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Russia proposes tax hike, oil funds reform

MOSCOW - Russia's Finance Ministry unveiled a draft fiscal strategy to 2023 on Sunday, proposing to raise social security taxes from 2010 and reform the $162 billion oil wealth funds to back up the pension system.

Under the proposal, Russia's oil revenues will be redistributed between the liquid Reserve Fund designed to support the budget in case the oil price falls and the National Wealth Fund (NWF), earmarked for riskier investment.

The Reserve Fund will shrink to 6 percent of gross domestic product from the current 10 with the cash going to the now-$33 billion NWF, whose main task going forward will be the support for the pension system.

‘The main challenge for the whole financial system of the country is the pension fund deficit. We should admit that today's pensions are not sufficient,’ said Finance Minister Alexei Kudrin.

The Finance Ministry also wants to raise the effective rate of the employers' Unified Social Tax, the backbone of the Russian pension system, to 24.7 percent by 2010 from 21.5 percent now and introduce a 3 percent social tax on individuals.

‘We will have to raise taxes. We are now at the threshold when higher pensions will require higher budget spending,’ Kudrin said. Russians currently pay a flat income tax of 13 percent.

The proposal, part of fiscal strategy till 2023, also sees the budget going into deficit from 2014 and suggests Russia may tap oil wealth funds and borrow to keep up with ambitious goals of diversifying the economy and supporting social welfare.

Russian pensioners, expected to number 37.3 million people in 2010, are surviving on about $160 per month from the state, but Kudrin said their patience was running out.

‘The situation is becoming critical,’ he said. Under the proposal, Russia will keep the average ratio of pension to wages at a constant rate of 30 percent with the average pension rising to double the subsistence level in 2013.

Under the fiscal strategy until 2023, to be handed over to the government next week, the NWF will contribute 0.6 percent of the GDP per year towards the pension system, with the amount partly covered by the returns on the fund's investment.

The investment return on the NWF, which will have about 40 percent of its assets invested in bonds and stocks of foreign corporations, is expected to fully cover the transfer to the pension fund in 2013.

Kudrin said that under such a scheme the horizon for the oil wealth investment has become clear. A special government-owned agency will oversee the investment in foreign corporate assets with the rest managed by the central bank.

He said the state-owned Development Bank, which manages the Pension Fund, government debt and infrastructure investment, may also receive a mandate to run private equity investment, with exposure to one issuer limited to 5 percent of total equity.

Kudrin, the advocate of prudent fiscal policy, fought in recent months against attempts increase budget spending and to cut taxes to give a boost to the economy. Kudrin did not say if his plan had received backing from the country's leaders.

Under the draft strategy, defence spending will remain at the level of 2.5 percent of GDP while national security and law enforcement expenditure will gradually decrease.