The role of natural resources in
            fundamental tax reform in the Russian Federation
The Russian Federation has one of the
            richest natural resource endowments in the world. Despite
            their importance in the Russian economy, natural resources
            do not contribute as much as they could to public revenues.
            Large resource rents (excess payments, or above-normal
            profits generated by natural resources in scarce supply) are
            dissipated through subsidies and wastage, or appropriated by
            private interests. Failure to tax this rent means that taxes
            must be levied elsewhere (on capital and labor) to sustain
            revenues, thereby depressing investment and employment, or
            that potential revenues are foregone. Failure to reinvest
            rent means that Russia perpetuates the tradition of
            exporting low value-added raw materials and excessive
            capital outflows, and retards its transition to sustainable
            economic development. The author provides estimates of the
            average and total current rent on crude oil, natural gas,
            and round wood in Russia. The sum of appropriated rent on
            oil and gas was estimated at US$9 billion in 1999 (in excess
            of $15 billion in 2000), or about 18 percent of consolidated
            tax revenues. The appropriated rent on round wood was
            estimated at US$191-1,032 million. A more appropriate
            natural resource taxation system would enhance the fiscal
            role of natural resources as well as create better
            incentives for resource conservation and environmental
            protection. Two conditions further reinforce the appeal of
            such a reform. First, the state still owns most of the
            natural resources, which theoretically facilitates change in
            resource pricing and taxation. Second, the cost of adjusting
            the tax system is relatively low at this time since Russian
            tax policy is undergoing thorough reform. Increasing rent
            taxation should be relatively straightforward since the
            system already exists. What mainly needs to be done is to
            differentiate the fees to reflect objective rent-generating
            conditions by withdrawing the rent and imposing higher taxes
            on profitable resource deposits. A seemingly desirable
            instrument-true differentiation of rental payments-does not
            exist in Russia despite legislative provisions that it
            should. Several natural resource taxes are specific taxes
            (set per volume), regardless of the market price or
            production cost. Such taxes favor profitable deposits and
            penalize marginal ones. The author's study should be
            given serious consideration in the renewed debate on tax
            reform and in the context of Russia's structural reform
            program. It is in line with the proposals of the new
            governmental economic strategy, particularly with boosting
            the share of natural resources in generating revenue and
            reducing income tax rates. The extra advantage to rent
            taxation and revenue recycling is that it would allow the
            government to lower the tax burden without leading to a
            budget deficit.