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Last Updated: Wednesday, 18 February, 2004, 18:14 GMT
Russia 'overly dependent on oil'
Sibneft oil processing plant
Russia's exposure to oil prices may be higher than originally believed
Russia may be more dependent on oil sales revenue than originally thought as result of widespread tax evasion, says a World Bank report.

The energy sector may account for a quarter of Russia's gross domestic product, says the international body.

The State Statistics Committee puts the figure at 9%.

By increasing its dependency on oil exports, Russia is now more vulnerable to a sudden drop in oil prices, experts warn.

Avoiding tax

Oil exports - shored up by booming energy prices - have driven Russia's economy over the past year.

"The Russian economy is more exposed to world movements in energy prices than official GDP figures imply," the World Bank said.

The Washington-based institution said many firms are reducing their tax liabilities by using trading companies to market their output - a practice known as transfer pricing.

Few people in the market would be surprised by the (World Bank's) much larger estimate of the energy sector
Sergey Voloboyev
A company will sell its production cheaply to a trading subsidiary, which will then sell it on at full market prices.

The trading companies pay less tax than the production companies because there has been a so-called transfer of value added and as they are usually registered in domestic tax havens.

The World Bank says accounts have been distorted by the exaggeration of the value added by service sector companies.

The body said the loss to the budget was difficult to estimate as tax relief obtained by individual trading companies differed from region to region.

"If the result of transfer pricing to avoid taxation would be to reduce the effective tax rate on the transferred profits by 10%... the scale of the revenue losses to the budget would already amount to about 2% of GDP," it said.

New laws

Economists have said they are unsurprised by the reports findings.

In January, Russia's second largest oil firm Lukoil agreed not to use legal loopholes to lower its tax bill.

The parliament has approved new legislation closing many of the loopholes and abolishing preferential tax regimes operated by a number of regions in the country.

"Few people in the market would be surprised by the (World Bank's) much larger estimate of the energy sector," said Sergey Voloboyev, economist at CSFB in London.

Trade and Economic Development Minister German Gref has acknowledged that "very painful reforms ... and a favourable outside economic environment" would be needed to achieve the high growth rates sought by the Kremlin.

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