Budget of the Russian Federation
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Last updated: August 10, 2017
Having reduction of the budget deficit as the major goal of the budgetary policy for the coming years (2017-2020), the state elaborated a variety of actions focusing on budgetary revenues’ increase together with measures aimed at budgetary cost-cutting (so-called “measures on fiscal consolidation”).
- Measures on Budgetary Revenues’ Increase
Given that there are quite limited prospects on budgetary revenues’ increase due to domestic economic activities’ growth, the measures on fiscal consolidation have been focusing on direct and indirect taxation measures and tax collection efforts.
Under the present roadmap of the top state authorities that was introduced in 2014 for the period of 4 years, the increase in the core taxes, such as personal income tax or corporate tax, is considered to be the last resort for the case of pessimistic scenario on development of external factors (primarily crude oil price) or subject to adopted economic reforms. Therefore, the fiscal measures of the state presently address the scope outside manipulations with the core taxes that may substantially impact the business.
A number of measures have been considered in the adopted federal budget for 2017-2019, and a number of amendments to the Russian Tax Code and the Russian Budgetary Code have been made for their introduction. The most part of those changes have been brought by the federal law #401-FZ “On Amendments to Parts 1 and 2 of the Tax Code of the Russian Federation and Selected Legislative Acts of the Russian Federation” dated November 30, 2016.
Among additional measures on the federal budget revenues increase being implemented or planned in 2016-2017 we can mention introduction of Platon (a toll system for heavy trucks), introduction of the daily resort fee for tourists visiting selected regions (Crimea, Altai, Krasnodar and Stavropol) starting from January 1, 2018 and plans on introduction of 22 / 22 tax reform in 2018.
- Measures on Restraining Budgetary Outlays
Key Measures of Fiscal Consolidation
The following fiscal consolidation measures have been introduced in 2017 (see Historical Notes below on discussions and proposals in relation to fiscal consolidation measures):
- Increase in excise duties starting from 2017 (see Changes in Excise Duties section for details).
- Substantial increase in excise duties for tobacco products;
- Introduction of excise duties for e-cigarettes and related products;
- Substantial increase in excise duties for wine;
- Substantial increase in excise duties for middle oil distillates;
- Indexation of excise duties for oil products (substantial increase already took place starting from 2Q 2016);
- Indexation of excise duties for a number of other products.
- Introduction of limitation on reduction of the corporate tax base due to losses of previous periods. In 2017-2020 the yearly tax base may be reduced for only up to 50% of loss of previous periods. At the same time, the 10-years limit on considering losses of previous periods in the tax base have been removed;
- The penalty for non-payment taxes, duties and fees (delay of more than 30 days) is corrected for legal entities from 1/300 to 1/150 of the base rate per day;
- Re-distribution of the corporate tax revenues from the regional budgets towards the federal budget (from present 18% / 2% to 17% / 3% distribution).
- Setting the requirement on distribution of dividends by the state-owned companies to 50%;
- Increased borrowings in the domestic market (issue of OFZ-n bonds for private persons);
The full list of the major measures aimed at the federal budget deficit coverage discussed over September-October 2016 in the course of preparation of the federal budget draft for 2017-2019 included the following ones:
- Changes in taxation of the O&G sector,
- Increase in dividends from the state-run companies,
- Privatisation of the state assets,
- Freezing selected investment projects financed from sovereign funds,
- Increase in borrowings in the domestic market,
- Increase in borrowings in the international markets,
- Increase in taxes, duties and fees,
- Increase in payments to extra-budgetary funds,
- Re-distribution of the corporate tax revenues from the regional budgets towards the federal budget (from present 18% / 2% to planned 17% / 3% distribution),
- Increase in revenues from the property tax for private persons by means of obligation of the land plot owners to pay the tax for the non-registered buildings and facilities located at those land plots.
