Day 3 of the Gaidar Forum 2017

The morning session of the final day of the Gaidar Forum – 2017 started with a panel discussion: The New Tax Policy in Russia: What Changes May Lie Ahead After 2018?

Experts discussed a “fine tuning” of the Russian tax system and told where and with whom the new fiscal policy was going to be discussed and how decisions on amendment of the fiscal system were to be approved. The discussion was held under moderation of Аndrei Makarov, Chairman of the State Duma Committee for Budget Issues and Taxes who put questions to Аnton Siluanov, Minister of Finance of the Russian Federation, Маksim Oreshkin, Minister of Economic Development of the Russian Federation, Аlexander Shokhin, President of the Russian Union of Industrialists and Entrepreneurs, Sergei Katyrin, President of the Chamber of Commerce and Industry of the Russian Federation, Sergei Sinelnikov-Murylev, Academic Director of the Gaidar Institute and Rector of the Russian Foreign Trade Academy.

Andrei Makarov asked Maksim Oreshkin, Minister of Economic Development of the Russian Federation and Anton Siluanov, Minister of Finance how their agencies were going to fulfill the President’s instructions to carry out a “fine tuning” of the fiscal system. Answering that question, Maxim Oreshkin said that for him it was mostly the problem of a man who left the Ministry of Finance for the Ministry of Economic Development. According to Maxim Oreshkin, a consensus is needed between all the economic field agents: fr om ultimate consumers and business to the government.

Maksim Oreshkin touched on the issue of the shadow economy. Speaking about the practice of tax administration, Maksim Oreshkin noted that collection of taxes was to be upgraded so that taxes could be reallocated among a larger number of taxpayers and, consequently, the budget would receive more tax revenues.

Anton Siluanov stressed that it would be difficult to reduce a tax burden without cutting the government’s spendings.
“When we speak about taxes, one should understand what those funds are going to be spent on”, the Minister of Finance said. According to Anton Siluanov, if the authorities want to fulfill their social obligations and have a strong army, they have to pay for it. “It is a different matter how those funds are spent. It is necessary to check to what extent those expenditures are efficient”, said the Minister of Finance.

Sergei Katyrin, President of the Chamber of Commerce and Industry spoke in support of Anton Siluanov. “One should not promise what one cannot do”, said Sergei Katyrin emphasizing that in the next three years a tax burden could not be reduced. At the same time, he agreed with Maksim Oreshkin who said that taxes were an instrument of economic growth stimulation.

Аnton Siluanov is confident that a switchover from the severance tax to the added income tax is long overdue in the oil industry. The number of tax privileges for the oil industry should be reduced. According to Anton Siluanov, debating and slowdown of that switchover are irrelevant. It is necessary to test it in pilot projects and then apply it to others.

Sergei Katyrin suggested that a burden should be reduced on the labor remuneration fund and the VAT rate be increased.

Andrei Makarov asked the Minister of Finance and the Minister of Economic Development to comment on such an adjustment of the tax system. Both the ministers said that such proposals should be analyzed carefully as their implementation might lead to growth in a tax burden on some industries and reduction thereof for others.

Answering Andrei Makarov’s question what she thinks about the current discussion, Grace Perez-Navarro, Deputy Director of the Center for Tax Policy and Administration, OECD, said that she often took part is such debates and it was a normal practice for all the OECD countries to discuss the issues under review at the Gaidar Forum, particularly, taxation.

Sergei Sinelnikov-Murylov put forward a proposal to carry out balancing adjustment of the existing tax burden.
Answering the moderator’s question what needs to be done with the small business, the Academic Director of the Gaidar Institute unambiguously said: “Nothing”. “A stable tax system is an inherent value. We have proposals as regards modification of taxation of business, but it would be better not to implement them now.”

All the participants in the discussion agreed that ideally it would be better not to “interfere”.

Alexander Shokhin noted that tax privileges, particularly individual ones, were more often received by state-owned companies than others. As an example, he mentioned an Arctic shelf deposit. Alexander Shokhin stressed the importance both of promoting competition between private companies and state-owned ones and reducing the public share in that sector in principle.

