Bankrolling Russia’s relief program

Putin has proposed sweeping tax cuts to shore up vulnerable businesses as coronavirus cripples the economy, but a lot more might be needed and it’s unclear who would foot the bill

In Vladimir Putin’s national address on March 25, the president outlined a series of large-scale programs intended to support businesses suffering from the economic slowdown caused by the global coronavirus pandemic. The measures are needed to prevent business closures that would cause a spike in unemployment, says the Kremlin. So far, Russians have been promised a more modest assistance package and not everyone suffering and in need will get help. Additionally, the state won’t be shouldering the costs alone, despite the fact that the federal government has accumulated large reserves in recent years. Russia’s upper and middle classes will pay for some of Putin’s emergency programs through a new tax on income from large deposits and securities. Some of the taxpayers asked to help finance the new assistance program will probably be owners of the same small- and medium-sized businesses Putin has vowed to help.

What did Putin promise?

Organizations from the industries that suffer most in the coronavirus crisis will receive the most state assistance.

What makes the list?

That’s still unclear. Putin ordered the government to “monitor the situation” and determine which industries are suffering the most. So far, federal officials and state bankers have named the following industries:

• Sberbank’s list: Transportation, hotels and real estate, the service industry, construction-materials production, retail and wholesale consumer goods, education, sports, and culture and the arts
• According to the Central Bank’s statement: travel companies and drug manufacturers
• According to the prime minister’s order: Cultural and sports organizations

These industries will be given not only government benefits but also a six-month moratorium on all lawsuits by their creditors. If we interpret Putin’s national address literally, it means that restaurants, gyms, and hair salons are getting a “holiday” on payments not only to banks but also to their own suppliers and landlords. It’s possible, however, that the president only meant a suspension of payments on loans owed by these enterprises. Either way, Putin didn’t explain how this will be enforced or who will repay the losses of banks, suppliers, and property owners. In the meantime, many suppliers could go bankrupt in the next six months — a risk that apparently also applies to many small- and medium-sized businesses that work in wholesale trade.

All small- and medium-sized businesses (even those in industries that don’t make the government’s list for emergency relief) will get a six-month tax holiday and micro-enterprises will also be allowed to forgo social security contributions.

For all small- and medium-sized businesses, the government is reducing the rate of taxes on employees’ salaries (and not just during the epidemic) that now fund Russia’s Pension Fund, healthcare system, unemployment benefits, and other social programs. Once the initiative gets parliamentary approval, these enterprises will pay social security taxes on employees’ salaries at a rate of 15 percent instead of the current 30 percent. The taxes, moreover, will be calculated using just part of workers’ pay, counting only the money earned above Russia’s minimum monthly wage (which is currently set at 12,000 rubles — about $150).

Finally, small- and medium-sized businesses will receive benefits that Putin has promised to continue even after the coronavirus pandemic ends, locking in the substantially lowered social security taxes on these organizations.

Is Russia only helping businesses?

Families already receiving state assistance will get an additional 15,000 rubles ($190) for each child under the age of three. As of late 2019, Russia had roughly 120,000 such families. Meanwhile, in just three months (when the new emergency payments finish), the number of “maternity capital” recipients will begin to grow. In his address to the Federal Assembly in January, Putin ordered the government to add families with newborns to this benefits category by July 1. The president later told the government that he wanted it done by June. Currently, Russia’s maternity capital system is only available to couples with more than two children.

According to Putin’s national address on Wednesday, Russians who “fall on hard times” because of the coronavirus pandemic will “temporarily” be permitted to suspend loan repayments. Who falls into this category? People whose income falls by more than 30 percent. The president did not explain how long this will last or who will compensate banks and microfinance firms in this process.

The president also vowed to raise unemployment benefits.

How much will all this cost? Who’s footing the bill?

At the moment, we can only approximate the price tag on Russia’s coronavirus relief efforts. The most costly of all the announced measures is obviously the reduced social security taxes on businesses. For years, the government has tried to devise a way to reduce the labor tax burden on businesses, but all options always seemed too costly. According to Finance Minister Anton Siluanov, cutting social security contributions by 1 percent (on enterprises of all sizes) would cost the federal budget about 200 billion rubles ($2.6 billion). Sberbank estimates that almost 40 percent of Russia’s labor force is employed by small- and medium-sized businesses. Based on these figures, Putin’s proposal will cost hundreds of billions of rubles in lost tax revenue and additional state spending.

So far, the government doesn’t yet have these funds “in hand.” Last week, the authorities allocated 300 billion rubles ($3.8 billion) to fight the spread of coronavirus. Combined with the new relief program, the state’s efforts will clearly cost a lot more. The government could theoretically get the money from Russia’s National Wealth Fund, but officials aren’t even discussing this option.

It’s also become clear, however, that Russia’s federal government won’t shoulder the costs of fighting the pandemic alone. Putin proposed a new tax on interest earned from bank deposits, securities, and funds transferred abroad exceeding 1 million rubles ($12,670). Conservative estimates say this will net the government at least 11 billion rubles ($140.3 million).

It’s hard to say how many people will end up paying this new tax. According to President Putin, it will affect less than 1 percent of Russia’s wealthiest depositors. This group will likely include several state officials and, ironically, some entrepreneurs who own small- and medium-sized businesses.

Will Putin’s relief program help Russia weather the coronavirus crisis?

The allocated funds might not be enough.

The direct assistance to households and individuals outlined so far is relatively little and distributed too narrowly. A more vigorous stimulus package, however, would require far greater state spending in addition to a new infrastructure for social assistance, like some of the innovations now rolling out in Asia and the West.

The Kremlin’s relief program for businesses is more ambitious (though it’s less than what many industry representatives have advocated). The Putin administration is taking into account two important requests from Russia’s suffering entrepreneurs: tax holidays and a moratorium on loan repayments. But there are problems here, too:

• It’s unclear how demand-driven industries not added to the government’s relief list are supposed to manage during the economic crisis. In the end, the Russian government will decide which businesses survive.
• It’s unclear who will compensate enterprises (not just banks but also suppliers) for the moratorium on loan repayments.
• Not all taxpayers and not all taxes are getting tax holidays. For example, the relief program doesn’t suspend Russia’s value-added tax, which is highly important to the federal budget. Some small- and micro-sized businesses that utilize Russia’s simplified tax system don’t pay this tax right now. For bigger enterprises (but also for many small- and medium-sized businesses), the VAT is the burden that most affects their short-term financial performance.

Finally, it’s unclear what businesses should do with another major expense item: wages. How are enterprises that lose all revenue during the coronavirus pandemic supposed to continue paying staff? In Moscow, St. Petersburg, and other major cities, entire industries dominated by small- and medium-sized businesses have been shut down to curb the spread of coronavirus. Pools, gyms, and more have been forced to close their doors. For example, in the week-long holiday announced by Putin in his national address, Moscow will close all cafes. Mayor Sergey Sobyanin has indicated that these measures could be extended.

In Great Britain, meanwhile, the government has promised to pay 80 percent of the wages owed to “furloughed” staff at businesses forced to close because of the nationwide quarantine now in effect.

If Russia has to resort to longer business closures, the state will need to commit to far greater public support to prevent whole industries from going bankrupt. According to rough estimates, even the week-long holiday implemented by the president will cost the economy hundreds of billions of rubles. The damage will be so great that only the government will be capable of compensating the losses, either in the form of assistance to enterprises that pay salaries or as benefits to the people whom businesses will be forced to lay off.

Text by Dmitry Kuznets

Translation by Kevin Rothrock