The Ministry of Finance indicated the intended measures in the beginning of October 2016 in the Key Directions of the Tax Policy for 2017 and the Planning Period of 2018 and 2019. The projected net effect of those measures over 2017-2019 with the aim to reach about 1.1% of GDP is provided below.
|Total net effect||983||1020||1104|
|Changes in taxation of the O&G sector||150||175||210|
|Severance tax for gas (prolongation of tax increase similar to 2016)||170||170||170|
|Dividends of the state companies fixed at 50% of net income||339*||296||263|
|Increase in excise duties for tobacco products (+10% each year)||35||82||122|
|Increase in excise duties for oil products||126||167||199|
|Sales from the State Reserve (stock of strategic materials and goods reserved for mobilisation needs and emergencies)||40||0||0|
|Increase in corporate tax share distributed to the federal budget (from 2% to 3% out of 20%)||122||130||140|
* - including dividends of Sberbank transferred as the net income of the Russian Central Bank.Source: Ministry of Finance, Vedomosti newspaper.
Changes in Excise Duties
The excise duties to be applied in 2017-2019 have been finally introduced by the federal law #401-FZ “On Amendments to Parts 1 and 2 of the Tax Code of the Russian Federation and Selected Legislative Acts of the Russian Federation” dated November 30, 2016. The changes in excise duties starting from 2017 are provided below in comparison with the duties effective in 2016.
Changes in Excise Duties for 2017-2019 Introduced by Amendments to the Russian Tax Code (law #401-FZ) to Be Effective Starting from 2017
|Article||Rates||Article in the Russian Tax Code|
|2017||2018||2019||1Q 2016 (reference)||2Q-4Q 2016 (reference)|
|Ethyl spirit proper or not proper for human consumption sold to organisations that do not pay excise duties in advance||RUR 107 per litre of anhydrous spirit contained in a product||RUR 107 per litre of anhydrous spirit contained in a product||RUR 107 per litre of anhydrous spirit contained in a product||RUR 102 per litre of anhydrous spirit contained in a product||RUR 102 per litre of anhydrous spirit contained in a product||Clause 1 of Article 193|
|Products with spirit content, excluding perfumes and household chemicals in metal spray cans||RUR 418 per litre of anhydrous spirit contained in a product||RUR 418 per litre of anhydrous spirit contained in a product||RUR 418 per litre of anhydrous spirit contained in a product||RUR 400 per litre of anhydrous spirit contained in a product||RUR 400 per litre of anhydrous spirit contained in a product||Clause 1 of Article 193|
|Alcohol with ABV (alcohol by volume) exceeding 9%, not including beer, wines, fruit wines, sparkling wines, wine beverages produced without adding rectified ethyl spirit proper for human consumption and/or fortified grape (or other fruit) must and/or wine distillate and/or fruit distillate.||RUR 523 per litre of anhydrous spirit contained in a product||RUR 523 per litre of anhydrous spirit contained in a product||RUR 523 per litre of anhydrous spirit contained in a product||RUR 500 per litre of anhydrous spirit contained in a product||RUR 500 per litre of anhydrous spirit contained in a product||Clause 1 of Article 193|
|Alcohol with ABV (alcohol by volume) less than or equal to 9%, not including beer, wines, fruit wines, sparkling wines, wine beverages produced without adding rectified ethyl spirit proper for human consumption and/or fortified grape (or other fruit) must and/or wine distillate and/or fruit distillate.||RUR 418 per litre of anhydrous spirit contained in a product||RUR 418 per litre of anhydrous spirit contained in a product||RUR 418 per litre of anhydrous spirit contained in a product||RUR 400 per litre of anhydrous spirit contained in a product||RUR 400 per litre of anhydrous spirit contained in a product||Clause 1 of Article 193|