Sergei Katyrin spoke in favor of state-owned companies. According to him, such companies often fulfill the authorities’ special orders and that justifies their lobbying for individual tax privileges.

Аndrei Makarov asked participants in the discussion about the “fine tuning” of regional and federal taxes. Andrei Makarov cited a few examples wh ere the Ministry of Finance was in favor of reduction of a number of regional taxes, but objected the reduction of federal ones as those taxes yielded revenues directly to the federal budget.

Anton Siluanov proposed to abandon the tax rhetoric of the “federal-regional” level and discuss the issue proceeding only from the business format: small, mid-sized and big. Also, Anton Siluanov noted that the tax system should be simplified in principle. He suggested that some enterprises should be transferred to the patent system.

Answering the moderator’s question what to expect from the year 2017, Sergei Katyrin said: “I would like to see more decisions than debates particularly at the legislative level with all the agents involved. Otherwise, we return to discussions at intra-industry agencies, relevant agencies and then with all the actors”.

According to Sergei Katyrin, in Russia there are more micro business entities than small business entities. “The President has approved reduction of the number of reporting by the small business to statistical authorities, but we see quite the opposite situation. The number of such reports required from businesses increased manifold and something is to be done about that already now in 2017”, Sergei Katyrin said.

“We should not delay a discussion on the main guidelines of the fiscal policy. We need a single budget document encompassing both taxes and customs rules and other”, Alexander Shokhin declared. He expressed hope that such a proposal would be reviewed as early as February 2018.

Alexander Shokhin completely supported Sergei Katyrin’s proposal to transfer the discussion to the legislative level. Also, he proposed to tighten up proceedings and discussion of proposals.

Maksim Oreshkin believes that “all the participants should take part in the discussion”.

“We proceed from the President’s instructions. We have already started work with participation of business, the Ministry of Economic Development and State Duma deputies. We shall bring the discussion to the State Duma. Hope, we shall be able to formulate the main proposals on upgrading the tax system by spring and discuss the new system comprehensively at the next Gaidar Forum”, Anton Siluanov said.

All the participants in the discussion agreed that a comprehensive review of the proposals should take place in the State Duma. The document will outline the actual current level of the fiscal burden, specify all the fiscal payments and present the analysis of the Russian fiscal system as compared to that of other countries. Also, it is to be specified in the document that in compliance with the RF President’s order the fiscal burden cannot be increased in principle.

It is to be stated specifically in the document that the tax system is a key economic growth factor, that is, the tax system should be an instrument stimulating development of business and economic growth.

The moderator proposed to introduce a moratorium on timeless establishment of preferential tax regimes and analyze operation of all the existing preferential tax regimes in Russia. According to Andrei Makarov, preferential tax regimes should be introduced only for a specific period and could be extended only on the basis of the analysis of their efficiency. Also, Andrei Makarov suggested that regions should be returned the rights to form independently their budgets by introducing tax systems of their own. The deputy noted that as regards the above the Constitution of the Russian Federation was not complied with well enough.

In the morning, the expert discussion – Estimation of Economic Indicators in Russian Statistics: Problems and Solutions – was held. Participants discussed the current issues of the Russian economic statistics, as well as the ways of promoting cooperation between Russian research and analytical community and the Russian official statistics authorities. Participants in the panel discussion exchanged views on the state of the economic statistics in Russia and what they wanted it to be like. The moderator of the panel discussion was Мarina Turuntseva, Director of the Center for Macroeconomic Forecasting, RANEPA and Head of the Short-Term Forecasting Department of the Gaidar Institute.

Аlexander Shirov, Deputy Director of the Institute of Economic Forecasting, Russian Academy of Sciences believes that the official statistics should meet the requirements of objective reflection of economic processes, frequency, adequacy and comparability. According to Alexander Shirov, despite the fact that the official statistics is imperfect, all the existing alternatives are even inferior. So, it is necessary to develop the state statistics system and bring it into harmony with alternative data sources.

