Unexpected move from Russia to fight “offshore companies”

The Russian president Vladimir Putin confirmed the start of a new campaign fighting “offshore companies” on order to eradicate them from the Russian economy. Vladimir Putin informed the press that two approaches were being considered – imposition of restrictions and penalties and creating a more business friendly environment. The Russian government has decided to adopt the second approach which is very unusual to the previous practice which was based on overregulation, restrictions and penalties. According to the Ministry of Finance of Russia about US$65bn left Russia in 2012. The reasons for Russian capital escaping the Russian economy are bureaucracy, a high level of corruption, lack of assets protection by a Russian law, excessive tax burden, etc. For example, one way that a business can be “expropriated” is to start a criminal prosecution and claim that assets were acquired through criminal actions and to promptly sell them in an “auction”.

Russian businessmen are actively using offshore companies to hide their identity and to avoid paying Russian taxes. Cyprus is still most popular destination for Russian businessmen to setup an offshore company. But there is a trend towards Singapore where offshore companies are used more and more for holding Russian assets and tax planning by Russian businessmen.

The Russian economy is classified as a state capitalist economy where there is a strong influence of state controlled enterprises. The Russian officials are looking at Chinese and Singaporean economic models which both being successful in their own way. In fact, this is not first time when Russian government is trying to address the issue of escaping capital however little progress has been made so far.