Russia’s economy is showing signs of stress, taking on new burdens with each round of worldwide sanctions. Japan has extended sanctions, Europe has levied sanctions, the U.S. has delivered the strongest bans, and Switzerland has closed loopholes to prevent wealthy Russians from avoiding EU sanctions.
As reported in The Moscow Times, Bern (Switzerland) has avoided outright sanctions, yet taken steps to exert pressure on rebels directly involved in the fighting in Ukraine. The newspaper says that some of the rebels groups have financial ties to Russian businesses and oligarchs, and the Swiss have cut ties between banks and 26 Russian individuals, 18 Russian companies, and several members of the Russian security services. Switzerland is not an EU member, but closely tied to the EU and the U.S., and must walk a fine line between supporting Western sanctions, while remaining neutral.
Inflation is growing at a pace now being felt by the average Russian consumer, and Reuters reports that the Russian stock market is down 12 percent in August. Russia has announced bans on imports ranging from Polish apples, EU cheese, and a ban on all American chicken, dairy and vegetable products. While these do hit back at the West, such bans also risk negatively impacting Russian consumers. Although the largest country in the world by size, other than natural resources, Russia is not known as a export economy. Government officials have admitted that many of the import items now banned cannot be quickly replaced by products made in Russia.
Sanctions are bringing new burdens to the Russian economy and The Moscow Times reports that capital flight out of Russia continues, and Russians are curtailing consumer spending. News reports on the closure of a new Russian domestic airline, and the abrupt closure of several Russian tour companies, point to the burdens brought on by Western sanctions. Russia’s oligarchs are under constant financial restraints, and it is often those wealthy oligarchs, whose wealth has been targeted by the West, who are first to feel the pinch of international sanctions.
Since the fall of Soviet communism, the Russian Federation has earned the reputation as being “tax friendly” for citizens. Russia uses a flat tax, non-progressive, and unified simple tax system. Most Russians do not file annual returns given the simplicity of the system. Personal income is taxed at a simple 13 percent, done via payroll deduction, and the elderly are exempted. Corporate taxes range between 9 percent for dividends and an average of 20 percent on profits. Russia has tax treaties with most large Western nations so that foreign nationals are taxed, but not double taxed.
Capital gains taxes on individuals are almost non-existent; any investment or real estate held over three years is exempt. Russians pay a share of national health and pensions as a payroll deduction, known as “social” taxes, but the bulk is paid by the employer, not the employee.
The largest share of corporate income taxes paid in Russia are from companies related to the oil and gas industry. As most of those companies are state owned, or indirectly state controlled, the corporate tax paid by those companies is 45 percent on net sales annually.
However, President Vladimir Putin is introducing a new sales tax for Russian consumers. In 2004, the sales tax was abolished for most goods and services, but the new tax will add an additional three percent when implemented in 2015. Russia’s Finance Ministry estimates that the sales tax will add around a trillion rubles (almost $28 billion) to state treasuries over the next three years.
Sberbank, Russia’s largest bank (and the third largest in Europe), says that the tax hike will increase inflation for consumers. Sberbank analysts fear that the increase in taxes will strain an already burdened economy and result in reduced consumption. Anton Siluanov, Russia’s Finance Minister, counters that argument by claiming that the new tax would reduce consumer spending by no more than one percent on average.
Western sanctions have imposed challenges, and experts say those sanctions will bring new burdens on the Russian economy. Meanwhile, Russia continues to hit back with sanctions on Western products. Dmitry Medvedev, Russia’s prime minister, said in a television interview yesterday that Russia has banned all Ukrainian airlines from Russian airspace, and is considering a ban on flights from Europe and the U.S. over Siberia. Such moves would add to the fuel costs, and flying time, of international flights.
By Jim Hanemaayer