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Russia's Challenging Environment

Bojan ?o?

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Russia's environmental policy over the past decade has been a story of neglect. Other, more vital issues topped the agenda as the government attempted to implement sweeping market reform amid political turmoil and the population struggled to survive in a new reality.

Today, things seem to be changing. Having recovered from the shock therapy of its reformist economists in the early 1990s and the market crash of 1998, Russia has reached a certain level of economic stability. The government can afford to pay more attention to such vital problems as environmental pollution and environmental protection. For the world's leading democracies, the environment has been prioritized for decades. In Russia it has received attention only in recent years. Critics say that Russia spends around 1 percent of its GDP on the environment - that's two to three times less than Western governments. However, it is a good sign that Russia's expenditure on ecology keeps growing. Many environmentalists label Russia's ecological situation as 'critical' or even 'disastrous' considering the degree to which the issue has been ignored in the past.

Vast ecological and human catastrophes, such as the June 1989 gas pipeline burst in Bashkortostan that killed 650 people, (most of them passengers on a train that was passing by) still echo a message of warning. More recent accidents, such as the massive oil spill from a pipeline in Russia's northern province of Komi in 1994, are reminders that environmental security is lax and needs to be tightened. The situation is improving with the emergence of privately-owned, vertically-integrated oil companies in Russia that are acquiring new assets and consolidating the environmental efforts of smaller companies. LUKOIL's example is one of the most illustrative. In 1999, the company established control over Komineft, the operator of the pipeline that spilled (depending on whose statistics you believe) between 14,000 and 60,000 tons of oil near the town of Usinsk in the 1994 incident mentioned above. In the five years preceding the acquisition, Komineft managed to recultivate only around 8.2 hectares (20.25 acres) of soil that had been polluted by the spill. But in the first three years of LUKOIL's reign, the company recultivated more than 10 times as much - 88 hectares (217.36 acres) and it will complete its restoration of the soil by the end of this year. Following in the footsteps of their Western counterparts, Russia's oil majors are willing to spend money on environmentally-friendly infrastructure in order to reduce environmental risks and boost security.

And yet Russia - a country with one fifth of the world's forests and one fifth of global reserves of pure water, with 60 percent of its territory untouched by industry (mostly in the Arctic and Eastern Siberian regions, northern parts of the Far East and mountain ranges in the Caucasus) - suffers from unusually high levels of pollution. The two thirds of the population inhabiting the remaining 40 percent of the land (central and southern regions of the European part of Russia, central and southern Urals, Western Siberia and the Volga basin) are thought to be living in the middle of an ecological disaster. Most of these regions are the very areas where Russia's oil companies operate, and, indeed, it is Russia's oil companies that are among the largest polluters. The Russian government has made attempts to curb industrial pollution, but recent changes in environmental legislation have threatened to negate these attempts.

Legal Maze

Over the past decade, Russia's environmental issues were regulated by a law on environmental protection passed in December, 1991. This law was later accompanied by the Russian government's Resolution No. 632 of August, 1992 that regulated the payment of pollution fees by individuals and companies. According to the resolution, 90 percent of the fees charged were transferred to special accounts held by non-budgetary ecological government funds. The remaining 10 percent of the pollution fees were transferred to Russia's federal budget. Of the 90 percent, 60 percent of the money was spent locally, 30 percent regionally and the remaining 10 percent on federal environmental programs. This policy enjoyed the support of environmentalists who claimed that the fees paid to sustain investment in environmental programs were indeed instrumental in their implementation. However, in 2000, the Prosecutor General's office launched an investigation that disclosed cases of mismanagement of transferred funds. In October 2001, the Russian government disbanded the Federal Ecological Fund and all non-budgetary ecological funds. In a matter of weeks, Russia's Tax Ministry issued a letter explaining the new payment scheme: from that point on, polluters would transfer 19 percent of all fees due to the federal budget, and the remaining 81 percent to regional budgets. In other words, from a specially designated fee supporting environmental programs, the charge turned into a tax levied by the government in order to fill the budget.

Tax Without ┴ Tax Law

With the enactment of a new law on environmental protection in January, 2002, and Russia's new Tax Code in force, it became apparent that businesses would disapprove of the principl┼ that pollution fees should be collected as extra tax. The companies argued that the new policy would hardly bring any benefits to environmental programs as they feared that the fees paid to the budget would simply vanish and be impossible to track down. The most vocal among these companies was the Kola Mining Company (KMC.) It disputed the decision in court, contending that under new legislation, Resolution No. 632 could no longer serve as the basis for collecting pollution fees. According to the Tax Code, KMC's lawyers said, any form of tax payment has to be regulated by a special tax law.

