Russia: No Tax Man Ever Had It Tougher

Boris Fyodorov undertakes a crucial crackdown on cheats

Wearing jeans and sunglasses, newly appointed Russian State Tax Service Director Boris G. Fyodorov toured around Moscow in a silver jeep on June 20, seeking out tax cheats. At markets and gas stations, the 40-year-old Fyodorov checked out how many merchants offered receipts--proof they were recording sales and paying taxes. None that he inspected was. Now, Fyodorov's army of tax police is set to launch a massive campaign to boost the collection of value-added and other business taxes across the country.

It could be Russia's toughest job: Vastly improving the tax take in a country where only 5 million out of 150 million citizens fill out income tax declarations, companies regularly stash income overseas, and industrial groups favored by the government have ignored their taxes with impunity. Fixing Russia's tax system is key to stabilizing the country's precarious finances and persuading both international investors and the International Monetary Fund to pump more money into the economy.

SERIOUS BLOW. Without an infusion of cash to shore up its dwindling hard currency reserves, Russia may be forced to devalue its ruble. That would strike a serious blow to its entire reform process. On June 23, Russian Prime Minister Sergei Kiriyenko and President Boris N. Yeltsin asked the Duma to approve an anticrisis package of tax and spending cuts, aimed partly at meeting IMF demands for radical action. If the Duma doesn't pass the laws within two weeks, Yeltsin warned, he would push the measures through "other means," most likely by presidential decree.

No matter how the President gets the laws on the books, Fyodorov faces the near-impossible task of implementing them. In Russia, evading taxes is practically a national sport. Still, the straight-talking banker seems to relish the task. In addition to inspecting stores and markets, he is compiling a database of Russia's glitterati to make sure the wealthiest 1,000 cough up all their taxes. And his tax police mounted a raid on a prestigious Moscow residential building on June 17, to flush out landlords evading taxes on their rental income.

More important, Fyodorov has the ear of top officials. In his anticrisis measures, Kiriyenko has adopted several of Fyodorov's ideas on revamping Russia's tax policy, such as shifting the burden of taxes from producers to consumers. Kiriyenko also wants to slash Russia's 35% tax on corporate profits, though he hasn't yet said by how much. And he wants to eliminate a controversial corporate tax on turnover, which with other taxes can bring a company's total tax bill up to 100%.

His government is also struggling to crack down on corruption and waste in the country's 89 regions, where credits sent from Moscow to pay wage or pension arrears sometimes disappear. Regions that don't clean up their act won't get more credits, warns Deputy Finance Minster Alexei L. Kudrin. "We've had to become a mini-IMF," he says.

EVASION ATTACKS. Fyodorov is as prepared as any reformer could be for his difficult job. Known for his strongly liberal economic views, he won his governmental stripes when Russia was just beginning its economic reform efforts in the early 1990s. As Finance Minister in 1993 and '94, he fought inflation by standing up to the then powerful industrial lobby and slashing subsidies to near-bankrupt enterprises. He also challenged the Central Bank when it wanted to finance government operations by printing rubles.

When Russia veered from its reform course in late 1994, Fyodorov left the government. He was elected to the Duma and founded his own investment bank, United Financial Group, later acquiring East-West Investment Bank. Outside government, he has often called for tougher moves against corruption and tax evasion. Yeltsin finally called Fyodorov back to the government as tax czar on May 30.

Russian citizens, international investors, and the IMF will all be watching Fyodorov closely. IMF Managing Director Michel Camdessus says Russia's hopes of receiving international aid rest on reform of its "fundamental problem"--its tax-collection system. For now, the IMF is giving Russia the benefit of the doubt. On June 24, officials indicated that the fund would soon release a delayed $670 million loan installment to Russia. But whether Moscow can restore the confidence of international investors may well depend on how sweeping and effective Fyodorov makes his tax collection campaign.

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