|Wine (excluding PDO and PGI wines and sparkling wines), fruit wine, wine beverages produced without adding rectified ethyl spirit proper for human consumption and/or fortified grape (or other fruit) must and/or wine distillate and/or fruit distillate.||RUR 18 per litre||RUR 18 per litre||RUR 18 per litre||RUR 9 per litre||RUR 9 per litre||Clause 1 of Article 193|
|Cider, perry and mead||RUR 21 per litre||RUR 21 per litre||RUR 21 per litre||RUR 9 per litre||RUR 9 per litre||Clause 1 of Article 193|
|Sparkling wine (excluding PDO / PGI)||RUR 36 per litre||RUR 36 per litre||RUR 36 per litre||RUR 26 per litre||RUR 26 per litre||Clause 1 of Article 193|
|Sparkling wine (PDO / PGI)*||RUR 14 per litre||RUR 14 per litre||RUR 14 per litre||RUR 13 per litre||RUR 13 per litre||Clause 1 of Article 193|
|Beer and beer-based beverages with ABV (alcohol by volume) above 0.5% and up to 8.6% (inclusive)||RUR 21 per litre||RUR 21 per litre||RUR 21 per litre||RUR 20 per litre||RUR 20 per litre||Clause 1 of Article 193|
|Beer with ABV above 8.6%||RUR 39 per litre||RUR 39 per litre||RUR 39 per litre||RUR 37 per litre||RUR 37 per litre||Clause 1 of Article 193|
|Tobacco (excluding tobacco used in production)||RUR 2520 per kg||RUR 2772 per kg||RUR 3050 per kg||RUR 2000 per kg||RUR 2000 per kg||Clause 1 of Article 193|
|Cigars||RUR 171 per each||RUR 188 per each||RUR 207 per each||RUR 141 per each||RUR 141 per each||Clause 1 of Article 193|
|Cigarillo, beedi, kretek||RUR 2428 per 1000 pcs||RUR 2671 per 1000 pcs||RUR 2938 per 1000 pcs||RUR 2112 per 1000 pcs||RUR 2112 per 1000 pcs||Clause 1 of Article 193|
|Cigarettes||RUR 1562 per 1000 pcs plus 14.5% of max retail price, but not less than RUR 2123 per 1000 pcs||RUR 1718 per 1000 pcs plus 14.5% of max retail price, but not less than RUR 2335 per 1000 pcs||RUR 1890 per 1000 pcs plus 14.5% of max retail price, but not less than RUR 2568 per 1000 pcs||RUR 1250 per 1000 pcs plus 12.0% of max retail price, but not less than RUR 1680 per 1000 pcs||RUR 1250 per 1000 pcs plus 12.0% of max retail price, but not less than RUR 1680 per 1000 pcs||Clause 1 of Article 193|
|Electronic cigarettes and related products, including consumables||Excise duties introduced (see rates below)||Excise duties introduced (see rates below)||Excise duties introduced (see rates below)||No||No||Clause 1 of Article 181 (sub-clauses 15-17 are introduced)|
|Tobacco and tobacco products designated for the use by means of heating||RUR 4800 per kg||RUR 5280 per kg||RUR 5808 per kg||No||No||Clause 1 of Article 193|
|Electronic systems of nicotine delivery (e-cigarettes)||RUR 40 per unit||RUR 44 per unit||RUR 48 per unit||No||No||Clause 1 of Article 193|
|Liquids for electronic systems of nicotine delivery (e-cigarettes)||RUR 10 per ml||RUR 10 per ml||RUR 10 per ml||No||No||Clause 1 of Article 193|
|Motor cars with engine power above 67.5 kW (90 hp) and up to 112.5 kW (150 hp) inclusive||RUR 43 per 0.75 kW (1 hp)||RUR 45 per 0.75 kW (1 hp)||RUR 47 per 0.75 kW (1 hp)||RUR 41 per 0.75 kW (1 hp)||RUR 41 per 0.75 kW (1 hp)||Clause 1 of Article 193|
|Motor cars with engine power above 112.5 kW (150 hp)||RUR 420 per 0.75 kW (1 hp)||RUR 437 per 0.75 kW (1 hp)||RUR 454 per 0.75 kW (1 hp)||RUR 402 per 0.75 kW (1 hp)||RUR 402 per 0.75 kW (1 hp)||Clause 1 of Article 193|
|Motorcycles with engine power above 112.5 kW (150 hp)||RUR 420 per 0.75 kW (1 hp)||RUR 437 per 0.75 kW (1 hp)||RUR 454 per 0.75 kW (1 hp)||RUR 402 per 0.75 kW (1 hp)||RUR 402 per 0.75 kW (1 hp)||Clause 1 of Article 193|
|Gasoline excluding class 5||RUR 13100 per ton||RUR 13100 per ton||RUR 13100 per ton||RUR 10500 per ton||RUR 13100 per ton||Clause 1 of Article 193|
|Class 5 gasoline||RUR 10130 per ton||RUR 10535 per ton||RUR 10957 per ton||RUR 7530 per ton||RUR 10130 per ton||Clause 1 of Article 193|
|Diesel fuel||RUR 6800 per ton||RUR 7072 per ton||RUR 7355 per ton||RUR 4150 per ton||RUR 5293 per ton||Clause 1 of Article 193|
