Russian tax policies scaring off investors

March 29, 1994|By Will Englund | Will Englund,Moscow Bureau of The Sun

MOSCOW -- Western oil companies that reached deals in Russia last year suddenly found themselves subject to an after-the-fact $5 a barrel export tax.

A Western business executive who moved to Moscow this month was shocked to discover after he had arrived that the State Customs Committee was levying a 60 percent duty on his clothes and furniture -- and would extract another 60 percent when he moved out of the country.

Ostensibly to protect local agriculture, Russia this month slapped a 15 percent duty on most imported food. It covers everything from coffee to rice to olive oil -- and possibly even bananas and pineapples -- none of which is exactly a staple of Russian farming.

A company doing business in Moscow is now subject to 51 different taxes -- and foreign firms here are starting to sense Russia may be more trouble than it is worth.

With that in mind, U.S. Secretary of Commerce Ronald H. Brown arrived in Moscow yesterday with a fairly straightforward message for his Russian counterparts: Enough is enough. If Russia does not stop driving investors away with capricious taxes and arbitrary bureaucratic delays, it will kill foreign investment, and that in turn will kill its own eco nomic development.

Mr. Brown, leading a delegation that includes 29 U.S. corporate chiefs, is officially here to sign some business agreements and generally show American support for free-market reforms.

But his real mission seems to be to try to convince the Russian government that foreign firms will do business here only if they believethere is a chance to make money.

And that requires, he said yesterday at a news conference, a consistent tax policy and an end to stalled permit renewals and ** other sudden bureaucratic obstacles.

Without these, foreign investors will be quite happy to take their money elsewhere, he said, and that will doom Russia economically.

"What we're offering is the possibility of success, as opposed to the possibility of failure," Mr. Brown said.

And it isn't only Americans who feel that way. Western European ambassadors, acting jointly, will likely be making the same points in the near future, a Western diplomat said last night.

Already, oil firms are starting to cut back on operations here. The $5 a barrel export tax, Mr. Brown said, turned what would have been viable deals into money-losers. With the price of oil only around $13 a barrel, no company can eat a tax of that size.

Occidental Petroleum Corp. said last month that it was cutting jobs here and planning to cut its investment.

The French firm, Elf Aquitaine, says it is de-emphasizing its Russian operation in favor of Latin America, which enjoys greater political stability.

A senior administration official said yesterday that U.S. investment in Russia amounts to about $1 billion, which makes ** the United States either the largest or second-largest foreign investor here.

Yet American investments in Hungary, which is one-fifteenth the size of Russia, total $3 billion. Hungary has gone through substantial economic reform, the official pointed out, and Russia hasn't.

In theory, he said, Russia could support a proportionate amount of American investment -- about $45 billion worth.

"The largest impediment is an unpredictable tax environment," he said. "I think that's terribly important."

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