Russia is looking to woo technology companies by giving firms annual tax breaks worth more than US$1.1 billion as it aims to diversify its oil export-dependent economy after the second price crash in four years.
Russia’s government proposed this week amendments to the Russian tax laws, in order to create a more favorable tax regime for IT companies and start-ups.
The development of the IT sector will allow Russia to lessen the dependence of its economy on energy resources, Russian Finance Minister Anton Siluanov said at a cabinet meeting on Thursday.
The government proposes slashing the profit tax for the IT sector to 3 percent from 20 percent, as Russia hopes it can become a cheap and corporate tax-friendly destination for the industry.
The need to diversify the economy became painfully evident for Russia which suffers the consequences of the oil price crash it helped create with the temporary rift with its OPEC+ partner Saudi Arabia in March. The Russian ruble crashed, and the oil income for Russia shrank as a result of the plunge in oil prices. Under the new OPEC+ deal from April, Russia is cutting its oil production by 2 million barrels per day (bpd) until the end of July, after which cuts are set to ease.
The price crash, along with the coronavirus-driven global recession, will result in Russia’s economy shrinking this year by the most in 11 years, the World Bank said in its latest economic report on Russia last week.
Russia’s economy will suffer from the global recession and local efforts to contain the pandemic and the low price of oil—Russia’s largest export—the World Bank said.
The COVID-19 pandemic has weakened the Russian ruble and has resulted in lower fiscal revenues for the country, according to the bank.
“Heightened global risk aversion on financial markets, further exacerbated by a slump in oil prices, has weakened the ruble by 11 percent since the beginning of 2020,” the World Bank said in its report.
By Tsvetana Paraskova for Oilprice.com
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Trying to woo technology companies by giving them tax breaks is no different from what the United States, the European Union (EU) and China do all the time to attract foreign investment.
All economies of the world particularly the big ones have shrunk as a result of the COVID-19 pandemic with the US economy projected to shrink by 11% in the fourth quarter. Russia is no exception. Moreover Russia’s economy is not projected to shrink by more than 4%-5% this year according to Russia’s financial sources. In June 2020 Russia's gold exports exceeded the value of natural gas exports for the first time in its history.
Furthermore, a weakened ruble has enabled Russia to reduce its lifting cost per barrel to $2.5 compared with $2.8 for Saudi Arabia. The reason is that Russian oil companies earn dollars and other hard currencies for their exports but pay for their operations in ruble. The lower the ruble slides against the U.S. dollar, the lower the production costs of Russian oil companies. That is one of the reasons why Saudi Arabia could never have won the oil price war against Russia.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
Russia has a positive trade balance and little foreign debt so a lower Ruble exchange is money in the bank. A few strong economic areas are agriculture, nuclear energy, heavy trucks, helicopters, and military airplanes. To date their commercial aircraft have not done well on the market.