Global Financial Integrity

 

Russian Foreign Direct Investment and Tax Havens

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It can be tough to impose economic sanctions against Russian citizens if you can’t find their money. Russia’s very complex relationship with tax havens could make this more difficult.

It is also tough to try to pinpoint exactly how much Russian money is being held in tax havens due to the fact that a lot of it isn’t reported to Russian officials/international organizations like the IMF (that’s the whole point of hiding your money in a tax haven).

The amount that is actually reported is pretty jaw-dropping. Approximately 61% of Russia’s $403 billion in outward Foreign Direct Investment (FDI) is held in tax havens:

Just to be clear, FDI is any amount of investment in a entity which gives the investor some  control over that entity’s operations. So, if a Russian billionaire incorporates an entity in Cyprus (often these entities in tax havens are just bogus “shell” entities), and invests $1,000,000 into the entity, that will show up in the FDI statistics.

The amount of FDI coming into Russia is also dominated by tax havens. Approximately 53% FDI invested in Russian companies comes from entities located in tax havens:

Who really own’s these companies in tax havens is really anyone’s guess.

Round Tripping

Russia has a known problem with what is referred to as “round-tripping,” where money gets moved out of Russia (both illegally and legally), and then pumped back in as foreign investment. By doing so, the person responsible can take advantage of tax breaks and other perks, or launder money.

Here is one example of how it can work:

  1. A Russian businessperson creates an anonymous shell company in Cyprus.
  2. The Russian business person moves $1,000,000 to the fake entity in Cyprus, either through a legal “investment” or funneled in an illicit manner.
  3. The Russian business person then re-invests the $1,000,000 back into Russia under the guise that its coming from a foreign resident in Cyprus. By doing so, the Russian business person can take advantage of a whole slew of tax breaks levied for foreign investors who invest in Russia (since Russia, like all countries, wants to promote foreign investment).

Read more about round-tripping in The Economist here.