Russian business has been sentenced to the gallows

28.09.2011 — Analysis

The resignation of Russian Finance Minister Alexei Kudrin has triggered another public discussion about the future of the country. A number of experts think that Russia goes into economic instability. However, Ural business people told the RusBusinessNews columnist that they were not able to grow steadily when Kudrin was in office. Today's taxes and fees are intended solely for the resource-based economy and are acceptable only to a few dozens of state-owned and near-government companies. Entrepreneurs doubt that anything can change in the country as long as the power is in the hands of the present-day political class.

Kudrin resigned at that very moment when the State Duma and public were discussing the tax initiatives offered by the RF government, which decided to revise the small business taxation. Instead of payment of the unified tax on imputed income, small business was offered either to buy a patent or to switch over to the simplified tax system.

The changes have been initiated by the Russian Ministry of Finance, which tries to expand the field of operation for tax collectors. Back in 2010, the fiscal authority decided to separate small shops and restaurants, hotels and car repair shops, laundries and veterinary clinics from the unified tax. The underlying intention was to improve predictability of budget revenues.

As a matter of fact, within the last years the Ministry of Finance has been concerned about pulling the RF Pension Fund out of the red. Alexei Kudrin offered to solve the problem in the way it was solved by most of the European countries - increasing the retirement age by a few years. However, the government saw it as unacceptable. The financiers had only two alternatives: to raise taxes or to increase the deficit of the Russian budget. A. Kudrin has always been against borrowings; therefore, he opted for the higher tax burden on the labor compensation fund designated for social needs.

The relevant tax amendments were made in the legislation. Entrepreneurs responded the government's resolution by hiding vigorously wages in the "shadow", and in the summer of 2011 President Dmitry Medvedev gave orders to decrease the social tax from 34 to 30% (for small business - to 20%). Premier Vladimir Putin confessed to mass media that he did not know how to bridge the gap in the budget. Having thought a little, the Ministry of Finance released to public "Tax Policy Guidelines" where it tried both to fulfill the executive order and to retain budget revenues.

The Ministry offered to decrease insurance payments, however only for those employees whose salary did not exceed 512 thousand rubles a year. Everything that was above that amount was to be taxed at 10%. Entrepreneurs estimated that middle-size business would pay the government more than it used to pay, starting from the monthly salary equal to 60 thousand rubles or 80 thousand rubles for small business, which is not rare in the service and retail sector. Alexei Kudrin admitted during the briefing that this increase would hit not only the financial sector and retailers but also high-paid engineers at innovation-targeted enterprises.

His statements made during his last days in the minister's office made it clear that the Ministry of Finance will try to take from enterprises everything it can. That is why the State Duma was offered a bill about cancellation of the unified tax on imputed income, while permitting municipalities to make independent decisions on the patent price. The more generous gift could hardly have been given to local officials.

The question whether the Russian budget will be more predictable than it used to be is open for discussion; however, it is already evident that the business community is very disappointed in the government's position. Anatoly Filippenkov, the president of the Sverdlovsk Regional Union of Small and Medium-Sized Business, thinks that the government's policy regarding entrepreneurship is not consistent. On the one hand, the government allocates funds to Russian people for starting their business; on the other hand, it increases the tax burden and approves increased rates for services provided by natural monopolies.

Most of all, entrepreneurs are upset about the unwillingness of the government authorities to create environment for business. They do understand that there are no funds to pay social security benefits; however, the Pension Fund should be supported not only through taxes imposed on small business, but also from other sources: for example, through restructuring of inefficient state corporations. A number of experts have repeatedly offered to look into bureaucratic hurdles that accompany registration of new companies and hardly help to increase the number of taxpayers as well as to introduce progressive income taxation. However, it is nothing but idle talk: The present-day Russian authorities have no intention to quarrel with oligarchs, opting for "milking" all the rest.

Vladimir Gerasimenko, a deputy of the Sverdlovsk Regional Duma, states that the increased social tax caused about one third of small business to go into "shadow". However, it did not help - many entrepreneurs went broke. The parliamentarian thinks that business should expect more difficulties in future: The taxation system will be more deformed without the unified tax. Having decided not to wait for business deterioration, V. Gerasimenko offered to decrease the rate applicable in the simplified taxation system, from 10 to 6%. The Sverdlovsk regional authorities did not agree; so, the deputy is looking into future without any optimism.

The entrepreneur Vladimir Novak thinks that reduced taxes will not be able to help Russian business. The present-day global economic crisis is going to be much more severe than the Great Depression. As Russia has developed the resource-based economy of quite a modest scale, the country is doomed to enormous shocks due to recession in demand in industrialized countries. The only way to rescue small business is to develop production and consumption in Russia. This requires a special taxation strategy, which would motivate the domestic manufacturer. But no one has ever heard about such strategy. Moreover, the RF Central Bank holds the ruble rate unreasonably high, which has a damaging impact on industry.

Import is thriving; the Central Bank reports decreasing of inflation - everything looks fine from the outside, though, in fact, the Russian economy is degrading. Therefore, with this policy going on, it is not important whether the unified tax on imputed income will be retained or it will be replaced by a patent. Without incentives, even decreased taxes will be like flogging a dead horse.

Standing up for increased taxes, Alexei Kudrin aimed to reduce the budget deficit. However, he was fired for another reason - for his unwillingness to finance the defense industry. Experts do not see much difference between the position of the former head of the Ministry of Finance and his opponents: both parties are concerned only about "proper" spending of funds and do nothing to improve efficiency of the economy. The ruling class has learned how to gain profits from inefficiency; therefore, it does not care much about the manufacturer's destiny.

This approach foredooms business to destruction. "I do not even doubt that tomorrow it will be worse, states the entrepreneur Dmitry Golovin. - If I am sentenced to the gallows, then I will be hanged". Vladimir Gerasimenko thinks that the forthcoming replacement of Dmitry Medvedev by Vladimir Putin in the office of the Russian president will only aggravate the situation. This reshuffling is a clear warning that business should close up and go away from Russia.

Vladimir Terletsky