#45 | August 13 - 26, 1998  

Time to dispel a few more myths about the Russian financial crisis. The lie du jour concerns Russian tax collection. Conventional wisdom holds that Russia doesn't collect enough taxes, that it needs to collect more, that tax raids by a fat huckster named Boris Fyodorov will lift Russia out of crisis, that ordinary Russians need to be shown the necessity of filing personal income tax returns. The I.M.F. agrees. It held up a $700 million credit to Russia last October, complaining that Russia wasn't collecting enough taxes. And a huge I.M.F. bailout package to Russia this summer was delivered only on the condition that Russia introduce radical austerity measures, including slashed spending and increased revenue collection.

In the wake of the bailout, the press bounded into action, vilifying Russia's tax deadbeats and lauding Fyodorov's buttkicking new break-the-door-down, fork-it-over-now tax collection drive. The coffers needed filling and everyone agreed: taxes were the way to do it.

In fact, Russia collects plenty of taxes. Earlier this year, the Centre For Economic Performance-a London School of Economics think tank-released a report which should have blown a hole in the tax shortfall myth. Written by eXile antagonist Rory McFarquhar, the report showed that Russia's overall government revenue in 1997 accounted for 33.3% of its GDP, or more than a full percentage point above U.S. and Japan, which were at 32.1%. True, Russian revenue as a percentage of GDP still lagged behind that of most Western European countries, which tend to hover at around 35%- but for a country of its size and income level, it was doing more than fine.

In fact, some 25% of the Goskomstat GDP estimate McFarquhar cited was (untaxed) unofficial economic activity, meaning that government revenue in Russia actually accounts for over 40% of the registered economy-one of the highest percentages in the world, and by far the highest for a country as poor as Russia.

So what's the deal? Why all the fuss about tax shortfalls? Why would the Moscow Times, for instance, run a July 22 editorial blasting communist calls for lower taxes, citing the wildly inaccurate revenue figure of 11% of GDP (this is actually the figure for the federal government revenue alone, minus state and local revenue) and calling for more efficient tax collection? The reason is rooted in the way Westerners view Russia's financial problems. Increased tax collection isn't in any way going to help Russia out of the current crisis: in fact, it will almost surely hurt. But bringing in taxes from Russians is an effective short-term anti-crisis solution for Westerners who hold shaky Russian debt instruments-a very powerful group cut from the same cloth as the IMF folks.

Western investors and the I.M.F. aren't satisfied with Russia's level of revenue collection mainly because much of the state's "revenue" doesn't come in cash. Much of the government's income comes in the form of "offset", i.e. payments by commercial firms using the obligations of other firms. There is also a large amount of so-called "off-budget" revenue, i.e. customs revenues that never enter the budget but are allocated instantly to the Customs Committee for its own use. As result of its reliance on these and other non-cash revenue sources, the state ends up with not a whole lot to show for the 33% of GDP it brings in-and this makes foreigners who own Russian paper nervous.

"Russia's problem isn't that it doesn't bring in enough revenue to meet its obligations," said Robert McIntyre, Fullbright scholar and an economist for the United Nations University's Wider Institute. "It's problem is that it doesn't have enough cash to deal with all of its financial market obligations. That's why the I.M.F. has emphasized tax collection."

The I.M.F. bailout was widely sold by the Western press as generous leap of faith made with the aim of helping Russia out of its economic troubles, a leap that would provide Russia with incentives to implement reforms that would put it back on the road to economic well-being. The Los Angeles Times, for instance, ran an editorial about the bailout headlined "Russia's Lifeline", while the Washington Post lauded the loan in its own editorial, noting the "urgency of restoring Russia's economic health". However, no one really bothered to consider the idea that rescuing Russia's financial markets and rescuing its economy might be two distinctly separate things-or that the I.M.F. might have interests that don't coincide with those of Russia or its people. "If you want to take a dark view of the I.M.F.," said one Western economist, who asked not to be named, "you can say that they've never shown any evidence that its goal is economic development, and you could instead look at them merely as bill collectors for the world financial community."