The company brought the matter to Russia's Supreme Court which eventually ruled in its favor, declaring the governmental resolution illegal. The Supreme Court's decision immediately created a legal void as companies halted payment of pollution fees. To fill the void, the government ordered the Natural Resources Ministry to prepare a draft law on pollution fees. At the same time, the government brought the matter to Russia's Constitutional Court which returned a ruling that declared Resolution No. 632 to be legal. Meanwhile, the Natural Resources Ministry presented their bill, which envisaged hiking the fees up to 10 times. The ministry also included a list of more than 200 pollutants whose emission or discharge would trigger such payments. These and other stipulations frightened the companies, many of which said they would be financially ruined if these regulations were applied. Those hurt most were pulp and paper factories who lobbied for a more liberal bill.

While the Natural Resources Ministry's bill on fees was being rewritten, other organizations and groups came up with alternative drafts as well. Environmental specialists at Russia's Chamber of Trade and Industry (TPP) drafted their bill, and State Duma Ecology Committee Chairman Vladimir Grachev also penned one. The alternatives proposed reducing the number of chargeable pollutants from 200 to around 30 and simplifying the payment scheme. The drafts also suggested scrapping mandatory payments on emissions, discharges and waste disposal that are not exceeding allowed norms (in line with the stipulations of the January, 2002 Federal Law on Environmental Protection.) Under the previous legislation, all discharges, including those within the norms, were subject to payment. One of the chief innovations is the provision of tax breaks for environmental activities performed by the companies.

'In our opinion, in line with Russia's environmental doctrine, it is necessary to stimulate businesses to carry out a stage-by-stage shift toward implementing the best available production technologies that in turn exert the least amount of negative influence on the environment,' the trade and industry chamber said in a statement.

According to Deputy Grachev's draft, air emissions would attract a charge of 11.6 rubles ($0.37) per ton of waste while discharges of pollutants into the water would be charged at 1,563.3 rubles ($50) per ton.

'These payments have to be collected only on the basis of an appropriate law, not just a regulation. With a special law, no court will be able to cancel these fees. Otherwise, we'll have what we had in summer 2002, when the Supreme Court dismissed the claim of the Finance Ministry to retain the resolution that regulated the collection of pollution fees,' says Alexander Belyakov, the chairman of the State Duma's Natural Resources Committee.

'And yet, there has to be a compromise - a company must be rewarded for implementing environmentally-friendly technology through reductions in its tax burden,' he added.

The oil companies are making significant investments in these technologies. Russia's third largest producer, Surgutneftegaz, spent 4.44 bln rubles ($142 mln) last year on environmental programs. This year, that figure will rise to 5.09 bln rubles ($163 mln). For the sake of comparison, Russia's federal budget was expected in 2002 to receive 1.6 bln rubles ($51 mln) in pollution fee receipts, and regional budgets should have collected an additional 8.5 bln rubles ($272 mln). 'In recent years, investment in the company's environmental programs has totaled over 3 percent of our sales,' Surgutneftegaz press service chief Raisa Khodchenko told OGE.

Last year, the number one producer, LUKOIL, paid 39 bln rubles ($1.25 bln) in taxes and fees related to developing natural resources. Although pollution fees accounted for only 0.2 percent of this amount, the company spent 5.4 bln rubles ($173 mln) on environmental schemes, including over 1.3 bln rubles ($41.6 mln) of capital investments in environmentally-friendly facilities. LUKOIL's environmentalists speak in favor of the new law on pollution fees, but stress that it should stimulate lessees to protect environment, instead of paying for polluting it.

'Either of the drafts could be acceptable if they would stimulate the protection of natural resources, i.e. if they contained a system of rewards for investing in environmental activities,' LUKOIL's experts told OGE. 'A bill that disregards this principle would eventually incur additional losses on the companies. These, in turn, would be paid by the end users of our products.'

These views are shared by other big players in the market - the fifth-largest producer, Sibneft, prides itself on being Russia's 'most forward-thinking oil company' - one that prefers to invest money into environmental protection and new technology and equipment, rather than paying fines. 'There are intangible expenditures that we make to protect the environment,' Sibneft spokesman John Mann told OGE. 'One example is that we and our subcontractors employ only the latest production technologies, which are generally less polluting and more secure.'

In early April, a spokeswoman for the Natural Resources Ministry told OGE that the ministry's latest version of its draft law on pollution fees would soon be submitted for government approval. If the drive this time around is not to create another tax to beef up the budget, but a genuine desire to protect the environment, a compromise may be near. It had better be fast, environmentalists say.

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