‘Drill, tovarich, drill’: Putin’s economic dilemma

russia.exports

Vladimir Putin’s Russia is a great military power with a backward economy.

Without a strong manufacturing base, Russia’s economy depends sale of oil and natural gas, which are non-renewable.   This means that, unless Russia changes direction, it is fated to become a resource colony of China or the European Union.

Economic sanctions promoted by the USA could be an opportunity for Russia to develop its domestic industries and its internal market, much as the infant USA did when it was cut off from trade with Europe prior to and during the War of 1812.  But according to this article by Mikhail Matveev for Inter-Press Service, Russia is going in the opposite direction.

The recent call from Russian Prime Minister Dmitry Medvedev for “tightening belts” has convinced even optimists that something is deeply wrong with the Russian economy.

No doubt the planned tax increases introduction of a sales tax and increases in VAT [1] and income tax will inflict severe damage on most businesses and their employees, if last year’s example of what happened when taxes were raised for individual entrepreneurs is anything to go by – 650,000 of them were forced to close their businesses.

Nevertheless, it looks like some lucky people are not only going to escape the “belt-tightening” but are also about to receive some dream tax vacations and the lucky few are not farmers, nor are they in technological, educational, scientific or professional fields – it is the Russian and international oil giants involved in oil and gas projects in the Arctic and in Eastern Siberia that stand to gain.

“In October [2013], Vladimir Putin signed a bill under which oil extraction at sea deposits will be exempt from severance tax.  Moreover, VAT will not need to be paid for the sales, transportation and utilization of the oil extracted from the sea shelf,” noted Russian newspaper Rossiiskie Nedra.

[snip]

In fact, the line of thinking adopted by Russian officials responsible for tax policy is very simple. Faced with the predicament of an economy dependent on oil and gas half of the state budget comes from oil and gas revenue, while two-thirds of exports come from the fossil fuel industry, they decided to act as usual – by stimulating more drilling and charging the rest of the economy with the additional tax burden.

Matveev wrote that Russia, like other countries, suffers the bad effects of global climate change caused by fossil fuel emissions.  The Russian economy is at risk, he wrote, if the USA or European Union ever achieve their announced goals for shifting to renewable energy sources.   I don’t think the latter is as likely as Matveev seems to think.

The fact that economic sanctions cause serious problems to Russia does not mean that they are a good idea.  Weaker nations than Russia have survived U.S.-led economic sanctions, and the economic war with Russia hurts European Union countries as much or more than Russia.

§§§

Click on Will Climate Change Denialism Help the Russian Economy? to read the whole article.

For statistics, click on Oil and gas revenues account for 68% of Russia’s total export revenues in 2013 by the U.S. Energy Information Administration.

[1] VAT is value-added tax.  It is like a sales tax, but it taxes value added on products during each stage of production.  The advantage of VAT is that, under World Trade Organization rules, it can be forgiven or refunded on products made for export.

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