Russian Prime Minister Dmitry Medvedev has confirmed plans to create special “on-shore off-shore” zones in Russia to allow sanctioned oligarchs to easily transfer ownership of their assets out of the reach of US and European courts.
The idea was floated after several top Russian businessmen, most notably oligarch Oleg Deripaska, were named in the Specially Designated Nationals And Blocked Persons List (SDN List) released by the US Treasury Department (USTD) on April 6 in the latest round of sanctions.
“Very soon we are planning to create special regions with a special legal status and a special tax regime in Primorsky Krai and the Kaliningrad region on the Russky and Oktyabrsky islands,” Medvedev said at a legal forum in St. Petersburg, naming territories located in Russia’s Far East as well as the Russian enclave on the Baltic Sea.
The special administrative zones are to help Russian businessmen transfer assets onshore whilst allowing them to avoid the bureaucratic jungle of permissions and regulations involved in setting up a Russian domiciled legal entity. Moreover, the onshore-offshore nature of the zones means companies registered there are essentially in a foreign country as far as the Russian tax code is concerned and so not liable for Russian taxes – an important incentive.
President Vladimir Putin has been on an extended campaign to persuade or force Russia’s companies to bring their domiciles and money back to Russia but without much success. Due to taxes and political risk concerns, amongst other things, many large Russian companies prefer to domicile themselves in tax havens such as Cyprus or the British Virgin Islands (BVI). The irony of the latest round of US sanctions is it has pushed many oligarchs to move assets and cash back to Russia and is helping Putin’s de-offshorisation policy.
Medvedev said the new zones are something of an experiment and the legal regulation will be tested in these “experimental zones,” but may spread to the economy as a whole.
The Central Bank of Russia (CBR) has expressed concern with the scheme, which creates a legal loophole for companies that bypasses its regulations on currency operations in Russia; companies will not be considered currency residents of Russia and will be able to carry out transactions with foreign currency and securities without restrictions and the required revenue repatriation. The CBR fears that such preferences will violate the principle of unity of the currency control system, and may fuel massive capital flight. Moreover, the regulator pointed out that the bill on special zones does not take into account Russia’s anti-money laundering legislation.
The scheme is reminiscent of the special tax-free zones set up by president Boris Yeltsin in the 1990s that were designed to bring in investment to Russia’s poor regions. All that happened was these regions turned into a massive tax black hole that depleted the government’s revenues to the point where it was in a perennial crisis.