"I have great respect for the professionalism of the I.M.F. economists, but I don't think they see the whole picture," added Edwin Dolan of the American Business and Economics Institute. "Russia needs growth more than it needs currency stability."

The flip side of that, of course, is that Westerners with GKOs, unlike the Russian nation, actually don't need growth more than they need currency stability. If the ruble crashes and Russia later grows, Westerners with ruble investments lose. Period. On the other hand, Westerners won't feel the effects much as Russia continues to plunge itself into debt by taking loans from the I.M.F. and other Western institutions. As long as Russia keeps making its payments, nothing else really matters.

That's what the last I.M.F.'s insistence on tax reform was all about. Like a junkie scoping his mother's apartment for something else to steal a week after pawning her television, the I.M.F. was effectively asking Russia to dredge up some extra money from between the couch pillows in order to keep the party going.

"The I.M.F. bailout was really a subsidy for the oligarchs, for the Russian banks, and for investors in the financial markets," said McIntyre. "And it was undertaken in a way that only made real economic problems worse."

That the I.M.F. wasn't much interested in growth was obvious from Michel Camedessus's statement after the bailout was announced. In that announcement, Camedessus talked about reforming the tax system, about Russia falling victim to the drop in world oil prices, about restoring confidence in Russia's financial markets, but not once did he mention corruption. Although anti-corruption measures were a major component of the I.M.F.'s recent East Asian bailouts, they were conspicuously absent from the Russia bailout. McIntyre and other Russia analysts agree that corruption, and the waste of tax revenue caused by corruption, are the central problems facing the current Russian economy. After all, when you're bringing in revenue at a rate on par with countries like the U.S. and Japan and you're still broke, your problem is almost certainly poor use of money- not the lack of it. Even beyond the fact that this remains a country where hundreds of millions of dollars, if not billions, are stolen more or less openly out of the budget every year (witness last year's MiG scandal, or the "disappearance" of World Bank coal industry loan, both of which resulted in the embezzlement of hundreds of millions of dollars), the general atmosphere of lawlessness has put a real chokehold on Russian business, and scared off most foreign investors.

"[One] reason for high interest rates and low growth in Russia (beyond the IMF austerity program) is a lousy investment climate," said Dolan. "Neither Russians nor foreigners want to put their money in Russia. So fixing the problems of corruption, bad corporate governance, etc. need to have a higher priority than the IMF gives them."

When you think about it, the very idea that the economy of a country like Russia can be repaired by collecting more taxes is perverse. And the idea that Russia needs to collect more in personal income tax-another theory propagated by the Moscow Times-is even more perverse. The Times even sank so low as to cite the oft-repeated statistic that only 4% of Russians filed tax returns last year, neglecting to mention the fact that most Russians, particularly state workers, have their taxes taken out of their pay, and don't need to file. Conditions for efficient income tax collection are very obviously absent in today's Russia. This is a country where state salaries are routinely left unpaid, and where it is next to impossible to do business legally. Personal incomes as it stands are already too low to support even the basic needs of most people, and furthermore, tax evasion by large corporations is so obvious and galling that almost anyone who files a personal tax return would justifiably feel like a fool for doing so. In fact, according to the CEP, the 100 largest tax evaders account for over 40% of Russia's tax arrears. Those same 100 corporations were also among the chief beneficiaries of cheap property sell-offs and other state favors. In this atmosphere, why would any individual voluntarily pay taxes?

"To achieve an acceptable level of compliance by individual tax-payers," the CEP report wrote, "the government will have to convince the population that the tax burden is distributed fairly, and that the dangers of not paying taxes are greater than the dangers of paying them."

Moreover, the insistence by the I.M.F. on increased attention to extracting tax revenue from Russia is bizarre, considering the extremely low amount of duties and tariffs foreigners now pay precisely as a result of pressure from groups like the I.M.F. According to the CEP report, countries at Russia's income level usually take about 3% of GDP in import and export taxes. Russia collects about half that amount, which the CEP says is "partly because of its commitment to trade liberalization, partly because it has granted extravagant tax exemptions to favored lobby groups, and partly because of its long, porous borders and its ambiguous relationship with the 'near abroad'."

