Putin Aide Proposes $7.5 Billion Tax Hike for Mining, Chemicals Sectors

(Bloomberg) -- The top economic adviser to Russian President Vladimir Putin proposed raising taxes on mining companies, including MMC Norilsk Nickel PJSC and Alrosa PJSC, among the largest producers of nickel and diamonds.

Additional budget revenues are needed to help pay for Putin’s promises to boost spending after his re-election this spring, according to a letter addressed to Putin and sent from Andrey Belousov, the Kremlin’s top economic aide.

The tax proposal could raise as much as 500 billion rubles ($7.5 billion) a year, according to the letter, which calculated rates based on profits from 2017. It would also affect chemical and fertilizer producers, the letter said.

Mining and other non-energy companies have benefited from a rally in commodity prices and drop in the value of the ruble, but aren’t paying taxes on this “excess income,” according to the letter, which was obtained by Bloomberg News. The industry immediately pushed back against the proposal, saying it seem unfair. Executives are holding a meeting with the government on Friday to discuss the issue.

Industry Reacts

It "looks like a promotion of inefficiency: the lower the profitability, the less taxes you will have to pay," billionaire Vladimir Lisin, controlling shareholder of Novolipetsk Steel PJSC and head of the Russian Steel Association, said in emailed comments.

The president hasn’t made any decision and told experts to study the option, Kremlin spokesman Dmitry Peskov said on call with reporters Friday. Shares of Russian mining and fertilizer makers dropped Friday, with Evraz Plc sliding almost 8 percent and Alrosa falling 4.1 percent by 1:20 p.m. in Moscow.

The proposed tax figure "is nonsense" as it affects as much as 30 percent of companies’ earnings before interest, taxes, depreciation and amortization, as well as 70 percent of their adjusted free cash flow and dividends, BCS Global Markets said in a note.

“Metals and mining taxation is a regular theme, but has never materialized," said Kirill Chuyko, chief of research at BCS. The “chances of some taxation are 5 percent to 10 percent."

Ruble Boost

Putin’s signature on the letter was dated July 28, before concern over further U.S. sanctions pushed the ruble sharply lower. Still, Russian miners tend to benefit from a weak ruble, since they sell much of their output to international markets in dollars, while their costs are based in rubles.

Russia’s energy giants, which are key sources of government revenue, have long lobbied for higher taxes on other sectors, particularly mining and metals. Companies in those industries have so far parried those efforts, arguing that their businesses shouldn’t be taxes as heavily as the hugely profitable oil and gas producers.

The letter names 14 companies that could be covered by extra tax. Norilsk Nickel, Alrosa and petrochemical group Sibur Holding PJSC could pay the highest rates, it said.

The list does have a few notable omissions. United Co. Rusal, which is struggling under the weight of U.S. sanctions, was not named. Neither was gold miner Polymetal International Plc or fertilizer group Eurochem Group AG.

--With assistance from Jack Farchy and Andrey Biryukov.

To contact the reporters on this story: Yuliya Fedorinova in Moscow at yfedorinova@bloomberg.net;Evgenia Pismennaya in Moscow at epismennaya@bloomberg.net

To contact the editors responsible for this story: Will Kennedy at wkennedy3@bloomberg.net, Nicholas Larkin, Lynn Thomasson

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