickly proceeded to extract a promise from Gref that the share of the population living below the poverty line would shrink from the current 20.4 percent to 10 to 12 percent in three years. "It is desirable for it to happen in three to four years," Gref told Putin. The president, however, insisted on a stronger pledge. "Don't be shy, say it: In three years this level will be achieved," Putin said. "We will do our best," Gref replied.

The poverty line for the last quarter of 2003, the latest State Statistic Committee data available, stood at 2,143 rubles, about $75. Despite the impressive economic growth of the past five years, consumption has only just now exceeded the 1990 level. Before 1999, growth in gross domestic product was registered only once, in 1997, and even then it was under 1 percent.

Russia's GDP grew by 7.3 percent last year, the fifth consecutive year of growth. The government forecasts 5.8 percent GDP expansion in 2004, although many observers believe the figure will be higher. "Today, we need mechanisms that would be able to sustain intensive qualitative economy growth. This will allow us to radically boost gross domestic product and sharply cut the poverty rate," Putin said. These goals, along with modernizing the armed forces, were among the three priorities he laid out in his state of the nation address last May.

In particular, Putin on Friday once again stressed that the oil industry should be squeezed for more money in times of high oil prices. Under the government's plan, a new system of taxes and export duties would add $2 billion per year to the federal budget if the price of oil averages $27 per barrel, Finance Minister Alexei Kudrin said.

The envisaged new taxation system, though consistent with what Kudrin and Gref have said before, appears to be much milder than proposals voiced just weeks ago by some members of the previous Cabinet, which called for up to an additional $6 billion a year in taxes to be squeezed out of the oil industry.

"Today we are proposing making the relation between the tax rate on the extraction of natural reserves and the oil prices more precise -- reducing [the rate] when prices are low, but increasing it when they are higher," Kudrin was quoted by Interfax as saying. For example, Kudrin said, if oil should stay at $30 per barrel, the benefit would be an extra $3.3 billion. Should the price drop to $24 per barrel, the additional budget revenues would drop to $900 million a year, he said.

The other side of Kudrin's plan to fine-tune the tax system would give a boost to other industries by slashing the starting rate for the progressive unified social tax from the current 35.6 percent to 26 percent as of 2005. The government has already reduced the value-added tax from 20 percent to 18 percent, and also has got rid of the sales tax, which in many regions reached up to 5 percent. According to Kudrin, the reduction in the unified social tax would save employers across the country some 280 billion rubles ($9.8 billion).

"We have never taken such a step to reduce taxes before," he was quoted by Reuters as saying. "The revenue will contribute first of all to modernization and investment." Employers also are expected to have an incentive to bring workers officially onto their books. Kudrin pledged not to increase the personal income tax rate, which stands at a flat 13 percent. "We think that currently and for the future the 13 percent rate should be kept," he said. Gref, however, indicated that eventually the income tax could change. But Putin stood by Kudrin and said that once a fiscal system is in place, it should remain intact for a long period of time.

"It is very important that after the completion of a tax reform, the basic components of the tax system are not reviewed for many, many years to come," Putin said. But squeezing the oil industry for more money and lifting some of the tax burden from other sectors of the economy will not solve all the problems, particularly for the older segment of the population. For example, Kudrin said the government is considering whether to increase the retirement age from the current 55 years for women and 60 for men, with the aim of decreasing the number of poor people in the older age groups.