A similar opinion was expressed by Vladimir Salnikov, Deputy Director General of the Center for Macroeconomic Analysis and Short-Term Forecasting. According to him, the Russian economic statistics should be real-time, accurate and correct and presented in a user-friendly format. The main factor behind the Rosstat’s limitations is a monopolistic nature of its activities with complete independence from consumers, Vladimir Salnikov believes.
Polina Kryuchkova, Deputy Head of the Department of Economic Policy and Development of the City of Moscow spoke about the problems related to utilization of the official statistics on Moscow. She told about the way how in her department some economic indicators regarding Moscow had to be corrected in order to improve their quality and present a more adequate view of the current economic situation.

Vladimir Bessonov, Head of the Research Laboratory for Inflation and Economic Growth Problems, National Research University Higher School of Economics spoke about the problems related to calculation of the consumer price index in Russia. Vladimir Bessonov’s assessment of overstatement of the official rate of inflation which took place due to a change in the method of calculating that indicator in 2013 amounts up to 0.5 p.p. in 2013. Another problem related to calculation of the consumer price index is a lack of accounting of the imputed rentals in the index which factor results in a substantial overvaluation of the inflation rate at the beginning of the crisis and subsequent undervaluation thereof at the end of it.

Ilya Voskoboinikov, Senior Research Fellow, Research Laboratory for Inflation and Economic Growth Problems, National Research University Higher School of Economics spoke about sectorial accounts of economic growth (Russia KLEMS). He noted that the above system was in no way alternative to the data of the system of national accounts of the official statistics and was meant for solution of a more narrow range of objectives as compared to the system of national accounts.

Roza Semenova (AIRR), Мarina Turuntseva (RANEPA, Gaidar Institute) and Аlina Sanakoeva (RANEPA) discussed the quality of the statistics on patents in Russia and prospects of utilization thereof for expert analysis and research purposes.

At the end of the expert discussion, Аndrei Tatarinov, Head of the Department of National Accounts, Rosstat, spoke about the main guidelines for upgrading the quality of the statistics of the system of national accounts. All the participants acknowledged that the Rosstat was doing an enormous job on collecting and processing of statistical data and upgrading the quality thereof.

The materials of the discussion will be published in the Scientific Bulletin of the Gaidar Institute.ru (No.1, 2017).

Presentations to the reports:

• А. Shirov. Structural Problems of the Economy and Their Reflection in Statistical Data
• V. Salnikov. The Russian Official Statistics in Terms of Requirements of Expert and Analytical Support of Decision-Taking by Executive Authorities (Primarily as Regards Statistics on Industry)
• P. Кryuchkova. Utilization of Alternative Information Sources for Evaluation of the State of Industry of the City of Moscow
• V. Bessonov. On Costs Caused by Problems Related to Evaluation of the Inflation Rate
• I. Voskoboinikov. Russia KLEMS as a Pilot Model of the Statistics of Factors of Production and Output
• М. Turuntseva, R. Semenova and А. Sanakoeva. Problems Related to Measurement of R&D Progress

An expert discussion – Ten Years of Endowment Market: Results and Development Trends – was carried out by Irina Tolmacheva, Head of Research Projects and International Property Division, RANEPA and Head of the Legal Department, Gaidar Institute.

Over 10 years of existence of endowment capital market in Russia, vast experience has been amassed in applying that instrument to support the non-profit sector. However, the current practical knowledge suggests that there are a number of problems related to application of the existing legislative rules and a need to upgrade the legal framework and consolidate efforts of public authorities and the non-profit sector to create favorable conditions for more efficient development of endowment capital.

Participants in the discussion included the following: Ilya Barkovsky, Head of the Department of Social Investments, UK Veles Management, Daria Miloslavskaya, Branch Director, Center for Non-for-Profit Law in Russia, Irina Vdovenko, Head of the Endowment Capital Program, Donor Forum, Ivan Kopytov, Deputy Director of the NITU MISiS Endowment Fund and Elsa Dyachkova, Chief Specialist, National Personnel Training Foundation.

