FOREIGN ORGANIZATIONS SEEK COVER AS GOR DITHERS ON

C O N F I D E N T I A L MOSCOW 003657

SIPDIS

E.O. 12958: DECL: 12/17/2018
TAGS: PREL PGOV KDEM PHUM PINR EAID RS
SUBJECT: FOREIGN ORGANIZATIONS SEEK COVER AS GOR DITHERS ON
PROCEDURES TO EXEMPT GRANTS FROM TAXES

REF: A. MOSCOW 1901

B. MOSCOW 3179

Classified By: DCM Eric Rubin; reason 1.4 (b) and (d)


1. (C) Summary: Despite the looming January 1, 2009
deadline for the possible end of a tax exemption for
recipients of some grants from foreign non-commercial
organizations, the GOR has yet to come up with the criteria
and procedures for such donors to apply for inclusion on the
list of foreign organizations whose grants will be tax-exempt
in the future. In a bizarre twist, a Russian NGO tasked with
following developments on this issue informed us that
squabbling amongst the ministries had ensued, and that a GOR
representative had suggested that foreign institutions send
letters to the Office of the Premier to support the Ministry
of Finance's position in this internal argument. U.S.-based
organizations that were included on the previous list have
begun to take measures to protect their activities pending
action by the GOR to implement Putin's June 28 decree. End
Summary.


2. (SBU) The GOR intra-agency has yet to agree on the
criteria and procedures for foreign donors who wish for their
grants to Russian institutions to be considered tax-exempt.
This is despite a specific decree by Premier Vladimir Putin
in June annulling, effective January 1, 2009, the tax-free
status for grants issued by most non-commercial organizations
and charging the Ministry of Finance to come up with new
criteria and procedures by October 1 (Ref A). The Ministry
of Finance has missed its deadline and appears to be
deadlocked with other ministries over the criteria and
procedures. The main sticking point seems to be who has the
ultimate authority and -- perhaps more important in today's
Russia -- the possible blame for deciding whose grants are
tax-free. The Ministry of Finance has implied that the
individual ministries should be on the hook for the
activities of the foreign organizations they sponsor.
Another possible bone of contention is any continued role for
the much-maligned inter-ministerial Commission on
International Humanitarian and Technical Assistance (CIHTA),
whose mandate more than one of our interlocutors has told us
the GOR is in the process of terminating (Ref B).

Little Interest in Ratting Out the Ministry of Finance
-------------- --------------


3. (C) The International Center for Non-Profit Law, a USAID
implementing partner that has closely monitored developments
of the new criteria and procedures, informed us December 2
that a representative "from the Russian Government" had
suggested that foreign donor organizations commence a letter
writing campaign pointing out that the Ministry of Finance
has failed to come up with a new regime and how this has made
their work in Russia more difficult. According to this
official, behind the scenes Ministry of Finance officials are
resisting the role foisted upon them under the decree to take
primary responsibility for establishing the new list of grant
making foreign donors, including coordinating applications
submitted by line ministries with the Ministry of Justice and
security services. To date, none of the members of the
Donor's Forum have expressed any willingness to join such a
letter writing campaign and increase their visibility with
the GOR.


4. (C) U.S.-based foundations and donor organizations have
taken a multi-pronged approach to dealing with the
uncertainty of the tax-status of their grants come January 1,

2009. Those who work primarily through the Ministry of
Education and Science (MES) have re-applied or are planning
to apply for inclusion on the list using draft criteria and
procedures distributed by the Ministry of Finance to other
agencies for their comment on October 6. The head of the
MacArthur Foundation told the Ambassador December 8 that the
MES had already forwarded MacArthur's application to the
Ministry of Finance, where it currently sits. Other
well-known U.S. foundations in the same predicament include
the U.S. Civilian Research and Development Foundation (CRDF),
Project Harmony, IREX and ACTR. The last three have told
USAID that they have submitted applications to the Ministry
of Education and have been assured that their applications
were forwarded to Ministry of Finance. The U.S. National
Institutes of Health is preparing its application to MES.
Several organizations that work through the Ministry of
Health (MOH),including the Swiss-based Global Fund for the
Fight Against AIDS, Tuberculosis and Malaria, to which Russia
is itself a donor nation, complained to us that there is less
clarity from the MOH on the status of their applications.
The Deputy Head of MOH's International Department told us
that the Global Fund had not sent its application to the
right people. But he was working to set it on the right
track and was optimistic it would be approved. Ironically as
a donor to the Global Fund, Russia could be seen as taxing
its own assistance, although it is probably a net-recipient
of Global Fund grants.


5. (C) Some organizations, such as the MacArthur Foundation
and IREX, are also hedging any possible exposure by advancing
some grant payments that were scheduled for 2009 to before
the end of 2008. MacArthur has a USD 11 million per year
program in Russia, primarily focused on higher education, but
also supporting independent think tanks, human rights/rule of
law programs and cases brought by Russian citizens against
their own government at the European Court of Human Rights in
Strasbourg. Unfortunately, not all of the grant-giving
institutions that might be affected by this decree have this
flexibility, especially those through which USG funds are
passed to Russian recipients.


6. (C) Several institutions that appeared on the current
list valid until January 1, 2009 have researched applicable
bilateral agreements with the GOR and determined that any
grants they give have tax-free status pursuant to the terms
of these agreements. Included in this group are programs
funded through the Department of Energy and the Defense
Threat Reduction Office in Moscow.


7. (C) IREX and others that are preparing alternative
tax-prevention strategies in the event they are not included
on the new list are also considering characterizing their
current grants as donations, a tactic that many other NGOs
not on the list have been adopting over the past year.Russian
legal parameters as to what constitutes a "donation" are thin
at best and many NGOs using this approach are concerned that
these "donation agreements" may be rejected upon scrutiny by
GOR tax authorities.

Comment
--------------


8. (C) Over the last four years, the GOR has increased its
oversight of NGO's, multiplying the levers at its disposal to
bring pressure to bear on civil society organizations -
particularly those focused on human rights and political
opposition. From the UK "spy rock" scandal to the
allegations by Kremlin-friendly youth groups that NGO's
receiving foreign funding are traitorous, and particularly
since the Orange Revolution, foreign financed NGOs have been
depicted as a "fifth column." While ministerial jockeying
could account for the confusion over the criteria, the policy
intent seems clear: to reduce foreign funding and to diminish
the appetite of foreign donors faced with up to 42 percent of
their grant being lost to taxes. Moreover, the perception of
forthcoming tax changes may have a "chilling effect" on
foreign NGOs' willingness to work in Russia. The Ambassador
has raised this issue with DPM Shuvalov, Minister of Finance
Kudrin and DFM Ryabkov, and will continue to push for clarity
and an environment more receptive to NGO activities.
BEYRLE