New tax to force metal companies to 'share' profits

These are good times for Russia’s economic interventionists. It emerged Thursday that Deputy Prime Minister Andrei Belousov has successfully lobbied for a special tax to oblige Russia’s metals giants to hand over about $2 million in “super-profits” from a global commodity boom. Belousov has promised this is only the beginning.

• Belousov first floated the idea that companies should return profits made from rising commodity prices at the end of May. His initial words were blunt, and he claimed businesses were “screwing the state”. This line of thinking was not immediately welcomed by other government figures, with Trade and Industry Minister Denis Manturov open in his opposition and Putin remaining non-committal at the St. Petersburg International Economic Forum at the beginning of June. But it seems Belousov has now managed to win over the president.
• It looks certain that a 15 percent export tax will be levied against all metals companies. The levy is set to apply from August to December and is expected to raise up to 165 billion rubles ($2 billion). But that’s only the start. From the beginning of 2022, the government wants to introduce a permanent system to allow it to collect ‘super profits’ from companies benefitting from inflated global prices.
• Metals companies responded with muted indignation, aware that opposition is now futile. After the announcement, shares in Russia’s biggest metals companies slumped and the six largest metals companies saw as much as 320 billion rubles ($4.5 billion) wiped off their valuations.
• Since it became clear that commodities were entering a new growth cycle (the Bloomberg Commodities index is up more than 50 percent since spring 2020), the Russian government has been unhappy that rising profits for Russian exporters have coincided with rising prices on the domestic market. In particular, rising food prices and the growing price tag for state investment programs to revive economic growth have created political problems. Unease has been fueled by growing inflation, which has climbed to an annual rate of over 6 percent.
• The metal-producing sector was not the first sector to feel the pain of this new trend of state appropriation. Exporters of grain and vegetable oils faced a retail price freeze last year. “We are talking about limitations connected with the extraction of inflated profits. And there’s nothing wrong with [restricting] that,” Putin explained to businessmen back in March.
• These changes may be recent, but Belousov — who is effectively in charge of Russian economic policy — has been fighting this battle for a long time. Fundamentally, Belousov believes Russia’s biggest companies do not contribute enough to the country’s budget. Back in 2018, when Belousov was one of Putin’s economic advisors, he suggested taking $7.6 billion from commodity exporters to finance public investment projects. That was never realized, but, since then, he has slowly pushed his agenda forward. Last year, commodity companies were forced to pay $800 million to help fund the government’s anti-coronavirus efforts.

Why the world should care: Belousov’s dirigisme may not have caught on in 2018, but Russia’s current economic problems (especially inflation and a budget shortfall) are pushing the Kremlin further and further down the path of state intervention. One of the most unpleasant consequences is unpredictability for investors – Russia’s metals companies are blue-chip stocks.