Russian-style offshore: Would sanctions bury the idea of tax paradise in Crimea

Author : Dmytro Shemelin

Source : 112 Ukraine

Russian State Duma registered a bill, which proposes to turn Crimea into offshore zone with simplified business environment for foreign investors
09:20, 14 May 2017

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Russian edition "Kommersant" reported that MP Aleksey Chepa introduced to Russian State Duma a bill, which proposes to turn Crimea into offshore zone with simplified business environment for foreign investors.

In fact, in 2014, Crimea has created a special economic zone with tax benefits for local businesses. Reports are mixed, but in any case, participants of this Russian special economic zone are mostly Russian investors.

According to the authors of the bill, foreign investors would also willingly invest in the Crimean economy if given the opportunity to make it to bypass the sanctions. Therefore, the main element of the new offshore areas, in addition to preferential taxation, will be anonymous trusts through which foreigners can invest without disclosing the origin of the funds. In addition, foreign banks and financial companies are offered the opportunity to do business in Crimea without local registration and with minimal exchange control.

Related: Russia illegally extracts three billion cubic meters of Ukrainian gas in Crimea

What are the chances of an offshore project in Crimea, and should Ukraine be worried about this?

For modern offshore low or even zero tax rate is only one of the factors of attractiveness. Other factors are simple and understandable legislation, property rights guarantees, reasonable secrecy, and high integration in the global financial system. For all these parameters Crimea has significant problems.

Let us take, for example, anonymous trusts. This might work for foreign investigators, especially if Russia would be deliberately closing information on Crimea. But we should not seriously expect that the real owners of trust property would remain secret for security services in Russia.

Any investor of the "secret" trust must understand that he is "under the hood" and men in a uniform at any moment can give information on him. With all the consequences, including when it directly falls to the police in the West.

Can investors be sure that his rights will be protected in Crimea?

Related: Water supply to Crimea completely blocked after building new Ukrainian dam

Russia as a whole has not very good reputation on the protection of foreign investors. This problem can be resolved by applying to the international courts. But in this case the situation is the opposite: investors will not apply to any remedies outside Russia, in fact, formally he has not invested in Crimea. Moreover, in many cases he simply had no right to do so.

Finally, a proposal to conduct financial transactions in Crimea bypassing sanctions. In this regard, I want to mention the famous case of Nauru. In 1980 Nauru dwarf was one of the richest countries per capita in the world due to large deposits of phosphates. But then phosphates were over, and in the 1990s the inhabitants of Nauru decided to switch to offshore services.

Among other things, they allowed foreigners to open (for a nominal fee) banks in Nauru and further establish correspondent relationships with other world banks. The trick was that Nauru banks were required to maintain normal banking documents, so any amount that passed through the Bank of Nauru was impossible to trace. Foreigners opened in Nauru more than 400 banks.

Clearly, Nauru immediately became a Mecca for money laundering. For instance, Russian businessmen put into Nauru banks billions of dollars.

Related: Poland’s MFA: Crimea is “informal zone of anarchy”

But the offshore paradise ended soon.

Already in 2003, under pressure from FATF, Nauru introduced laws on combating money laundering, and by 2006, last bank was closed on the island. Finally, there was no banking system from 2006 to 2015 in Nauru, all payments were made in cash.

Indeed, one can imagine that the Russian government will try to provide covering of the financial transactions in Crimea, ignoring their obligations to combat money laundering. But the result might be a further strengthening of sanctions to the extent that it could hardly justify the investment potential.

Thus, even in the event of a new bill, investment regime in Crimea would not significantly improve for the "average" international investor.

Crimean assets remain available, probably only in the mode of secrecy and under the personal guarantees of the Russian government.

Related: Illegal annexation of Crimea and aggression in Donbas speak of Russia’s provincialism, - Poroshenko

Each investor would have serious difficulties with starting business in Crimea. This, in turn, means that the bill will be practically useless: massive foreign investment in Crimea are not expected due to the sanctions.

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