6. Discussion
6.1. Cases Discussion
國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
6. Discussion
In the previous chapter we provided three business cases of Russian large companies that exploit particular offshore schemes. The companies are among leaders in their industries.
Additionally, “T Plus” group is involved in providing housing and communal services, and
“Domodedovo” is the second largest airport in Russia. Using offshore companies, at first, they protect the assets from a hostile takeover by other business groups as well as the government.
In case of legal proceedings, offshore companies can defend their interests in international court.
Then, the offshore schemes are used to avoid corporate taxes. Thus, offshore firms serve as profit accumulation centers in holdings. Lastly, offshore companies are designed to fund main businesses in the resident country due to lower interest rate abroad.
In this chapter, we intend to compare these cases and discuss other aspects of offshore activities such as ethics, anti-offshore initiatives in the world and in Russia.
6.1. Cases Discussion
The provided business cases are typical for Russia. The offshore schemes are caused by the aggressive business environment in the country and inspired by common practices globally.
The government cannot guarantee entrepreneurs an explicit compliance with rules for doing business. Moreover, the authorities themselves are not afraid to exploit the same semi-legal methods of property redistribution. The most famous incident is the expropriation of the oil company Yukos valued at $100 billion in 2003 (Williams 2016).
To begin, dealing with offshore companies is not illegal in the world. There are many MNCs have offshore subsidiaries in order to minimize their taxes. For instance, only 2 companies among 100 the largest listed on the London Stock Exchange do not use offshore services
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
(Katasonov 2014). From 100 largest companies in US traded on the stock exchange, 83 have subsidiaries in offshore jurisdictions (Katasonov 2014). Furthermore, as the UK as the US are both often recognized as offshore areas. These countries are more focused on struggling with the negative consequences of using offshore schemes like pure criminal issues (money laundering, financing terrorism, bribery) and unfavorable economic effects (reduction of fiscal base, destabilization of global financial system).
In addition, many global banks located in Anglo-phone countries are specialized on the provision of offshore banking services. Among them are UBS, Credit Suisse, HSBC, Deutsche Bank, BNP Paribas, JPMorgan Chase, Bank of America, Morgan Stanley, Wells Fargo and Goldman Sachs (Katasonov 2014).
In that sense, the described offshore schemes in Russia are not unique. All three exemplified companies are actively cooperating with leading investment banks in order to trade their stocks, to acquire assets and to raise capital. For instance, IES Holdings’ (the owner of “T Plus”) stocks are traded on Nasdaq. Interestingly, the company description form does not mention that the firm is actually doing business in Russia (IES Holdings, Inc. 2016).
As the case demonstrates, Russian large companies do not concern about the services themselves do not have long-term plans to develop business, but care more about revenues. The main purpose is to obtain cash as much as possible right now and to transfer it overseas to hide in offshore jurisdictions. To some extent, companies can pretend that they are doing real business, but ultimately, it is not important. It should be important for the government, since such services to provide electricity and heat are basic for all people on an equal footing with food, housing and health care. Therefore, their provision should be regulated by the government
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
more tightly.
In 2012, the Domodedovo Airport attracted a syndicated loan €165 million from a group of Raiffeisen Bank International AG, together with ING Bank N.V. and Rosbank (Société Générale Group) (Raiffeisen Bank International 2012). Besides, in 2014 $300 mln notes have been issued by DME Airport Limited (an Irish SPV) and on-lent to Hacienda Investments Ltd (Cyprus) (Fitch Ratings 2014). It supports the idea that offshore companies are used to raise capital overseas.
The same is true regarding the Russian Alfa-Bank. But there was another advantage of exploiting offshore companies discovered. Under the international economic sanctions imposed on Russia in 2014, Russian businesses that are actually are not Russian could continue borrowing overseas. For instance, in 2014 Alfa Bank issued Eurobonds to raise $500 mln with the support of US investment banks (Edwards 2014). That year earlier the bank’s bond was a
$350 mln three years note priced on June 4 and issued through its holding company, ABH Financial, with the arrangement of JP Morgan, Goldman Sachs, Bank of America and Merrill Lynch (Turner 2014).
Overall, the offshore schemes in Russia are similar and not to those used around the world. The problem with Russian companies, as mentioned previously, is that they do it differently. Russian companies not just conceal their profits, but also register assets far away from the country.
Thus, the main reason to use offshore companies is to protect property, hide beneficiaries, and the less prioritized thing is a tax optimization.
6.2. Scale
The wide exploitation of offshore schemes causes the offshorization of whole industries. For
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
example, among top 10 Russian airports, only 3 remain state-owned. Others are all controlled by the offshore companies. For example, the largest one is Sheremetyevo Airport is owned by TPS Avia Holding registered in Cyprus. In turn, the holding is owned by three Russians.
Now, the scale of Russian offshorization is significant. For instance, in Europe around 4% of largest companies are controlled from offshore jurisdictions, in the US – 5%, in Russia this share is more than 90% (Katasonov 2014). It is specifically related to the large businesses which are supposed to be the main sources for tax collection. Moreover, the authorities themselves can be involved in offshore schemes. For instance, in case of communal and housing services, local governments incorporate mediators to collect payments from people and to transfer it to the suppliers. But the intermediaries often have incentives to collect money and do not transfer it. It is especially true for municipal entities that particularly own nothing. When the municipal mediator is recognized as a bankrupt, local authorities establish another one. Eventually, the municipality would be liable to creditors for these debts, whilst all money went to the offshore beneficiaries who are usually connected to local decision-makers in the field of housing services or even a mayor. Therefore, the issue of offshorization is a part of corruption schemes.
