Russia Cracks Down On Offshore Tax Havens

Airport in Moscow
Airport in Moscow
Svetlana Sukhova

MOSCOW — There is nothing new about offshore tax shelters. In ancient Athens, after the government decided to levy a 2% tax on all trade operations, merchants started avoiding the city, conducting business on the surrounding islands instead. Those Greek islands became the first offshore tax havens.

The current offshore landscape evolved in the middle of the 20th century, as former British colonies decided to follow the Swiss banking example and provide clients with completely anonymous accounts, in addition to very low tax rates.

Many of these banking havens would eventually be targeted by law enforcement agencies who suspected them of laundering money for criminal organizations. Still, despite the attention, it hardly managed to kill the offshore model. Now most reputable banks and companies don’t like to deal with firms that are "registered" in Belize or the Cayman Islands, but they don’t have anything against the "special economic zones" that abound in Ireland, Gibraltar, Hong Kong or the United Arab Emirates.

In other words, the "civilized" world has a problem with illegal tax avoidance zones, but no problem with special financial advantages. Just last September, the Group of 20 nations voted on a list of 15 measures to take against tax avoidance, meant to close loopholes in national laws and facilitate international cooperation. Within two years, most expect that all of the G20 members will move to a standard system to share data about taxpayers, and eventually will share information from tax declarations.

It seems like Russia, which is in the middle of trying to reduce the use of "offshore" accounts, fits right in the trend. But some experts wonder if the efforts to reduce dependance on offshore accounts might come at the expense of domestic business development.

Taxes and bribes

The Duma recently adopted a law to try to reduce the number of companies and individuals who use offshore accounts and businesses to avoid paying taxes at home. Needless to say, not everyone is happy.

It’s hard to criticize Russian entrepreneurs for wanting to save money. Let’s start with the fact that low taxes in Russia are a total myth. The taxes on profits stand at 20% (compared to 10% in Cyprus). There is also an 18 percent VAT, and payroll taxes. Starting next year, taxes on dividends are going to go up. And those are just the "official" taxes. There are also the "unofficial" taxes, that also go up all the time: These are the charges levied by corrupt government officials or law enforcement officers who want to get "their piece of the pie."

Under these circumstances, it’s not surprising that businesses move offshore, to protect themselves and manage the situation more effectively. Businesses of all sizes make the move offshore. There are up to 100 companies that are part of Gazprom’s structure that are registered in offshore havens or countries that offer financial benefits. The three leaders in foreign investment in Russian in 2013 were Cyprus, Luxembourg and the British Virgin Islands.

Banking options in Cyprus. Photo: Leonid Mamchenkov

Most of these investments are actually coming from Russian companies. This is because foreign companies in Russia have always been treated differently by law enforcement and government officials. They also don’t have any tax responsibilities. Is it really surprising, then, that one-fifth of Russian exports in 2013 went through offshore firms, totaling $111 billion. That is a direct loss for state coffers, since taxes were not accessed on those exports. In addition to those exports, $50 billion in cash also left the country in 2013. The losses to offshore accounts in 2014 is on track double.

Correction or fleecing?

Last spring, the government first announced and then rescinded a new law that would have required all foreign companies owned by Russian citizens to be registered in Russia. The idea was abandoned because it would have caused both financial damages from potential demands that credit be immediately repaid, and because it would effectively outlaw holding companies.

Then there was an idea that any citizen who owned more than 1% of a foreign company would have to include that in his or her tax declaration, but that idea also died because of the very low ownership threshold (in the United States, taxpayers only have to declare companies in which they have more than 50% ownership).

The law adopted by the Duma last week established that citizens who own at least 50% of an offshore company will have to declare their ownership. After two years, the threshold for how much ownership an individual has to have in a company before reporting it on tax declarations will drop to 25%, and then to 10%. This includes owners of companies that are registered in "legal" zones, provided that the tax burden in the place where the company is registered is less than 75% of Russia’s. Not a single recommendation from the business community was adopted.

The Russian government has made it clear that in this time of budget woes, dropping oil prices, a weak rouble and inflation, local businesses are just a cash cow. The sad thing is that they are being beaten by foreign competitors. According to estimates from Bank of America, the government’s de-offshoring could add around $5-6 billion to the overall budget. That’s about the same amount that was being reinvested in Russia annually from Cyprus, Luxembourg and the British Virgin Islands. So it seems like the new law might actually end up being an economic wash. Was it really worth all the fuss?