|Motor oil for diesel and carburettor (injector) engines||RUR 5400 per ton||RUR 5400 per ton||RUR 5400 per ton||RUR 6000 per ton||RUR 6000 per ton||Clause 1 of Article 193|
|Straight-run naphtha||RUR 13100 per ton||RUR 13100 per ton||RUR 13100 per ton||RUR 10500 per ton||RUR 13100 per ton||Clause 1 of Article 193|
|Benzol, paraxylene, orthoxylene||RUR 2800 per ton||RUR 2800 per ton||RUR 2800 per ton||RUR 3000 per ton||RUR 3000 per ton||Clause 1 of Article 193|
|Aviation kerosene||RUR 2800 per ton||RUR 2800 per ton||RUR 2800 per ton||RUR 3000 per ton||RUR 3000 per ton||Clause 1 of Article 193|
|Middle oil distillates||RUR 7800 per ton||RUR 8112 per ton||RUR 8436 per ton||RUR 4150 per ton||RUR 5293 per ton||Clause 1 of Article 193|
Source: law #401-FZ, the Russian Tax Code as of December 2016.
*In May 2017 the Ministry of Finance put imported PGI and PDO wines outside the definition of PGI / PDO wines subject to lower excise duties provided by the Tax Code.
Limitation on Reduction of the Tax Base Due to Loss of Previous Periods
It terms of tax obligations of the companies operating in Russia one the most important amendments concerned the possibility to consider the loss of previous periods in the taxation base of the current year. Starting from January 1, 2017 and ending with December 31, 2020 the taxation base for the current year may be reduced for only 50% of loss of previous periods (clause 2.1 of article 283 of the Russian Tax Code was amended by the law #401-FZ).
Changes in Taxation of the O&G Sector
Starting from 2018 the government plans to implement new taxation system for O&G sector that could bring about RUR 600 billion annually to the budget. That system assumes introduction of the added income tax (nalog na dobavlenniy dokhod, налог на добавленный доход) to replace export duties and partially severance tax. According to formulas agreed by the Ministry of Energy and the Ministry of Finance, the added income tax rate is stated at 50% for the income from oil sales excluding extraction and transportation costs. In case the oil price is at USD 50 per barrel, the tax will amount to USD 17.5 per barrel or 35% of the oil price (as of the mid-2016, severance tax and export duties stood at about 42% of the oil price). The tax reform will initially cover new deposits and selected old deposits with extraction volumes below 10 million tons (there will be a list of pilot projects for them). For new deposits (until the year 8 of operations) there will be lower rates (at the level of around 14% of oil price until the year 5 and a bit more afterwards).The introduction of the new tax system at selected old deposits will lead to decrease in tax revenues from them, so it will only be possible in case of increase in severance tax for the remaining deposits. Based on discussions in the government that took place in September 2016, the greenfield projects enjoying specific tax benefits are supposed to have an option, but not an obligation of introduction of the new taxation system. On December 16, 2016 at the meeting of the Government Commission on Issues Related to the Fuel and Energy Sector and Increase of the Energy Efficiency of the Economy led by Vice Prime Minister Arkady Dvorkovich it was confirmed that the added income tax is supposed to be introduced in the pilot mode starting from 2018.
On September 26, 2016 it was announced that the Ministry of Finance plans to withdraw additional tax revenues from the oil companies in 2017 for the total sum of RUR 238 billion by means of increase of severance tax (approximately by USD 1 per barrel, i.e. by RUR 473 per ton up to RUR 1 392 per ton). Given introduction of added income tax, the net tax effect will amount to approximately RUR 200 billion as it was initially expected. At the same time, it was decided not to increase excise duties for oil if not urgently needed for the federal budget balancing.
