Bloomberg News

Putin May Copy U.K.’s 5 Billion-Pound Privatization Windfall Tax

February 20, 2012

Feb. 17 (Bloomberg) -- Russia may follow the example of a 5 billion-pound ($7.9 billion) one-time windfall tax imposed on privatized utilities in the U.K. in 1997, the head of the country’s budget watchdog said.

Prime Minister Vladimir Putin, who’s campaigning for the presidency in a March 4 election, last week said that he may charge a one-time fee on entrepreneurs who acquired assets in “unfair” 1990s privatizations.

“We’ll find those willing to pay part compensation for ‘unfair’ privatizations,” Sergei Stepashin, a former prime minister who heads the Audit Chamber, said in an interview published today in the official government newspaper, Rossiyskaya Gazeta. “There’s an example for us: Tony Blair’s government carried out a similar measure with a number of big companies that were privatized under Margaret Thatcher.”

Within months of its landslide 1997 victory, Blair’s Labour government imposed the 5 billion-pound tax on the “excess profits” of utilities sold to investors by the previous Conservative government. The new government contended the British utilities were undervalued when privatized and wanted the new owners to make up the difference through the tax.

Russia will consider imposing a levy equal to the difference between the market value and actual price paid in the asset sales in the 1990s, Stepashin said, adding that the process may involve legal proceedings, if necessary.

The Micex Index of 30 stocks closed almost one percent lower after Putin’s Feb. 9 announcement. Since he came to power in 2000, he has repeatedly pledged not to reverse the 1990s auctions, which handed holdings in the oil, metals and other industries to so-called oligarchs, or wealthy businessmen, who built ties to the government after the fall of communism. Moscow is the city with the greatest number of billionaires at 79, compared with New York’s 58, according to Forbes magazine.

Draw a Line

“We have to draw a line under this period, so that society accepts the outcome, ending this problem of the 1990s,” Putin said at a meeting in Moscow of the Russian Union of Industrialists and Entrepreneurs, a lobby group for big business. He described the privatizations that took place through auctions as “frankly speaking unfair.”

Alexey Mordashov, the billionaire owner of steelmaker OAO Severstal, said Feb. 9 Putin’s proposal was a “sensitive” issue. “The desire and the need to turn the page is understandable, while it’s unclear whom to tax exactly -- those who privatized, who own now, or minorities,” he said.

Decide Themselves

Billionaire Mikhail Prokhorov, who’s standing for president in the March election, said this month that all the businessmen who bought state assets in the 1990s should decide themselves how much they want to compensate the state.

If elected president, he vowed to donate almost all his money to charity. Prokhorov’s fortune was estimated last year by Forbes at $18 billion, making him Russia’s third-richest person.

After being elected to the presidency in 2000, Putin agreed not to revisit the government’s asset sales from the previous decade on condition the tycoons stay out of politics.

Mikhail Khodorkovsky, once Russia’s richest man and owner of the country’s biggest oil producer, was imprisoned for tax evasion and fraud and his OAO Yukos company dismantled in a campaign he alleges was motivated by his political activities.

Khodorkovsky’s Menatep Bank bought a 78 percent stake in Yukos for $300 million in a so-called loans-for-shares auction that was organized by Menatep in December 1995. The energy producer’s market capitalization later rose to as high as $30 billion.

Knockdown Prices

Some of the biggest Russian companies were auctioned off to the businessmen at knockdown prices after the loans-for-shares plan, which was created to prop up late President Boris Yeltsin’s government. Among other transactions under the loans- for-shares, program, billionaire Vladimir Potanin’s ZAO Interros Holding bought a 38 percent stake in miner OAO Norilsk Nickel.

Putin, 59, the clear favorite in polls, is seeking to garner more than 50 percent of the vote to avoid a runoff against the second-place finisher in his bid to return to the presidency after four years as premier. He was elected president in 2000 and 2004 and stepped down in 2008 in favor of his protege, Dmitry Medvedev, to comply with constitutional term limits.

--Editor: Paul Abelsky, Andrew Langley

To contact the reporter on this story: Henry Meyer in Moscow at hmeyer4@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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