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Iran-Saudi Arabia Rivalry May Be Set To Ease, Or Get Much Worse

The Saudis may be awaiting the outcome of Iran's nuclear talks with the West, to see whether Tehran will moderate its regional policies, or lash out like never before.

Military parade in Tehran, Iran, on Oct. 3


LONDON — The Iranian Foreign Ministry spokesman Saeed Khatibzadeh said earlier this month that Iranian and Saudi negotiators had so far had four rounds of "continuous" talks, though both sides had agreed to keep them private. The talks are to ease fraught relations between Iran's radical Shia regime and the Saudi kingdom, a key Western ally in the Middle East.

Iran's Foreign Minister Hossein Amirabdollahian has said that the talks were going in the right direction, while an Iranian trade official was recently hopeful these might even allow trade opportunities for Iranian businessmen in Saudi Arabia. As the broadcaster France 24 observed separately, it will take more than positive signals to heal a five-year-rift and decades of mutual suspicions.

Agence France-Presse news agency, meanwhile, has cited an unnamed French diplomat as saying that Saudi Arabia wants to end its costly discord with Tehran. The sides may already have agreed to reopen consular offices. For Saudi Arabia, the costs include its war on Iran-backed Houthis rebels fighting an UN-recognized government in next-door Yemen.

The role of the nuclear pact

Bilateral relations were severed in January 2016, after regime militiamen stormed the Saudi embassy in Tehran. Amirabdollahian was then the deputy foreign minister for Arab affairs. In 2019, he told the website Iranian Diplomacy that Saudi Arabia had taken measures vis-a-vis Iran's nuclear pact with the world powers.

It's unlikely Ali Khamenei will tolerate the Saudi kingdom's rising power in the region.

He said "the Saudis' insane conduct toward [the pact] led them to conclude that they must prevent [its implementation] in a peaceful environment ... I think the Saudis are quite deluded, and their delusion consists in thinking that Trump is an opportunity for them to place themselves on the path of conflict with the Islamic Republic while relying on Trump." He meant the administration led by the U.S. President Donald J.Trump, which was hostile to Iran's regime. This, he said, "is not how we view Saudi Arabia. I think Yemen should have been a big lesson for the Saudis."

The minister was effectively admitting the Houthis were the Islamic Republic's tool for getting back at Saudi Arabia.

Yet in the past two years, both sides have taken steps to improve relations, without firm results as yet. Nor is the situation likely to change this time.

Photo of Iranian Supreme Leader Ali Khamenei in 2020

Iranian Supreme Leader Ali Khamenei in 2020

Riyadh's warming relations with Israel

Iran's former ambassador in Lebanon, Ahmad Dastmalchian, told the ILNA news agency in Tehran that Saudi Arabia is doing Israel's bidding in the region, and has "entrusted its national security, and life and death to Tel Aviv." Riyadh, he said, had been financing a good many "security and political projects in the region," or acting as a "logistical supplier."

The United States, said Dastmalchian, has "in turn tried to provide intelligence and security backing, while Israel has simply followed its own interests in all this."

Furthermore, it seems unlikely Iran's Supreme Leader Ali Khamenei will tolerate, even in this weak period of his leadership, the kingdom's rising power in the region and beyond, and especially its financial clout. He is usually disparaging when he speaks of Riyadh's princely rulers. In 2017, he compared them to "dairy cows," saying, "the idiots think that by giving money and aid, they can attract the goodwill of Islam's enemies."

Iranian regime officials are hopeful of moving toward better diplomatic ties and a reopening of embassies. Yet the balance of power between the sides began to change in Riyadh's favor years ago. For the kingdom's power has shifted from relying mostly on arms, to economic and political clout. The countries might have had peaceful relations before in considerably quieter, and more equitable, conditions than today's acute clash of interests.

For if nuclear talks break down, Iran's regime may become more aggressive.

Beyond this, the Abraham Accord or reconciliation of Arab states and Israel has been possible thanks to the green light that the Saudis gave their regional partners, and it is a considerable political and ideological defeat for the Islamic Republic.

Assuming all Houthis follow Tehran's instructions — and they may not — improved ties may curb attacks on Saudi interests and aid its economy. Tehran will also benefit from no longer having to support them. Unlike Iran's regime, the Saudis are not pressed for cash or resources and could even offer the Houthis a better deal. Presently, they may consider it more convenient to keep the softer approach toward Tehran.

For if nuclear talks with the West break down, Iran's regime may become more aggressive, and as experience has shown, tensions often prompt a renewal of missile or drone attacks on the Saudis, on tankers and on foreign shipping. Riyadh must have a way of keeping the Tehran regime quiet, in a distinctly unquiet time.

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