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Desperate to Save Its Economy, Russia Attacks Giant Monopoly

Gazprom told Thursday to pay taxes in a move by Yeltsin to avert Asian-style financial meltdown.

It was dramatic act even for a government known for melodrama.

Russia's previously untouchable gas monopoly Gazprom, the country's largest company, suddenly found itself in the undignified position of being ordered by the Russian government to pay hundreds of millions of dollars in back taxes. The alternative was that authorities would seize the company's yachts, lodges, country homes, and swimming pools.

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The government's surprise edict on Thursday shocked the company, which is the world's biggest gas producer. It almost led to a revolt by the Communist-dominated lower house of parliament, which leapt to Gazprom's defense.

In the end, the two sides reached a compromise: The assets would be left alone if Gazprom paid $600 million per month for the next several months.

Desperate to avert an Asian-style financial meltdown, the government of President Boris Yeltsin believes a possible $10 billion to $15 billion stand-by loan from the International Monetary Fund (IMF) is the only way to save the economy from complete collapse.

Indeed, for the first time the government may be confronting the reality that it desperately needs to reform its inefficient economy. But more sweeping reforms will have to come.

"The government realizes that even with the IMF loan the financial crisis will not go away," says Robert Hanania, a partner in the Moscow office of Coopers and Lybrand.

The incident was clearly meant to serve as a warning that the government is serious about economic reform. "There are taxes and they have to be paid," Prime Minister Sergei Kiriyenko told the Duma.

Beleaguered Russian financial officials say the IMF loan is necessary to support the ruble and prevent financial collapse. The currency came under pressure after foreign capital deserted financial markets last month, fueling fears of an inflationary devaluation.

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Russia is currently at risk of defaulting on long-overdue salaries and pensions. Currency reserves have declined. Interest rates are pushing 70 percent. The government is due to pay more than $12 billion in principal and interest on foreign debt in the coming months.

The IMF says it will disburse the loan in return for austerity measures and serious work on tax collection. Last month the government presented a plan that envisions slashing budgetary spending by $6.7 billion and raising an additional $3.2 billion in revenues. Part of this would be done by reducing spending on higher education and cutting one-fifth of public sector jobs.

It certainly appears serious about taxes, if gestures by the new tough state tax chief Boris Fyodorov are anything to go by.

Authorities are developing a database of the country's 1,000 wealthiest people. Apartments of wealthy tax dodgers have been raided. Last month 22 people, including the head of the state Statistics Commission, were arrested for helping big companies evade taxes. The prosecutor general says more arrests are coming.

Analysts say the government will lose much face if it fails in its efforts to collect arrears from Gazprom, as well as two other big companies targeted: the UES electrical utility monopoly and the Norilsk Nickel metals producer.

It is unclear whether the Duma will approve the government's new tax package before it breaks for the summer on July 16.

Mr. Fyodorov has proposed a new pro-business tax regime, which puts more of the burden on the average citizen to encourage companies' growth.

The Communist faction, which sees its mission as protecting the ordinary working man, has been more placid than expected after initial insistence that the austerity package would not become law.

Last Friday, deputies approved a series of changes including cutting profit taxes, taxing casinos, and streamlining the number of taxes from 44 to 28.

But they held firm on proposed measures that they see as hurting the population at large: imposing new income and sales taxes and ending lower sales taxes for food.

Many analysts believe the opposition legislators will hold firm.

"Those laws connected with the rights of workers and the social sphere will be rejected by the Duma because the Communists want to show the public that they defend workers," says Sergei Auktsionek, director of the Russian Economic Barometer, a Moscow-based independent research organization.

Mr. Yeltsin has indicated that he will push the laws through by special decree if the Duma does not endorse them. He has warned of social unrest if the IMF money is not received.

According to Valentina Belova, an analyst at the Moscow-based Russian Society Research Academy, there is currently tremendous political pressure on the government, notably with miners and teachers mobilizing against it around the country.

"The government is criticized if they do something and they are criticized if they don't," says Ms. Belova. "It's profitable for everyone to kick them now."

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