To be precise, offshore schemes are not phenomenon itself. It is only a means to transfer assets from a resident country. The assets are withdrawn by companies and individuals, and the origin of money is various. In terms of business, money comes from revenues and dividends. In terms of state government, money comes from corruption. It is estimated that in Russia, the major part of capital outflow is related to bribery. The main corruption schemes are implemented in public procurement, especially in the military-industrial complex. On average, the volume of
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
so-called ‘kickbacks’ in public procurement is assessed in one trillion rubles that equals to $17,4 bln based on the current exchange rate. These are the stolen money that are then transferred to
offshore companies.
6.3. Reasons
In the previous pages, we explained the reasons why Russian businesses are involved in offshore schemes. The situations like the cases are possible due to dubious operations with the ownership registration. It is even feasible to bribe courts to obtain a favorable decision. Still, many people in Russia are doubtful about the privatization occurred in the early nineties. The half-baked actions of authorities led to the unequal distribution of previously state-owned property. It turned into that the whole nation’s assets had been redistributed in favor of several people who were trickier. They suddenly realized that the majority did not understand the idea of privatization and offered them simple food in exchange of their coupons. At that time, there was a food deficit in Russia, thus, people were easily willing to do it. It resulted in the rise in business oligarchies. Then, these Russian oligarchs had transferred their assets overseas and still continue to do the same. Essentially, they are becoming richer on the natural resources belonging to the entire nation, and ordinary people get nothing from that.
On the other hand, these businessmen have tight relations with the politicians. That is why they are called ‘oligarchy’ since they influence political decision-makers in order not to interfere the assets withdrawal from the country. These are all related to corruption.
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
6.4. Consequences
The future of Russian economy and as a whole country appear to be foggy. Every year the outflow of capital is estimated in $80 bln on average in 2014-2016 (Lenta.ru 2016) especially through offshore schemes. It leads to a reduction of gross accumulation and a reduction of investments in real capital within the country (Kuzmina 2013). In addition, the national currency becomes unstable to the influence of external and unforeseen factors. It is very revealing when the RUR-USD exchange rate follows the oil prices. Since Russian economy is highly dependent on oil, the estimation of oil and gas revenues in federal budget is 51.3% in 2014 (Sabitova and Shavaleyeva 2015). By Movchan (2015), “at least 60 percent of consolidated budget revenues come from the mineral extraction tax, excise duties, export duties, value-added tax on imports and other taxes attributable to the oil and gas sector directly or indirectly.”
On the other hand, the government actions in regulating business are not sequential and fair.
The game rules are a subject for consistent changes. Therefore, people do not trust the authorities and prefer not to deal with them. This position is justified by the history of Russia when citizens were several times robbed by own government during many economic reforms.
In contrast, substantially, the $100 banknote of 1960s is the same $100 bill. However, not many people still remember the Soviet 100 rubles, and of course, they are nowhere near the current money. Thus, in Russia people try to save money in USD and EUR avoiding RUR which are spent on current consumption.
There is a main issue of corporate hostile takeover in Russian business climate. Unfortunately, the government does not make efforts to prevent these practices, although many legal actions are conducted through the state authorities including the courts. But the mistrust of courts is so
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
strong that businessmen prefer to be engaged in litigation outside the country, because the chance to assert own rights overseas is higher.
Overall, the state of the Russian economy and society is poor. Offshore schemes are not a cause of problems, but are the consequences and the understandable response to what happens.
Experience of other countries confirms that it is possible to develop economy and to have offshore businesses. However, it is not that simple, because offshore issue is a reflection of injustice in a global scale when wealthy nations become richer while developing countries have less opportunities to grow.
Among the popular offshore jurisdictions, there are some prosperous nations called the world financial centers and small or island jurisdictions that depend on offshore services. Interestingly, there are no pronounced developing countries. The possible answers are the following. First, those nations cannot afford to provide such favorable tax conditions as wealthy countries can.
Instead, developing countries have other priorities in economic growth to have it more solid.
Second, the possibility to become an OFC is unofficially regulated by more influential nations that are more prosperous at the same time. It seems that the global market of offshore services is divided between the US and the UK, and it is not easy for novices to enter the market. Third, to act as an OFC, a territory should have some positive business reputation regarding keeping secrecy, safety and political stability. Finally, the leading investment banks which are mainly American should support a jurisdiction in its efforts to be an OFC which is unlikely. These banks are professionals in attracting the clients.
Based on mentioned above, offshore jurisdictions present a global market regulated economically and politically by the ‘Golden Billion’ governments. To push the idea further,
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
offshores are a tool in the hands of global policy makers to redirect capitals. It provides control over large businesses and even industries in countries, accumulates evidences on key individuals to manipulate them, guides financial flows from developing countries to global investment banks.
In Russia’s circumstances, since the country is involved in globalization, it cannot be on the sidelines of it. Thus, Russian companies face the global competition and should react properly.
However, in reality Russian businesses operate within the country, but at the same time register its assets overseas. They do it not only because of economic reasons, but also because of fundamental risks to lose their property by semi-legal manipulations by other companies and the government itself. Therefore, the situation may change for the better, if the authorities will change their attitudes towards business and if there will be adequate ‘rules of the game’ and political stability in the country.
After all, it is about politics in Russia that affects economy. No any other country in the world is interested in Russia’s success or failure, because each country is busy with its own issues:
internal and external. Like in the people’s world, there is no one to make it better except you.
Russia itself should be more self-reliant learning from others experience in anti-offshores initiatives as well as attracting capital to the country. However, it seems that the global anti-offshores actions are not effective.