At the session, participants summed up the results of operation of endowment capital funds over the past 10 years, assessed the applicable laws and application practices and discussed difficulties on the way of development of endowment capital funds, as well as possible lines of support for those funds.

Presentations to reports:

• I. Barkovsky. Endowment Capital: Results of the First 10 Years
• D. Miloslavskaya. Legislation on Endowment Capital: in Russia and Abroad
• I. Vdovenko. Endowment Capital Club
• I. Kopytov. Strategical Development of Science and Education
• E. Dyachkova. Utilization of Income from Endowment Capital in Higher Education Establishments

Participants in the expert discussion – Options of Regulation of the Market of Alcoholic Beverages and Their Social and Economic Effects – held under moderation of Sergei Prikhodko, Executive Director of the Gaidar Institute discussed the beer production and consumption trends in Russia, as well as mechanisms of regulation of the market for alcohol products.

Sergei Drobyshevsky, Scientific Director of the Gaidar Institute presented an “assessment of the effect of state regulation on the beer market” carried out by the Gaidar Institute. According to Sergei Drobyshevsky, in Russia alcohol-related mortality rate fell by 54% in the past 10 years. It is to be noted that the most dramatic drop in harmful consequences of alcohol consumption was observed in the 2005-2007 period when consumption of strong spirits was falling, while that of beer was growing.

“In 2005 –2007, on the back of high economic growth rates, rise of new brands and beer positive image a trend of substitution of beer for strong spirits was formed. In that period, a substantial drop in the alcohol-related mortality rate was registered. Also, other indicators, including the crime rate and road traffic accidents caused by drunk driving fell dramatically. In the 2012 –2015 period, despite economic recovery after the crisis growing excises on beer led to further reduction of beer consumption. It is to be noted that toughening of the beer regulation, including limitation of advertising and places and time of sales promotes replacement of beer by strong spirits in the consumption pattern”, Sergei Drobyshevsky said.

According to the estimates of the Gaidar Institute, in the 2009 –2012 period excises growth together with tough regulation led to reduction of beer consumption by 1.1bn liters, while in the 2012 –2013 period, by 0.86bn liters.

Touching on the issue of beer production, Sergei Drobyshevsky noted that growth in excises and toughening of beer regulation, including limitation – introduced in 2013 – of advertising and time and places of beer sales resulted in sustained shrinkage of the beer market in subsequent years. So, from 2008 a drop amounted to over 30%.
Also, Sergei Drobyshevsky presented the three scenarios of development of the beer market and changes in households’ beer consumption. According to the “Economy is the Priority” scenario, beer excises rates will fall to the level of Rb 18 per liter in 2018–2020, while excises rates on strong spirits grow in 2020 in accordance with the forecasted level of the rate of inflation; beer and strong spirits regulation will be eased. According to the “Balanced” scenario, excises rates will grow on all alcohol products, beer regulation will be eased while strong spirits regulation is made tougher. In accordance with the “Health is the Priority” scenario, excises both on beer and strong spirits will gradually grow and beer and strong spirits regulations become tougher.

In case of implementation of the first scenario, the beer market volume will increase from 6.85bn liters in 2016 to 7.154bn liters in 2020, while the forecasted volume of the aggregate excise payments is to fall from Rb 280.7bn in 2016 to Rb 263.7bn in 2020. According to the “Balanced” scenario, the beer market will decrease insignificantly to 6.9bn liters in 2020, while the volume of excise payments is to grow somewhat to Rb 286.7bn in 2020. According to the “Health is the Priority” scenario, the beer market will fall to 6.349bn liters, while the volume of collected excises, to Rb 278bn in 2020.

In her report, Аnna Dupan, Director of the Institute for Problems of Legal Regulation, National Research University Higher School of Economics, touched upon the issue of regulation of the alcohol market. According to Anna Dupan, with beer excises growth regulation both of beer production and sales is made tougher. Due to conflict of law, beer producers have to work in the same conditions as producers of strong spirits. For the above reasons, Anna Dupan stands for division of the regulation of the beer market and the strong spirits market.

