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Expert opinions on Russian premier’s proposal to set up offshore zone mixed

March 22, 2013, 19:15 UTC+3 Alexandrova Lyudmila

MOSCOW, March 22 (Itar-Tass) – Proposal by Prime Minister Dmitry Medvedev to set up Russia’s own offshore zone in the Far East has produced a variegated reaction among experts and politicians.

Some of them have hailed the idea enthusiastically while others recall a rather lamentable experience Russia has had with the so-called special economic zones in a recent past.

Independent experts say Medvedev’s proposal has a rational element in it but they say, however, that it will be hard enough to implement the idea.

Thursday, Medvedev came up with the proposal on two occasions – at a regular session of the cabinet and at a congress of the Russian Union of Industrialists and Entrepreneurs /RUIE/. He believes the Russian offshore could be located on the island of Sakhalin or on the Kurile Isles.

According to Medvedev’s supposition, the presence of an offshore zone in Russia will help this country get back the monies that once flowed out to Cyprus, which is stricken by crisis now, as well as the monies lurking in other popular places, which boast lax taxation requirements.

“It’s time for us to revert to the idea of setting up an offshore zone on our territory,” the Prime Minister said. “Look at the tensions that are running so high in Cyprus right now. Maybe, we could set up an area of that type in the Far East where we have a lot of nice places, like Sakhalin or the Kuriles.”

He surmised that the availability of an offshore economic area might help Russia to get back the monies that have trickled away, apart from Cyprus, to the British Virgin Isles, the Bahamas, and other lucrative destinations.

President Vladimir Putin is aware of Dmitry Medvedev’s initiative, the presidential Press Secretary, Dmitry Peskov said.

While the share of financial assets hidden away in offshore zones stands at around 10% in the European Union and the U.S., various assessments suggest that Russia’s largest companies may have withdrawn about 50% of their assets there.

This is far from the first attempt on the part of the government to keep the truculent monies inside the country but even the most delicate attempts to do it, for instance, with the aid of special economic zones, failed to come up with the goods. Experts recall in this connection the experience with offshore zones, which existed in a number of Russia’s constituent territories – for instance, Kalmykia and Ingushetia -- in the 1990’s and did very little in terms of propelling the economic development of those regions.

According to the information released by Russia’s Accounting Chamber, the thin number of 6,700 jobs created in the SEZ’s by July 1, 2012, contrasted heavily with the 115.4 billion rubles /USD 1=RUB 30.5/expended for their promulgation.

Last year, Vladimir Putin came up with a program of ‘de- offshorizing’ the Russian business sphere. As he addressed a major annual press conference in December, he mentioned the ways that would be helpful in attaining the goal.

“Number one is administrative methods, like many countries do, that is, to sign agreements with the offshore zones on disclosures of information,” Putin said. “Method number two is more complicated and more important. It implies improvements in legislation, which would make it more efficacious and.”

Last but not least, there comes a bettering of investment climate in this country.

Most delegates of the congress of the Russian Union of Industrialists and Entrepreneurs responded to Medvedev’s proposal with applause. “I think that’s an interesting proposal,” said Andrei Kostin, the president of the VTB bank.

RUIE President Alexander Shokhin proposed even the location of the offshore areas. “Kaliningrad /Russia’s exclave region in the southeast Baltic area – Itar-Tass/ and Sakhalin, or possibly the Island of Russky in Vladivostok,” he said.

Federal Minister for Development of the Far East Viktor Ishayev, who simultaneously is the President’s plenipotentiary representative in the Far-Eastern Federal District, voiced support for Medvedev’s proposal. “Why not after all?” he said in an interview with Rossiyskaya Gazeta.

“The only thing we should work out is the special terms of taxation,” Ishayev said. “Why do people relocate their monies to offshore zones? They do it because taxes there are small enough. Also, other economic incentives are needed, too.”

According to the minister, a preview of possible risks is needed. “There must be state regulation and specification of the things that can or can’t be done.”

“There’s a need for strict rules of the game and smoothly working regulations for the functioning of these zones,” Ishayev said.

Skeptical comments are abounding, too, and one of them came from the former Finance Minister Alexei Kudrin, who chairs the Committee for Civic Initiatives at present and who believes the chances for implementing the idea of offshore zones on the Russian territory are very slim.

“That’s a highly topical thing in the wake of events in Cyprus but turning the creation of offshore areas into an element of state policies is the worst thing a respectable state could possible offer,” Kudrin said in an interview with Dozhd Television.

Russian money will never get back to Russia if its owners do not see rewarding conditions here. Most likely, it will simply drift to other offshores, he said.

Kudrin indicated that the offshore zones generate the flows of illicit finances that are drained from the main industrialized areas to evade taxation.

“Throughout all the years that we had internal offshore areas, like ZATO Baikonur, regional governors pleaded for closing them down,” Kudrin recalled. “They literally wept because the monies that would have been spent for teachers’ salaries, investments, or road repairs simply streamed to the regions where discounted taxes were charged.

Business captain Mikhail Prokhorov, who stands at the head of the Civic Platform party believes that instead of turning into an offshore area, the Russian Far East should turn into a free economic zone, which would also embrace Japan. He said it in a comment in Facebook.

Moskovsky Komsomolets daily quoted the editor-in-chief of the Moscow-based Finansovaya Gazeta, Nikolai Vardul, who believes that the Kurile Islands would probably be the best imaginable replacement for both Cyprus and Sakhalin.

“There’re obviously more chances there and, in addition, the Japanese finances won’t take a long time to get into the play,” Vardul said.

Still many experts say Medvedev’s initiative does contain a rational kernel.

“Imperfections of the legislative base and high corruption levels constitute the main problem of business in Russia while the big fiscal burden occupies a second place,” Alexei Kozlov, a senior analyst at the UFS Investment Company told Nezavissimaya Gazeta.

“The idea of an offshore zone is encouraging in itself,” he said. “Cyprus really failed to become a Switzerland in the Mediterranean but this doesn’t mean however that the Russian business community will perceive the Far East as an absolutely secure place for conducting business and depositing capitals.”

Narek Avakian, an expert at the AForex company, believes that the problems posed by the corruption tax and underdeveloped infrastructures remain in place but if they are eliminated the Far Eastern offshore project might be successful enough.

“If this happens, Russia’s territory will then turn into a transit bridge between Europe and the countries of East and Southeast Asia,” Avakian said.