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QAFQAZ VƏ MƏRKƏZĐ ASĐYA
ĐQTĐSADĐ VƏ BEYNƏLXALQ MÜNASĐBƏTLƏR
II BEYNƏLXALQ KONQRESĐ
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QAFQAZ VƏ MƏRKƏZİ ASİYA ENERJİ
LAYİHƏLƏRİ
284
COMPERATIVE ANALYSIS OF RUSSIAN AND AZERBAIJAN TAX SYSTEMS IN
THE CONTEXT OF INVESTMENT CLIMATE AND ENERGY POLITICS
Prof. Dr. Süreyya SAKINÇ
Celal Bayar University, The Faculty of Economics and
Administrative Sciences, Public Finance Department,
Manisa-TURKEY
sureyya.sakinc@bayar.edu.tr
Asst. Prof. Dr. Birol KOVANCILAR
Celal Bayar University, The Faculty of Economics and
Administrative Sciences, Public Finance Department,
Manisa-TURKEY
bkovancilar@yahoo.com
ABSTRACT
Russia and Azerbaijan are important countries to world energy markets. Russia holds the world's largest natural gas
reserves, the second largest coal reserves, and the eighth largest oil reserves. Azerbaijan also have rich oil and natural gas reserves
in the Caspian Sea basin. Because of these potentials, these two countries are attracting foreign investors interest.
Emprical studies generally find that Foreign Direct Investment (FDI) choices are affected by tax systems of countries.The
paper will evaluate and analysis the tax systems of Russia and Azerbaijan in the context of investment climate and energy
politics. The design of a tax system have significant economic impacts and influence multinationals in deciding where to invest.
Tax regimes with relatively high marginal rates and which include a number of exemptions and allowances tend to be less
economically efficient in relation to efficient use of energy sources and encouraging investments.
In these context, we will analysis the tax systems of these countries by using some fiscal parameters in which tax incentives,
tax rates, tax compositions, structure of tax administration, redtype, tax exemptions etc.
Finally we will discuss some suggestions and key actions for governments of Russia and Azerbaijan to find more business
friendly and efficient type tax systems .
Key Words: Tax system, tax policy, Azerbaijan, Russia, energy politics, foreign direct investments
1. INTRODUCTION AND SUMMARY
Russia and Azerbaijan are large producers of
oil and gas. Russia’s economy is heavily dependent
on oil and natural gas exports. Russia is important
to world energy markets because it holds the
world's largest natural gas reserves, the second
largest coal reserves, and the eighth largest oil
reserves. Russia is also the world's largest exporter
of natural gas, the second largest oil exporter, and
the third largest energy consumer.
1
Besides,
Russia’s natural gas industry has not been as
successful as its oil industry, with both natural gas
production and consumption remaining relatively
flat since independence.
Their rich natural resources make these
countries potentially vulnerable to what is called
the “Dutch Disease” –potentially negative effects
of an inadequately managed natural resource
boom that in case a reource-rich economy may
suffer its natural wealth. The risks associated with
the Dutch Disease are particularly imminent in
Azerbaijan.
1
US Energy Information Administration, http://www.eia.
doe.gov/emeu/cabs/russia.html. (22/03/2007)
Since 2003, Russia has attracted increased
mounts of foreign direct investment (FDI), which
reached record levels in 2004 and 2005. However,
the share of FDI in domestic capital formation still
remains low by international comparison. In 2005
the manufacturing sector attracted the largest FDI
share and the energy sector absorbed one third of
inflows, but Russia’s service sectors have not yet
benefited from significant FDI.
2
This paper analysis current tax systems of
Russian and Azerbaijan and explores how Russian
and Azerbaijan tax policies may affect the
investment climate and energy production and
consumption. Part 2, examines energy develop-
ments and FDI inflows in Russia Federation and
Azerbaijan Republic. Part 3, gives more detailed
overview of the current tax regime relevant to
investment climate and business environment.
Finally, policy conclusions deriving from the
analysis and some recommendations are presented
in Part 4.
2
OECD, Russian Federation – Enhancing Policy Transpa-
rency, 2006, p.7.