Аlxei Sazonov, Director of the Department for Tax Policy and Customs Policy, Ministry of Finance of the Russian Federation said that his agency did not consider the prospect of reducing excises either on strong spirits or beer.
Also, Ilya Sokolov who took part in the discussion said that anti-alcohol policy should not be pursued by fiscal measures alone and it was necessary to apply regulatory instruments. “Fiscal instruments should not be priority ones in the anti-alcohol policy”, said Ilya Sokolov.

Presentations to reports:

• S. Drobyshevsky. Evaluation of the Effect of State Regulation on the Beer Market
• А. Dupan. On Division of Regulation of Production and Sales of Beer and Other Alcohol Products

The moderator of the expert discussion – Banking Sector Sustainability – was Мikhail Khromov, Director of the Center for Structural Studies, Gaidar Institute.

The banking sector has traditionally been a core of the Russian financial system. It accumulates the bulk of financial assets both of households and the corporate sector and provides a significant portion of debt financing in the Russian financial system. Participants discussed topical issues of the banking sector and proposed methods of assessment of system risks within the financial system and methods of identification of latent bank capital problems.

Elena Rovenskaya, Director of the Advanced System Analysis (ASA) Program, International Institute for Applied System Analysis (IIASA, Austria) presented a model developed at IIASA to identify system risks in the financial sector. In her report, Elena Rovenskaya formulated the notion of “system risks” and provided examples of the effect of bankruptcy of individual banks on the banking sector as a whole. The model was tested on the basis of the data on the Austrian banking sector. Participants discussed the possibility of adapting that model to the Russian environment.

Report by Мikhail Mamonov. Leading Expert of the Center for Macroeconomic Analysis and Short-Term Forecasting was dedicated to identification of “holes’” in the capital of Russian banks which were not bankrupt yet. Mikhail Mamonov outlined the methods of early identification of “holes” in a bank’s capital and evaluation of the extent of possible losses. Evaluation outputs point to the fact that as of the mid-2016 over a half of the banks could have latent capital problems, while the aggregate volume of potential losses could exceed 5% of GDP.

In his report, Dmitri Miroshnichenko, Leading Expert of the Development Center Institute, National Research University Higher School of Economics touched on assessment of individual aspects of the current situation of the Russian banking sector. According to him, a number of indicators points to a low level of business activities both in the banking sector and among corporate customers of Russian banks. The latter explains low demand on loans on the part of the economy. Also, a share of state-owned banks is growing on the market of private deposits, while the interest margin from lending and deposit-taking remains at a critically low level.

In his report, Elman Mekhtiyev, Executive Vice-President, Association of Russian Banks stressed the importance of rebuilding confidence between the banking sector and its customers. According to him, households keep maintaining deposits with banks only thanks to the existing deposit insurance system. As a new instrument aimed at promoting customers’ confidence in banks, it was proposed to introduce gradually the principles of behavior supervision in the Russian Federation, that is, a new model of control by the regulator over the protection of rights of financial service consumers.

Presentations to reports

• Е. Rovenskaya. Modelling systemic risk in inter-bank networks: From theoretical to data-driven models Modelling systemic risk in inter-bank networks: From theoretical to data-driven models
• D. Miroshnichenko. Risks of the Banking Sector: Analyst’s Thoughts
• E. Mekhtiev. Confidence in the Banking Sector and the Role of Behavior Supervision

The moderator of the expert discussion – Trade and Economic Development Strategy for Russia and EAEU in the Current Context – was Аlexander Knobel, Director of the Center for Foreign Trade Studies, Gaidar Institute.
Major quantitative changes in the global trading system due to regionalization, promotion of Eurasian integration, wider global interests of domestic businesses as the Russian economy opens up to internationalization and transnationalization and the changing nature of economic integration necessitate development of new approaches to the Russian integration strategy. The active integration agenda should be developed to foster higher growth rates of the Russian economy.