On October 5, 2016 the Ministry of Finance provided the draft of the key directions of the tax policy for 2017-2019 to the government. Referring to the document, it was decided to slow down increase in severance tax for the oil companies in 2017 with the planned growth by RUR 306 per ton (RUR 357 per ton in 2018 and RUR 428 per ton in 2019) and estimated additional tax revenues for the year decreasing to RUR 150 billion. At the same time, the Ministry proposed not to decrease excise duties for class 5 gasoline (decrease from RUR 10 130 to RUR 7 430 per ton was initially planned for 2017) and to increase excise duties for diesel fuel up to RUR 7 400 per ton in 2017, RUR 7 700 per ton in 2018 and RUR 8 080 per ton in 2019 (decrease from RUR 5 290 to RUR 5 090 per ton was initially planned for 2017) with projected additional tax revenues at RUR 190 billion. Thus, the overall additional revenues are projected to increase from RUR 238 billion to RUR 340 billion. The export duties for oil and oil products are still expected to be abolished.
The following dynamics of excise duties for oil products for 2017-2019 have been proposed by the Ministry:
- Gasoline not complying with class 5 and straight-run gasoline: keep the excise duty at RUR 13 100 per ton in 2017-2019;
- Class 5 gasoline: RUR 10 130 per ton in 2017, RUR 10 637 per ton in 2018 and RUR 11 062 per ton in 2019;
- Diesel fuel: RUR 7 400 per ton in 2017, RUR 7 770 per ton in 2018 and RUR 8 080 per ton in 2019;
- Middle oil distillates (definition is provided in clause 1.11 of article 181 of the Russian Tax Code): RUR 8 400 per ton in 2017, RUR 8 770 per ton in 2018 and RUR 9 080 per ton in 2019.
On October 18, 2016 the mass media reported on further changes in taxation of the O&G sector proposed by the Ministry of Finance. Those changes primarily assume correction of excise duties for the diesel fuel and the middle oil distillates presumably due to growing concerns over increasing share of surrogate diesel fuel made of middle oil distillates (heating oil, marine fuel oil, etc.).
|Changes in severance tax for oil companies, RUR per ton||+306||+357||+428|
|Changes in severance tax for gas (Gazprom, not including Gazprom Neft), RUR per 1000 m3||+413||n/a||n/a|
|Excise duties for class 5 gasoline, RUR per ton (4% annual growth after 2017)||10 130||10 637||11 062|
|Excise duties for diesel fuel, RUR per ton (4% annual growth after 2017)||6 800||7 072||7 355|
|Middle oil distillates, RUR per ton (4% annual growth after 2017)||7 800||8 112||8 436|
Source: Kommersant newspaper, calculations by Factosphere.
Increase in Dividends from the State-Run Companies
On September 23, 2016 the Ministry of Finance proposed to fix the dividends of the state-run companies at 50% of their net income under IFRS for the coming years.
On April 27, 2017 Mr. Dmitry Medvedev, the Russian Prime Minister, ordered to secure the dividend payments of not less than 50% of the net income of the state-controlled joint stock companies (including infrastructure companies, O&G companies and companies of the defence industry).
In the beginning of April 2017 Mr. Anton Siluanov, the Russian Minister of Finance, commented to the press that in case the appropriate decision is made, the outlays of the federal budget for 2017 will be increased for the sum of additional budgetary revenues. According to the available estimates, the Russian budget is expected to receive RUR 150 billion (about USD 2.6 billion) of dividends of the state-controlled companies for 2016.
Selected companies with the majority shareholding belonging to the state were able to agree on the special terms with the Government. Specifically, RosNeft is to distribute only 35% of the net income as dividends.
Privatisation of the State Assets
The role of the state in the Russian economy is presently considered to be enormously extensive, and the state demonstrates commitment to arranging privatisation of a number of large companies with state participation.
In his interview to Bloomberg (September 2016) Mr. Vladimir Putin noticed on privatisation on the state-controlled companies: “The state really is perhaps too big in the Russian economy now. But in a falling market, even from the point of view of fiscal interests, it doesn’t always make sense, so we’re taking it carefully. But our trend, from the standpoint of privatization and the state’s gradual withdrawal from certain assets, is unchanged and will remain unchanged.”
At present the state generally sticks to selling non-controlling stakes in the largest state-owned companies with the general belief that it is the only proper approach to protection of the state interests. However, there are proposals from the side of the Ministry of Finance on limiting the state participation to the blocking interest to be held only in selected industrial companies.
