Moscow Wants Russian Society to Pay for War in Ukraine (Part One)

Despite the Russian ruling elite’s optimism about the Russian economy “stepping into a positive trajectory of growth” (RIA Novosti, February 28), the real state of affairs in economic development may not be as bright as the Russian authorities portray. Despite propaganda, Russia`s economic troubles—caused by a combination of economic sanctions (BBC News Russian, October 27, 2022) and Russia`s skyrocketing war expenses (TASS, September 29, 2022)—are becoming increasingly conspicuous. According to Russian sources, in 2023, Russia`s budget deficit could exceed a staggering 4 trillion rubles ($51.2 billion) (Vedomosti.ru, February 8).

Economic troubles are also visible on two other levels. At the regional level, the situation has been described as “dangerous.” In October 2022, it was estimated that the amount of income tax revenues in regional budgets fell by 40.2 percent (The Bell, February 8). At the corporate level, even traditionally privileged large companies and natural monopolies are seemingly no longer feeling as confident; the Russian government has already exercised its power, forcing some of them to share profits to cover war expenses. For example, in 2022, Gazprom was forced to stop paying dividends to shareholders. Instead, the government—having increased the tax on extraction of natural resources—collected an additional 1 trillion rubles ($12.8 billion) from the gas-producing giant (RBC, June 22, 2022).

Now, given mounting economic challenges, Moscow seems to be even more interested in covering its mounting war expenses and patching growing budget expenses through levying additional charges and taxes on Russia`s largest businesses. Interestingly, this idea was first voiced in late 2022 by Russian Prime Minister Mikhail Mishustin, who proposed combating the growing budget deficit through introducing what he called a “mobilization tax” (The Bell, February 8).

Currently, the Russian Ministry of Finance is planning to raise 300 billion rubles ($3.6 billion) by taxing those large companies that earned the highest profits in 2021–2022. These plans were voiced by Minister of Finance Anton Siluanov in an interview to the Russia-24 state-owned news channel. Siluanov also noted that this measure will not be applied to small- and medium-sized enterprises nor to companies working in the “energy complex” (toplivno-energeticheskii kompleks), which, despite this proclamation, have already been subjected to a number of tax regulations (Forbes.ru, February 17).

For now, the main issue is the form that the proposed “tax” will take. It appears that the most appropriate way would be introducing a so-called “windfall tax” (Kommersant, February 15). According to some Russian sources, the tax will be applied to those companies whose average profits exceeded 1 billion rubles ($12.14 million) in 2021–2022 (Kommersant, February 20). Per insider information, these companies might come from the “coal, pharmaceutical, metallurgical and fertilizers industries” (RBC, February 8).

Despite the initial overt negative reaction, large Russian businesses (controlled by oligarchs) have reportedly agreed to pay the “tax.” As stated by Alexander Shokhin (president of the Russian Union of Industrialists and Entrepreneurs, or RUIE), Russian businesses have agreed to a one-time-payment to “patch up the budgetary hole.” Shokhin mentioned that the money will be raised through “a mandatory one-time payment, a quasi-windfall tax.” According to Russian news outlet The Bell, RUIE agreed to raise the money due to Siluanov’s personal lobbying—most likely originating from the Kremlin (The Moscow Times, February 21). While little concrete information is available on what these businesses might ask in return for the “war tax,” some bits and pieces of information coming from Russia point to two measures that the Russian government could undertake to compensate oligarchs for their financial assistance.

First, according to Deputy Finance Minister Alexey Moiseev, the Russian state could lift all restrictions on currency transfers—currently, no more than $1 million per month may be transferred abroad—for Russian businessmen (The Moscow Times, March 1).

Second, Russian authorities could go ahead with a the oft-discussed “Gosplan 2.0”—a Soviet-style system of economy—which, despite its deeply harmful nature, would likely be welcomed by many large businesses that would gain exclusive, almost monopolistic rights in specific industries as a result (see EDM, September 7, 2022). According to Russian sources, the majority of large businesses simply do not know how to deal with economic sanctions and argue for increasing the role of the state in the Russian economy. A study published by the State University of Management showed that 78.5 percent of respondents (the survey was conducted among mid- to high-level management) positively assessed the prospect of short-term (five years) as well as mid- and long-term central planning, which would be established and managed by the state. The respondents did not argue specifically for the implementation of a Soviet-style planning (Gosplan), yet supported the introduction of “serious strategic planning for the successful development of the Russian economy.” Managers converged on the opinion that it would be extremely hard—if not impossible—for large Russian businesses to overcome the consequences of Western sanctions without the state acquiring a larger role in managing available resources and giving directions for further development.

At the same time, it was argued that a greater role for the state brings with it a number of risks, including the strengthening of special interests groups with political and economic agendas of their own (The Moscow Times, March 30). Interestingly, it has been reported that several leading Russian universities—including Bauman Moscow State Technical University, Plekhanov Russian University of Economics, Moscow State University and Moscow University of Finance and Law—have already started working on a “digital Gosplan” that envisages a return to the Soviet-style five-year plans (The Moscow Times, February 14). According to available information, the pilot project of “digital Gosplan” is planned to be launched in 2023 in so-called “priority areas of import substitution”—including radio electronics and car manufacturing—and will later be extended to petrochemicals, agriculture, transportation and medicine. The founders of this idea are planning to launch the first five-year plan in 2025 (Vedomosti.ru, February 14).

All these facts highlight three major points. First, the state of the Russian economy is extremely dire, and the means to patch up holes in the budget are much more limited than Russian officials have admitted. Second, the role of the government in the Russian economy is poised to expand and apparently transform into a semblance of the Soviet Gosplan. Third, and perhaps most consequential, with limited resources and rising special interests groups, the internal struggle for power and influence in Russia is likely to deepen.

*Read Part Two.