MOSCOW, August 16 (RIA Novosti political commentator Peter Lavelle). President Vladimir Putin's call for an end to "tax terrorism" against the business community has started to work its way through Russia's bureaucracy.
The lowering of some hefty back-tax claims and defining tax collection methods has been translated into lower political risk affecting Russia's investment case, and contributed to sterling stock market performance.
What do the following Russian companies have in common: TNK-BP, Vimpelcom, Sibneft, Lukoil, and MTS? All have won or are in the process of winning court cases to lower back-tax claims. In the case of TNK-BP, the tax authorities have ordered the company to pay $245 million in back taxes for 2001, a massive reduction from the $560 million initially claimed and appealed by TNK-BP, which was part of a much larger tax bill for nearly $1 billion. Irrespective of the final outcome of current legal proceedings contesting back-tax claims, the market consensus is that total liabilities should not have any significant impact on the bottom line for these companies. The stock performances of these companies bear out this expectation.
The reduction of back-tax claims against Russian corporates, with the exception of former oil giant Yukos, provides strong evidence that the authorities have no intention of using the tax code to attack big business or repeat another "Yukos affair." Indeed, "tax terrorism" - an issue that greatly unsettled investor and business confidence over the past eighteen months - is becoming a thing of the past. So much so, that back-tax claims are no longer deemed to be an issue contributing to political risk. Instead, what was categorized as a political risk during the past year and a half is now defined as a strictly financial issue.
A number of local media sources claim that both the tax authorities and the Finance Ministry abandoned the procedure of assigning precise tax collection quotas to territorial divisions on July 1. In place of set quotas, the authorities will now focus on 'indicative figures' based on budgets and other technical requirements.
The use of tax quotas partly explains the zealous behavior of the tax authorities over the past few years, with some companies repeatedly investigated and often going to court to settle tax disputes. The shift from set tax quota collection to 'indicative figures' should deter over-zealous tax collectors. This change of tax collection methodology will also lower political risk.
The July-August rally on Russia's primary stock market, the RTS, is attributed to strong earnings outlook, high oil prices, buoyant global equity markets, and a discernable reduction in political risk. Emerging market funds, traditionally averse to investing in the Russian market due to political risk concerns, have returned in significant numbers.
Further evidence suggesting that political risk is no longer a major concern for investors is the RTS volatility. According to the Moscow-based brokerage house Aton Capital, "the RTS index's volatility has dropped sharply in recent months. Typically, higher-than-normal volatility reflects a riskier market: Russia's market volatility rose sharply following the arrest of former Yukos CEO Mikhail Khodorkovsky in late 2003 and remained stubbornly high amid the subsequent barrage of negative news on Yukos coupled with back-tax claims against other Russian corporates." Reining in the taxman is paying dividends to investors, but also enhancing Russia's investment case.
Needless to say, political risk is not the only factor influencing Russia's stock market. Strong market fundamentals make Russian blue chip stocks attractive, particularly in an environment of high oil prices. But the reduction of political risk is the added push that has seen the RTS attain record levels this summer. Ending "tax terrorism" is certainly benefiting those who invest in the Russian stock market; the next important step for the authorities will be the use the tax code to deal with capital fight. For the past 18 months, the application of the tax code was something to fear; now it should be used to create investment incentives.
The opinions expressed in this article are those of the author and may not necessarily represent the opinions of the editorial board.
