Tax Offsets or Netting Operations in Post-Soviet Public Finance

Post-Soviet economies are plagued by a public sector practice whereby the Ministry of Finance cancels tax liabilities that enterprises owe it in exchange for debts the Ministry owes enterprises. Although the practice seems innocuous enough to its practitioners, it has multiple distorting effects. Netting operations distort prices, prevent increased monetization of the economy, and hinder the pace of economic transformation in post-Soviet economies. This paper describes the practice of netting operations, draws an analogy with input-output models used in planned economies, and reveals the multiple distorting effects of netting operations.