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Russia: Tax Breaks Threaten To Derail GAZ-Fiat Deal

Moscow, 20 May 1998 (RFE/RL) -- Controversial tax breaks for foreign companies that invest in Russia's automotive sector is threatening to delay a landmark deal between Russian carmaker GAZ and Italy's Fiat.

The $850 million joint venture between the two companies was signed earlier this year to produce about 150,000 cars annually. The European Bank for Reconstruction and Development has a 20 percent stake in the joint venture, the first major foreign direct investment in the manufacturing industry in Russia.

The deal has irritated the International Monetary Fund, which has criticized the government's recent decision to provide tax breaks and other incentives for investment in the automotive industry. The IMF has said that Russia, saddled with poor tax revenues, should focus on reforming its entire tax system instead of giving breaks to major international corporations.

As one Western investment banker who asked not to be identified said: "The EBRD essentially broke ranks with other international financial institutions owned by governments. Why was the EBRD in there at all when they were being asked to back off by the IMF?"

President Boris Yeltsin signed a decree outlining the tax breaks soon after the deal was first announced late last year. Despite a recent government order, however, the tax breaks as written remain too vague to be implemented. The joint venture partners, including the EBRD, had been expected to sign an investment agreement with the federal government in Rome this week specifying the tax concessions. Once the terms are spelled out, the EBRD will be able to move ahead with plans to arrange a syndicated loan for the project worth some 100 million dollars.

But some of the tax breaks originally envisioned under the deal have been rolled back, making it more advantageous to import parts from abroad rather than produce them locally. Some bankers who lined up to lend money to the project are apparently now having second thoughts.

EBRD officials dismissed the criticism, saying the tax breaks are available to all foreign investment in the automotive sector. As Reinhard Schmoelz, director of the EBRD's Russia team, put it: "There has been no sweetheart deal." He said such investment incentives are offered by governments around the world. In his words: "It would be a bit unfair if one country got penalized for something that is acceptable everywhere else." Schmoelz said the deal was not delayed, saying EBRD would be ready to arrange the loan in the coming weeks.

Bank officials said the economic benefits of the project for Russia as a whole far outweigh such criticisms, pointing out that the joint venture will have to increase the share of locally-produced parts over the next five years.

At the same time, they say, the EBRD's involvement accelerated the deal by providing a certain degree of comfort to Fiat to take a gamble on Russia.