Why Vladimir Putin’s tax hike for the rich won’t bother Russia’s oligarchs

The wild decade: how the 1990s laid the foundations for Vladimir Putin's Russia

Just a couple of days before Russians began voting in a constitutional referendum in late June that is likely to pave the way for Vladimir Putin to stay on as president until 2036, the government announced a tax rise for well-off Russians. It was widely seen as a populist gesture.

From January 2021, Russians earning more than 5 million roubles a year (£57,000) will pay 15% tax on income over that amount. This is the first change to the flat 13% rate of income tax which Putin introduced for all Russians in 2001 – but it will not bring in large amounts of extra cash. The estimated addition to the treasury will be only 60 billion roubles, which Putin said would be spent on helping sick children.

Putin’s populist reasoning makes strategic sense. Significant numbers of Russians still resent the wealth some of their fellow citizens acquired in the 1990s as the country transitioned from communism to capitalism. These targets of hatred, however, are unlikely to be much affected by the latest tax hike.

One of the richest of them is the metal tycoon Vladimir Potanin, who since March 2020 has been leading Russia’s Forbes rich list. Like many other wealthy Russians, his wealth was hit when the oil price plummeted after Russia broke with OPEC in early March. By May, however, Forbes reported that he had regained US$6.4 billion, a rise in his total wealth from US$19.7 to US$26.1 billion.

Potanin’s biography embodies everything Russians resent. In 1995, he reputedly thought up – and certainly benefited from – the scandalous loans-for-shares auctions in which some of the country’s largest assets were auctioned off at a bargain price to a handful of insiders.

Listen to Recovery, a series from The Anthill Podcast, to hear more about how the world recovered from past crises, including an episode on the post-Soviet transition in the 1990s.

It’s highly lucrative to be one of the biggest business players in Russia today – and it is much less risky than widely assumed. True, the oligarchs’ grip on political power declined during the early years of the Putin presidency in the 2000s and some fled or were imprisoned. But if you become a billionaire in Russia, you are more likely than in any G7 country to keep that status.

Stepping in to help

As my own research has detailed, Russia’s multi-billionaires know they must pull their weight and commit to helping sustain Russia’s infrastructure to stay in Putin’s good books. There have been times when they have been especially nudged into doing so: after the 2008 financial crisis, in December 2014 when the rouble crashed in the aftermath of the Crimean crisis, and now during the COVID-19 crisis.

The hyper-rich chip in not only to pacify the Kremlin but also for their own sake. Many of them have set up their business empires by taking control of vast natural resources and large industrial complexes in remote areas, where they dominate as the single employer. Such monotowns make up around 25% of Russia’s urban population, most of whom depend on a single employer and their attached industries for a living.

Many of Russia’s biggest private charity foundations operate in the regions where the major plants of these business empires are located. Each recent crisis has given these foundations new meaning in these areas. In some regions, foundations attached to businesses tried to absorb some of the harm done to the local population following downsizing and layoffs in the aftermath of the 2014 crisis. Their costs in doing so were minimal, but the tough business strategies proved lucrative.

Now, many of these oligarchs have come forward to help the state during the coronavirus crisis. At the end of June, Russia had the third-highest number of cases in the world after the US and Brazil. According to Forbes, Potanin’s foundation in Norilsk, a town with a population of 180,000 in the Arctic region, has spent 10.5 billion roubles on testing kits, millions of masks and 46 ventilators.

Other oligarchs were more hands-on. They took decisions way beyond their official competence, using their companies’ logistics and procurement capacity to deliver COVID-19 test kits and provide the elderly with fresh food. Some even shut down airports near to their business empires to minimise the movement of people and prevent the spread of the virus.

Mutual benefit

It will work for them. As much as Russians resent the 1990s oligarchs, any negative sentiments have been successfully detached from the actual individuals. Men such as Potanin are now celebrated as much for their generosity as they are resented for their path to richesse.

So much so that Potanin may well avoid serious consequences for an environmental disaster at one of his company’s power plants in the Arctic in late May. A fuel tank collapsed, releasing more than 21,000 metric tons of diesel into the thawing permafrost and surrounding rivers. A few weeks later, his company suspended workers responsible for dumping waste water at a metals plant in the same area.

Potanin was chastised by Putin in a televised video call about the oil spill, and promised to pay the costs of the clean up. But this could take years, and it’s unlikely Putin will come down very hard on Potanin for the scandal. It’s mutually beneficial for the president and oligarchs to maintain their current levels of cooperation.

Environmental activists did their own investigation: the toxic fuel might have already reached the Arctic Ocean and Greenpeace Russia estimate the damages to the Arctic waterways at 100 billion roubles. That’s ten times the amount Potanin has reportedly donated to ease the COVID-19 crisis and nearly twice as much as the new wealth tax will bring in.

The Conversation

From 2015-2017 Elisabeth Schimpfössl held an Early Career Fellowship from the Leverhulme Trust. From 2017-2019 she received a British Academy/Leverhulme Small Research Grant.