RIA Novosti reports today that Russian GNP will grow about 6% annually for the next three years, according to government ministry figures. While during the Soviet era such Gosplan statistics would be meaningless (though the CIA often accepted them, overestimating Soviet productivity) we have good reason to believe that Russia's economic forecast is finally improving after more than a decade of decline.
Furthermore, RIA Novosti editor Peter Lavelle thinks that there is a very good reason why Russia's stock market has surged in recent months - the flat tax reforms of 2001-2002, combined with the government's attempts to produce a more liberal climate for business following the Yukos upheaval.
President Vladimir Putin's call for an end to "tax terrorism" against the business community has started to work its way through Russia's bureaucracy.The lowering of some hefty back-tax claims and defining tax collection methods has been translated into lower political risk affecting Russia's investment case, and contributed to sterling stock market performance.
Lavelle goes on to address the argument that Russia's recent growth is entirely driven by rising global oil prices. If the RTS stock market can be considered as a significant indicator, then the surge began in July of this year - after the government announced that it would continue reforming Russia's tax collections.
The July-August rally on Russia's primary stock market, the RTS, is attributed to strong earnings outlook, high oil prices, buoyant global equity markets, and a discernable reduction in political risk. Emerging market funds, traditionally averse to investing in the Russian market due to political risk concerns, have returned in significant numbers.Further evidence suggesting that political risk is no longer a major concern for investors is the RTS volatility. According to the Moscow-based brokerage house Aton Capital, "the RTS index's volatility has dropped sharply in recent months. Typically, higher-than-normal volatility reflects a riskier market: Russia's market volatility rose sharply following the arrest of former Yukos CEO Mikhail Khodorkovsky in late 2003 and remained stubbornly high amid the subsequent barrage of negative news on Yukos coupled with back-tax claims against other Russian corporates." Reining in the taxman is paying dividends to investors, but also enhancing Russia's investment case.
Putin and his potential successors still have much work to do if they are to keep Russian bureaucrats from shaking down businessmen for bribes. However they deserve some credit for trying to correct the impression that corporations in Russia are at the mercy of mob-connected bureaucrats and Kremlin intrigues.
UPDATE 08/29/05: John Fund reports in today's Wall Street Journal that Poland's opposition party is promising a flat tax if elected, and that even in Germany the Christian Democrats' spokesman on taxes has argued for a flat 25% rate for corporations and individuals. The notion that a flat tax is simply a "giveaway to the rich" and an example of American cowboy capitalism continues to be challenged by new policy around the world, especially in central and eastern Europe.