Participants discussed how Russia can advance its interests in the WTO, what strategy of cooperation with new-generation trade agreements it should follow, the results of two-year application of the EAEU Treaty, methods of development of the EAEU export potential and whether the trade policy can be used as an economic growth tool.
William Tompson, Head of Division, Eurasia, Global Relations Secretariat, OECD said that though for political reasons Russia’s accession to those international organizations was suspended the networking between working groups was high. Willian Tompson pointed out that Russia participated actively in G20.

In her report, Natalia Volchkova, Director, Applied Studies, CIFIR touched on added value chains. She stressed that low diversification of exports is a common problem for all the EAEU countries. According to the expert, the greater the country is involved in the global trade, the higher the production of added value. Integration yields new opportunities of diversifying exports of all the EAEU countries.

Natalia Volchkova cited the following data. If in the Eurasian Economic Union as a whole the share of imports in production of export goods amounts to about 13%, the share of exports in the export to third countries, to 32% and the share of exports returned through imports, to 1.4%, as regards Russia the above indicators amount to 9%, 39% and 2%, respectively; as regards Belarus, to 81%, 24% and 0.4%, respectively and as regards Kazakhstan, to 21%, 39% and 0.4%, respectively. According to the above data, Belarus is the leader, while Russia is not very active in utilizing imports in export.

Natalia Volchkova spoke about the important role of imports in countries’ economy. Export firms are the most efficient in the economy as growth in exports takes place by means of displacement of less efficient companies. But it is imports that are the source of growth in companies’ efficiency because they help remove from the economy less efficient companies, too, thus releasing resources for more efficient ones. Imports stimulate competition in the economy by pushing down consumer prices. Proceeding from the above, Natalia Volchkova concludes that import substitution reduces people’s wellbeing and is inefficient for Russia.

Natalia Volchkova pointed to a great difference in the trade policy for export and import. According to her, export and import positioning of the trade policy should be the issue of consideration.

Also, Natalia Volchkova said that at present the Single Customs Tariff was not elaborated well enough in terms of development of exports of member-states of the Eurasian Economic Union.

In his report, David Tarr, Lead Economist of the World Bank highlighted the issue of Belarus’s accession to the WTO. According to him, the situation will not change much for Belarus with its accession to the WTO. As a member-state of the Eurasian Economic Union, Belarus has assumed a large volume of Russia’s obligations to the WTO, though it is not a WTO member. Belarus has been reducing tariffs on industrial and agricultural goods, as well as the volumes of subsidizing the agrarian production. At the same time, reduction of barriers in the services sector in respect of Belorussian providers and foreign investors as an integral part of accession to the WTO should yield substantial advantages.

Speaking about the prospects of development of Eurasian integration, Evgeny Vinokurov, Director, EDB Center for Integration Studies summed it up as follows: “The forthcoming years will be difficult, but we do not lose hope”.

Presentations to reports:

• А. Knobel. Trade Policy for the Benefit of Economic Growth
• N. Volchkova. Trade Policy as an Instrument of Economic Development
• D. Tarr. Privatization and the Unusual Case of Belarus Accession to the WTO
• Е. Vinokurov. Eurasian Economic Union: Successes and Stumbling Blocks

An expert discussion – Taxation of Electronic Commerce: Setting Priorities, World Experience -- was held on the third day of the Gaidar Forum. The current system of international taxation established in the 1950s is based on the tax competition which took place in the post-war years to attract investors whatever it took and the industrial nature of the economy. The wide-spread dominance of computers, Internet and digital technologies has led to significant changes in many markets: business-models were modified, new kinds of goods and services and whole markets appeared, the mobility of business and people has greatly increased. In such an environment, the international tax system no longer fits the realities of the modern economy.

The moderator of the discussion was Natalia Kornienko, Head of the Tax System Development Laboratory, RANEPA, Gaidar Institute.

Participants discussed the international experience in taxation of electronic commerce, the position of the OECD and the EU, the extent to which the tax system of Russia and EAEU corresponds to the realities of digital technologies and reasonable approaches to the taxation of e-commerce.