According to the budgetary revenues’ projections of the Russian Ministry of Finance, SovComFlot, a maritime shipping company, is likely to be the sole large state-owned company privatised in 2017.
The following largest companies have been a part of privatisation plan for 2016-2017:
Alrosa (diamonds producer)
In July 2016 the state sold 10.9% shareholding in Alrosa, one of the world’s largest diamond producers, for RUR 52.3 billion.
The state considers decreasing its shareholding in Alrosa from 33% to 29%+1 share as a result of implementation of privatisation program for 2017-2019. The program envisages coordination of sale of a shareholding belonging to the Republic of Sakha-Yakutia and also shares held by ulus nationality in Yakutia.
Bashneft (oil company)
The privatisation of 50.08% shareholding in Bashneft was planned for September 2016, and Rosneft, the largest Russian oil company controlled by the state, joined the list of bidders with announced rationale to increase valuation of Rosneft before its privatisation.
However, the idea of participation of the state-run company in privatisation was not supported by the Government and is said to be declined by Mr. Putin personally. As a result, after numerous discussions in the Government in August 2016 Bashneft’s privatisation was put on hold for an undefined period, while Mr. Sechin, the head of Rosneft, is said to be making further attempt with proposal on bringing in USD 16 billion to the Russian budget (USD 5 billion for controlling interest in Bashneft followed by USD 11 billion sale of 19.5% shareholding in Rosneft in the course of its privatisation).
On September 30, 2016 there was a surprising decision on proceeding with privatisation of Bashneft. Rosneft was allowed to participate, and the company appears as the most possible bidder even with a chance of closing the deal with no competition at RUR 325 billion.
On October 6, 2016 it was announced that the Russian Government approved the acquisition of Bashneft by Rosneft and gave an order to the board of Rosneft to buy 50.0755% shareholding in Bashneft for no more than RUR 330 billion (USD 5.3 billion) signing transaction documents not later than October 15, 2016.
On October 12, 2016 the mass media reported that Rosneft acquired the target shareholding in Bashneft for RUR 329.7 billion and the appropriate funds had already been transferred to the Russian budget. Thus, it was possible to execute privatisation plans on Bashneft in 2016, while the transaction can be considered as one of the fastest large privatisation deals in the Russian history.
Rosneft (Oil Company)
The government intention to sell 19.5% shareholding in Rosneft, the largest Russian oil company (out of 69.5% shareholding owned by the state) had been initially disclosed in Privatization Plan for 2014-2016 adopted in July 2013.
In his interview to Bloomberg (September 2016) Mr. Putin commented on the sale of Rosneft: “We’re preparing for this deal this year. I don’t know whether the government will be able to prepare and do this deal together with Rosneft’s management, whether appropriate strategic investors will be found. I think that we should be talking about precisely such investors, but we’re preparing and planning to do the deal this year.”
In the mid-October 2016 Mr. Vladimir Putin, the President of Russia, commented to the press that the state considers buy-back of the target shareholding by Rosneft until the end of 2016 as an intermediate step with further efforts to secure “real” privatisation of the asset. That option was confirmed further by Mr. Alexey Ulyukaev, the Russian Minister of Economic Development. On November 7, 2016 it was announced that the state obliged RosNefteGas, the nominal shareholder of Rosneft, to close the transaction until December 5, 2016 with transaction value not less than RUR 710.85 billion and transfer appropriate funds to the Russian budget until December 31, 2016.
Given extremely tight time framework for the deal, buyback by RosNeft looked as a highly probable scenario, but the factual transaction did not meet the expectations. On December 8, 2016 it was announced that the target shareholding is to be acquired by Glencore, the global commodity trader owning also a number of mining businesses, and Qatar Investment Authority, which is Qatar’s sovereign wealth fund and Glencore’s largest shareholder. The transaction value was indicated at EUR 10.2 billion to be closed until the year end.
SovKomFlot is the Russian maritime shipping company specializing in petroleum and LNG shipping that operates a fleet approaching 150 ships with sales exceeding USD 1.5 billion in 2015 (100% owned by the state). The company was initially announced to be a part of privatisation plan for 2016 assuming sale of 25% minus one share, but the privatisation was reportedly postponed for 2017. On February 2, 2017 it was confirmed that the company will be a subject of privatisation plan for 2017-2019 and that the state plans to end up with 25% - 1 share.