Of course, you'll never catch the I.M.F. complaining about Russia's commitment to trade liberalization. We didn't hear Michel Camedessus complaining a few weeks ago when Aeroflot struck a $350 million deal to lease Boeing passenger liners, on the condition that the Russian government waive the normal import duties. The lesson from that deal, and lack of a backlash against it, is that Russians as a whole should pay more taxes, except in those instances when they happen to want to buy American products. In that case, apparently, government exemptions are okay.

Another aspect of that deal worth noting was that the lease for the planes was guaranteed by the U.S. Export-Import Bank, a U.S. government-subsidized organization whose mission is to promote American exports. Of course, Russians for years have been pressured by the West (particularly by USAID and the World Bank) to open up their economy and to resist any move by the state to meddle in commerce to protect Russian industry. But now, just weeks after Russia undertook a series of austerity measures in order to secure an I.M.F. loan, effectively promising not to spend its way out of its depression, an American company can breeze in and with government help on both sides score a major sale. The lesson can't be lost on Russians: Americans are allowed to use state tax breaks and guarantees to support industry, but Russians aren't.

Though the I.M.F.'s insistence on low budget deficits and rational levels of spending on social programming is often sold as evidence of its commitment to responsible market capitalism, the truth is that the I.M.F., in Russia anyway, is actually an anti-capitalist force in the national economy. Though its bailout package was ostensibly intended to stabilize the ruble, what "stabilizing" the ruble really meant was keeping it far above its true market value. Meaning, in other words, it prevented natural market forces from operating in the Russian economy.

Not uncoincidentally, the I.M.F.'s continued protection of the ruble helps foreigners more than anyone else.

Without I.M.F. intervention, the ruble would devalue, making foreign imports more expensive and Russian exports more attractive. As it stands, however, the ruble is allowed to remain steady during a state of continual semi-subsidized inflation, making foreign products cheaper and Russian exports-which in the best case were usually already unattractive to foreign buyers-especially unpalatable. The predictable result of a situation like this is exactly what has occurred: sharply reduced industrial growth, a consumer goods market dominated by foreign products, and a "stable", market-proof ruble. Of course, devaluation would have its negatives, but at the very least it might force Russia to make meaningful changes in its economy. With I.M.F. support, though, it can consistently get away with meaningless measures, like collecting more taxes from an already sufficiently tax-burdened populace.

"[The tax issue] is a false issue," said McIntyre. "Focusing on tax collection only provides an excuse to continue reneging on the responsibility to confront real problems."

The I.M.F. is an inherently conservative organization. Squaring nicely with Robert McNamara's original vision of the World Bank as a protector of West-friendly governments against revolution, the I.M.F. has evolved nicely into a body which helps Russians remain indifferent while motives to revolt against the Yeltsin government pile up around them.

Inflation is always politically expedient for the incumbent government. It temporarily stimulates economic activity, which always wins favor. Loans from the I.M.F., however, allow governments to pursue inflationary policies more or less indefinitely. Ostensibly, the I.M.F. is supposed to intercede to prop up currencies when a country suffers from a temporary trade imbalance that isn't its own fault- due, say, to a drop in commodity prices. More often than not, however, pressure on currencies comes as a result of the poor economic policies of the government in question, meaning the problem is endemic, not temporary. Although Russia has been affected by a drop in world oil prices, its real problems run deeper. But the I.M.F. bailed Russia out anyway, allowing it to continue its awful economic policies.

This is what the economic coordination the I.M.F. preaches ultimately comes down to: it allows member countries all over the world to reap the political benefits of inflation without paying the costs.

That's why this whole tax issue is ridiculous. Sure, it makes sense that a country suffering from budget deficits and all sorts of economic problems needs to tighten its belt in order to get out of the hole. But the belt-tightening the I.M.F. prescribes is a one-way street. Westerners who hold GKOs don't have to tighten their belts, nor do foreign companies looking to retain market share for their products in Russia. And the West-friendly government doesn't have to suffer the consequences of its disastrous economic policies.