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    July 24, 2015

    Russian de-offshorization picking up pace


    Russian de-offshorization picking up pace

    By fritzmorgen

    Translated from Russian by J.Hawk

    American cleaning ladies don't yell at those who make messes. Instead they thank them for making a mess because that's how they earn a living.

    It's a crazy thought, right? When I read about that, I instantly remembered a classic plot from American literature when brand new cars straight from the production line are crushed for scrap because the car market is saturated but the plant cannot be halted.

    Offshores strike me as a similar capitalist madness: organization which conduct business in Russia but are registered in some small, sun-bathed country with a soft tax legislation. Of course, there are situations when offshores are logical and useful. When, for example, working with foreign partners, it's easier to conduct dealings via an offshore from the perspective of signing contracts and keeping track of paperwork. One can spend less on accountants. Some offshore owners hope that it will help them survive corporate raiders, although in practice it's not always so.

    However, when large firms register as offshores, their purposes are usually none too noble. Firstly, they try to avoid paying taxes. Secondly, their owners wish to avoid possible responsiblity for dangerous decisions. Let's say, a firm opens an Eastern bazaar-style mall, with small rooms, narrow stairwells, and a confusing maze of corridors. After some time there is a fire which costs human lives. Naturally you would want the owner of the mall to face justice, since he gave the order to cut costs at the expense of fire safety. But then it turns out that the real owner is hiding behind three offshores which means he cannot be apprehended.

    One has to remember that the majority of major businessmen intend to make a profit off their firms--that's how they made their fortunes in the first place. As soon as there is a conscientious business owner who refuses to use offshores and transfers all of his assets to Russia, he quickly runs into a serious problem--his competition is still offshore which gives it an advantage.

    It's an unhealthy situation which must be changed. It's impossible, unnecessary, and even harmful to completely ban offshores, however, legislation ought to be crafted in such a way as to make keeping one's business offshore inadvisable. Then the majority of business owners will leave the offshores, even happily so.

    What is being done right now?

    Ruxpert.ru has an article chronicling the de-offshorization of our economy:


    http://ruxpert.ru/Деофшоризация_в_России

    So, President Putin signed a law forbidding state purchases from offshore firms. It's a logical move, including from the anti-corruption point of view. It will no longer be possible to render low-quality services to the government and then hide offshore:

    http://lenta.ru/news/2015/07/13/antioffshore/

    In November 2014, the President signed another law which obligates Russians to declare to tax authorities their shares in the capital of foreign firms:

    http://lenta.ru/news/2014/11/25/offshore/

    This law also obligates Russians to pay taxes on the income from offshorized firms, even if they receive that income outside of the Russian Federation.

    In December 2014 the State Duma forbade individuals with security clearances from having foreign accounts:

    http://ria.ru/defense_safety/20141212/1037951893.html

    A number of well known billionaires already started transferring their assets to Russia. Only Timchenko and Usmanov made noise about having done so, but the process is well underway so much so that in the UK there is concern about a massive flight of Russian capital from the foggy Albion:

    http://www.bfm.ru/news/292273

    As far as major firms are concerned, I'll mention Oleg Deripaska's Rusal, the world's largest aluminum producer. It used to be registered on the Jersey Island, now it is returning to Russia.

    Finally, the big law about capital amnesty was signed a month ago:


    http://lenta.ru/news/2015/06/08/amnkap/

    This law is the carrot which ought to make the whip stronger. Offshorized businessmen are being shown a smooth path home, but those who will persist in their comprador heresy will face various government penalties.

    Note the time span. The discussion concerning the necessity to de-offshorize began in late 2011 when Washington displayed its clear intent to organize an orange revolution in Russia. Such revolutions always rely on the oligarchs, which meant that foreign accounts and foreign business now represent a danger not only our budget, but to our entire country.

    In December 2012 Vladimir Putin designated de-offshorization as one of the main tasks for the upcoming years, and in February 2013, right before the Cyprus crisis, the government already had concrete instructions from the president on how to attack the offshores.

    First results became visible a year later. Sberbank stopped servicing offshores, first laws limiting offshores appeared (I listed those above). Another year had passed and now, three and a half years after the problem was identified, we have a three-pronged system:

    1. Offshores are cut off from state contracts.
    2. Offshores must pay taxes.
    3. There is a capital amnesty program.

    Could the offshores have been dealt with faster? By, say, issuing an order in 2000: "all the offshores must be shut down in a month"?

    Obviously not. Before one starts establishing order in the cargo hold, one first has to plug the holes through which water is entering the ship and bring the demoralized crew into a state where they are once again capable of consciously carrying out captain's orders.

    There are good news hidden in that imposed slowness. Capital has been fleeing Russia and settling abroad during the entire time of post-Soviet Russia's existence. Now our Western friends and partners are actually helping us with their not entirely nice behavior, therefore one can imagine a scenario in which all the capital returns to Russia in the course of a few years.

    This would lead to a genuine investment boom in Russia.




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