On May 18, 2017 it was announced that the state plans launching privatisation of SovComFlot in June 2017. The non-blocking interest (25%-1 share) will be offered for sale with expected valuation at RUR 24-30 billion (USD 420-525 million).
VTB, one of the largest Russian banks with 60.9% shareholding belonging to the state (the remaining shareholding is a free float, including GDR), was initially announced to be a part of 2016 privatisation plan. 10.9% shareholding was expected to be sold so that the state would retain control. However, the privatisation of VTB was postponed for 2017 with sanctions among the indicated reasons. On February 2, 2017 it was announced that the state considers ending up with the blocking interest in VTB (25%+1 share) as a result of privatisation program for 2017-2019.
Other Companies Included in the Privatisation Plan for 2017-2019
- Russian Railways (Rossiyskie Zheleznie Dorogi, RZD, http://eng.rzd.ru/)
- Post of Russia (Pochta Rossii, https://www.pochta.ru/)
- AO PZCM (Prioksky Zavod Tsvetnykh Metallov, Oka Non-Ferrous Metals Plant, http://www.zvetmet.ru/) is the precious metals refining plant located in the Ryazan region.
- PO Kristall (Proizvodstvennoye Obyedinenie Kristall, Smolensk Kristall) is the largest Russian producer of diamonds and one of the world’s largest diamond cutting facilities.
Freezing Investment Projects Financed from Sovereign Funds
In September 2016 the Russian Ministry of Finance reportedly considered freezing financing of selected current investment projects from the National Wealth Fund as one of the options of the budget deficit coverage. The required volumes of freezing were estimated at RUR 261 billion.
Borrowings in the Domestic Market
Referring to results of Bloomberg poll (June 2016), Russia can quadruple its domestic debt from 10% to 40% of GDP before it becomes a source of systematic risk.
The Russian Central Bank led by Ms. Elvira Nabiullina is more inclined towards financing the budget deficit with a combination of domestic debt instruments (like OFZs – federal bonds) and sovereign funds rather than sovereign funds alone (position of the Ministry of Finance).
According to estimates of the Ministry of Finance, Russia will have to increase net domestic borrowings via OFZ by RUR 1 trillion in 2017-2019 in case the other options on the budget deficit coverage are not employed (like increase in taxes).
On October 12, 2016 the Ministry of Finance provided the draft of the Federal Law “On the Federal Budget for 2017 and the Planning Period of 2018 and 2019” for public discussion (anti-corruption assessment) with the following indicators on the internal debt:
|Cap of the internal debt as of the end of the year, RUR billion||10351.623798||11580.9406172||12788.3866311|
|Cap of the internal debt as of the end of the year, % of GDP||11.93%||12.55%||12.94%|
Source: Ministry of Finance, calculations by Factosphere.
On April 26, 2017 the state started sales of the Russian Government bonds designated solely for private persons (OFZ-n). The exclusive placement agents are Sberbank and VneshTorgBank (VTB). The coupon rate for the first coupon was 7.5% pa increasing to 10.5% pa for the sixth coupon. The issue size is RUR 15 billion (about USD 280 million), while there is a possibility of increase to RUR 30 billion (about USD 560 million) subject to the demand conditions. The placement end date is October 25, 2017. The maturity date is April 29, 2020. The total volume of orders for the first day of sales exceeded RUR 1.6 billion (USD 28 million).
Borrowings in the International Markets
As of July 2016, the total Russian external debt was at USD 521.46 billion, including USD 44.5 billion of the public debt (USD 34.85 billion of general government debt and USD 9.65 billion of Central Bank debt). Therefore, the external public debt is approximately at the level of 3.4% of the Russian GDP, and generally there are good prospects for additional state borrowings in the international markets.
Still the experiment was tough enough not to consider external borrowings a priority way of the Russian budget deficit coverage, at least in the short-run.
Mr. Vladimir Putin commented in his interview to Bloomberg on borrowings in the international markets: (1) “We simply don’t have the need today with the government’s reserve funds of about $100 billion. This is pointless, bearing in mind the cost of borrowing.” and (2) “We’ll act very cautiously and, I hope, at any rate, that we’ll have no particular need to seek financing from overseas.”