II International Congress
285
2. IMPORTANCE OF THE ENERGY
SECTOR AND FDI IN RUSSIA
FEDERATION AND AZERBAIJAN
REPUBLIC
Azerbaijan is endowed with large oil and gas
resources, estimated at 7.0 billion barrels (0.6
percent of proven world oil reserves) and 48.4
trillion cubic feet (0.8 percent of proven world gas
reserves), respectively. After a long period of
decline in oil production, oil output started to
increase in mid-1990s, to reach 0.3 million barrels
per day in 2003, and is expected to increase sharply
in 2005, reaching a maximum of 1.3 million barrels
per day in 2010. This boost to oil production
capacity is attributable to substantial investments
implemented in cooperation with international oil
companies during the last five years.
3
The oil sector is of vital importance to the
Russian economy. Estimates vary considerably, but
the World Bank has suggested that the oil and gas
sector may have accounted for up to 25 percent of
gross domestic product (GDP) in 2003—while
employing less than one percent of the population.
In 2003 35% of crude oil production was exported
by pipeline.However the World Bank point out that
official data shows oil and gas accounts for nine
percent This apparent anomaly is of GDP, while
exports of this sector account for 20 percent of
GDP explained by the World Bank as being due to
transfer pricing – illustrating the significance of
this problem.
4
Azerbaijan has been one of the most
successful CIS countries in attracting FDI mainly
due to its significant oil and gas reserves, with
inward FDI flows averaging about $900 million
per year during 1997–2001 (equivalent to about 20
percent of average annual GDP). Inward FDI
flows, mostly into the oil sector, accounted for
about 70 percent of gross capital formation during
this period.
5
In Russia, the very low levels of
inward FDI flows reflect the slow pace of reforms.
Inward FDI flows into Russia grew from $2.1
billion in 1995 to $4.8 billion in 1997, fell to $2.5
billion in 1998 reflecting the financial crisis, and
were roughly $3 billion in 1999–2001, implying
that inward FDI flows have not reached their pre–
crisis level. In the 1999–2001 period, following
the Russian crisis, inward FDI flows accounted for
3
IMF, Azerbaijan Republic: Selected Issues, IMF Country
Report No: 05/17, January 2005, p.3.
4
Philiph Daniel & Adrian Fernando, “Reforming Taxation
of Oil Sector in the Russian Federation”, ITIC Special
Report, December 2004, p.9.
5
Clinton R. Shiells, “FDI and the Investment Climate in the
CIS Countries”, IMF Policy Discussion Paper PDP/03/5,
November 2003, p.9.
less than 10 percent of gross fixed investment, and
FDI’s contribution to economic growth was
correspondingly limited.
6
In Russia, the economy is expected to expand
by 6.5 percent in 2007. Azerbaijan's GDP is
expected to grow 31.3 % in 2007. Azerbaijan
possesses very rich natural resources, including the
richest resources of oil and gas centralized in the
Caspian Sea. Russia and Azerbaijan are relatively
well-integrated into the global economy. Higher
global energy demand continues to accelerate at
high growth rate of these countries by stimulating
growth in other economic sectors. Azerbaijan has
remained largely open to foreign investment and
avoided tight state control over energy sectors and
has been particularly successful in attracting
foreign funds by opening their energy sectors to
major Western companies.
Empirical studies have found that foreign
investment in Russia was not driven primarily by
demand but was highly responsive to indicators of
reform and liberalisation, including those
measuring enterprise reform, competition policy
and the volume of foreign exchange and tax
collection.
7
The Russian investment environment
may also not be sufficiently competitive to attract
adequate inflows from abroad.
Main part of foreign investments in these
countries is concentrated in the energy sector.
Now Azerbaijan is an important link in growing
business of a number of the world’s leading
energy companies (BP, Exxon Mobil, Chevron
Texaco, Elf Total Fina and etc.) in the Caspian
region. Azerbaijan was applied The state
Privatisation Programme for establishment of self-
regulated market economy space for economic
entities based on private ownership and free
competition and restructuring of the national
economy in accordance with market-economy
requirements and for attraction of investments to
achieve efficiency of the privatised enterprises.
According to an comprehensive analysis of
Russia’s transition process, Russia’s current
growth rates can be attributed neither to general
success of transition nor to Putin’s reforms. In
fact, Russia seems to be in the fortunate position
of having very large amounts of raw materials
(rising prices for crude oil, natural gas, coal, etc.)
at a time of globally rising prices, which are
currently driving the economy.
8
6
Shiells (2003), p.10.
7
Fabry N., Zeghni S. “Foreign Direct Investment in Russia:
How the Investment Climate Matters”, Communist & Post-
Communist Studies 2002; 35: pp. 289-304.
8
Peter Voigt, “Russia’s Way From Planning Toward
Market: A Success Story? A Review of Economic
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