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Russia targets $4 billion windfall tax on oligarchs to recoup Ukraine war losses

Due to the economic strain caused by its involvement in the war in Ukraine, the Kremlin has decided to implement a one-time windfall tax on major Russian companies and their oligarch owners.

The Russian finance ministry announced on Tuesday that a draft bill has been approved to impose a windfall tax of up to 10% on large Russian companies. This tax will apply to companies that have generated profits exceeding 1 billion rubles, or $11.9 million, annually since 2021.

According to Andrei Belousov, the first deputy prime minister, this levy has the potential to generate approximately 300 billion rubles, or $3.6 billion, in collective tax revenue. In an interview with RBC TV, Belousov stated that the companies themselves proposed the implementation of these taxes.

The finance ministry’s announcement stated that the taxes would be utilized for social spending, although it did not provide specific details on how they would be allocated.

While the announcement did not explicitly mention the targeted companies, analysts interviewed by the Financial Times suggested that Russia’s fertilizer and metals sectors were likely to be affected. These sectors play a crucial role in Russia’s commodity exports, particularly in agriculture and certain industrial raw materials.

Despite facing sanctions and boycotts from several Western nations and their allies, Russia remains a significant exporter of commodities. This continued relevance in the global market benefits companies operating in these sectors.

Timur Nigmatullin, an analyst at Russian investment company Finam, expressed his expectation that information about the windfall taxes would be deliberately kept “opaque” to minimize the risk of these companies being subjected to further sanctions.

Indeed, Russia has resorted to implementing windfall taxes in the past to generate revenue for the war in Ukraine. One such instance occurred last year when the country imposed a windfall tax on Gazprom, the energy giant.

This tax was imposed following a surge in natural gas prices after Russia’s invasion of Ukraine. Although Gazprom reported record profits in the first half of 2022, its net profits for the full year experienced a 40% year-on-year decline due to the tax increase in the second half of the year.

However, the situation has changed as energy prices have now fallen to pre-war levels, primarily driven by concerns of a global recession. Additionally, Russia’s energy revenues have been significantly impacted by extensive restrictions on its exports.

Notably, the European Union, a major customer of Russian energy, banned the import of Russian crude oil starting from December 5.

The consequences of these developments are reflected in Russia’s financial performance. In the first quarter of 2023, the country recorded a deficit of nearly 2.4 trillion rubles, marking a significant reversal from the over 1 trillion ruble surplus posted in the first quarter of 2022.

Furthermore, Russia’s finance ministry data released on April 7 indicated a 45% decline in quarterly energy revenues to 1.64 trillion rubles.

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