However, he commented that the borrowings are still possible in the future. In the mentioned interview Mr. Putin also commented: “You always need to look carefully. By the way, borrowing is also possible. You just have to understand what is more advantageous at the given moment.”
In September 2016 it was announced that the Russian Government decided to place additional sovereign Eurobond issue for the total sum of USD 1.25 billion probably trying to compensate the lack of budgetary revenues due to postponement of privatisation of Bashneft and Rosneft. Thus, the total international borrowings quota for 2016 equal to USD 3 billion was consumed (envisaged by Article 14 of the Federal Law #359-FZ “On Federal Budget for 2016” dated December 14, 2015, quota of previous years was at USD 7 billion a year).
On October 12, 2016 the Ministry of Finance provided the draft of the Federal Law “On the Federal Budget for 2017 and the Planning Period of 2018 and 2019” for public discussion (anti-corruption assessment) with the following indicators on the external debt:
|Cap of the external debt as of the end of the year, USD billion (EUR billion)||53.6 (48.7)||52.8 (48.0)||53.6 (48.7)|
|Cap of the external debt as of the end of the year, % of GDP||4.17%||3.93%||3.85%|
|RUR/USD exchange rate (used in calculations)||67.5||68.7||71.1|
Source: Ministry of Finance, calculations by Factosphere, RUR/USD exchange rates from official forecast of the Ministry of the Economy as of October 12, 2016.
On May 23, 2017 the Ministry of Finance announced the result of assessment of offers of investment banks on the services for the next Eurobond placement. VTB Capital Plc was selected an agent bank with other authorised tender participants being Sberbank CIB and GaspromBank. The first placement in 2017 is likely to take place in May or June.
Increase in Taxes, Duties and Fees
On September 23, 2016 the decision of Mr. Vladimir Putin and the Government not to increase taxes until the year 2019 was reported by the mass media.
At the same time, the state reportedly decided to increase fees for the use of aquatic biological resources and fees for use of forests (current rates can be checked in the section on the federal budget revenues), while the following proposals were under discussion at the Government in the end of September 2016:
- Increase in the personal income tax from 13% to 20% with benefits allowing to keep the factual rate at 13% for the people with income below the country’s median (presumably from 2018);
- Increase in VAT from 18% to 20% (either from 2017 or from 2018), gradual increase of VAT for products with incentive VAT rate (from 10% to 20%);
- Introduction of excise duties for sweet drinks
- Increase in excise duties for tobacco products
On October 5, 2016 the Ministry of Finance delivered the draft of the Key Directions of the Tax Policy for 2017-2019 to the government. Among the proposed measures were doubling excise duties for non-sparkling wines and gradual increase of excise duties for tobacco products (by 10% a year in 2017-2019 in addition to the planned increase assumed by the Russian Tax Code with generation of additional RUR 243 billion of tax revenues).
Besides this, the Ministry considered introduction of higher excise duties (+30%) for tobacco products manufactured and shipped in the last quarter of a year in excess of the average monthly production volumes, so that tobacco companies would not facilitate production before planned annual increases in excise duties.
The Ministry of Finance also proposed (1) levelling of excise duties for non-alcohol beer and similar drinks with ABV below 0.5% with excise duties for drinks having ABV above 0.5%, (2) introduction of excise duties for electronic cigarettes and related products and (3) indexation of the remaining excise duties in line with inflation rates (except those for the alcohol drinks and the oil products).
The options on increase of the personal income tax and VAT have not been mentioned in the document, except the proposal of introduction of VAT for imported goods bought by the Russian private persons via Internet starting from 2018-2019.
Nearly all proposals on the amendments to the tax policy have been accepted and implemented in 2017.
Increase in Payments to Extra-Budgetary Funds
As reported by the mass media in the end of September 2016, it was decided to eliminate the upper limits of payments to the Social Security Fund and the Pension Fund with the terms and timing to be elaborated by the Ministry of Finance, the Ministry of Economic Development and the Ministry of Labour. The introduction of the unified payment to extra-budgetary funds was also under consideration.