Moscow's Economic Cop

Vladimir Potanin must round up revenue and calm investors

In the two months since he took office, First Deputy Prime Minister Vladimir O. Potanin has become Russia's economic crisis manager. Working 12 hours a day, the 35-year-old former banker races from meetings to wheedle a monthly loan from the International Monetary Fund to the Duma to defend his austerity budget for 1997. Flying to Russia's heartland, he pleads with local politicians to accept lower subsidies. All the while, he fields calls from businesspeople worried about Boris Yeltsin and the impact of his upcoming heart surgery on the markets.

Cool and collected, Potanin shrugs off any worries that things might be coming unglued. His mission is straightforward, he told BUSINESS WEEK in an interview on Oct. 25 in his office in Russia's White House. Instead of playing power politics, he is taking charge of the economy. His chief task is to find ways to keep Russia afloat. Besides dealing with the IMF and the Duma, he's pushing hard to get Russia's big corporate tax cheats to pay up and putting teeth into bankruptcy laws. "Cracking down on bankrupt companies makes the economy healthier and encourages people to pay taxes," he says.

CONSENSUS. Yeltsin's decision to fire Alexander Lebed smooths the way for Potanin. Although Lebed was responsible for national security, his efforts to influence economic matters spurred dissension. Now that Lebed is out, there is a consensus at the top on how to push ahead to fix Russia's economy. Potanin, Prime Minister Viktor Chernomyrdin, and Yeltsin's chief of staff, Anatoly B. Chubais, all want to revamp the tax and legal systems, bolster property rights, and finish privatization.

Tax collection is Potanin's first target. Even though the government has slashed spending, it is running a deficit of 3.9% of gross domestic product. The betting is that further cuts could spark social unrest or mutiny in the military, where soldiers earn $10 a month. The only option: boost tax revenues. At 80%, Russia's corporate tax rate is among the world's highest, but few pay in full. In the first nine months of 1996, the government brought in only 71% of anticipated tax revenue.

Potanin's solution is harsh: threaten deadbeat taxpayers with bankruptcy. Although a bankruptcy law has been on the books for two years, companies rarely go out of business. At Potanin's urging, the government launched bankruptcy proceedings against four companies on Oct. 29 for failing to pay at least 10% of their current tax bills. "Despite the President's illness, we have the political will," Potanin says. One company, truckmaker KamAZ, agreed to pay taxes after the government took it to court.

In his quest for revenues, Potanin is eliminating tax exemptions, too. He's not sparing old allies--including Norilsk Nickel, which is controlled by Oneximbank, where Potanin was president. After Oneximbank backed Yeltsin's reelection, the Russian President promised Norilsk $1.2 billion in tax exemptions. But by the time Yeltsin was ready to sign the decree, Potanin was in the government. To avoid favoritism, he says, he cut more than $800 million of the benefits, which would have wiped out Norilsk's back tax bill. "They were deleted by my hand," Potanin insists. Now the company must pay up.

JUST POLITICS. Potanin professes to be conscious of conflicts of interest. "When Yeltsin proposed that I take this position, I explained to my friends not to lobby me," he says. But he admits that he keeps in close contact with former colleagues. And with privatization almost complete, the next big financial power struggle will be for the assets of bankrupt companies. Says Dirk Damrau, research director at Moscow bank Renaissance Capital: "Deciding which companies go bankrupt and who gets to buy their assets is a political decision."

The Deputy Prime Minister is sure to come under further scrutiny as he steers Russia through financial crisis. For now, Potanin takes as a vote of confidence the decision by rating agencies to give Russia a rating just under investment grade in advance of its planned $1 billion Eurobond issue. Raising cash on the global markets will help Potanin fill gaping holes in his budget. But Russians will be watching to see if the funds go to well-connected companies or the people.

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