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The Advantages of the Russian Market

Very favorable tax rates and numerous special economic zones are some of Russia's advantages

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This post first appeared on Russia Insider

The author is Chairman, Disciplinary Committee, National Association of Corporate Directors, Russia

It appears that nations and groups active in world geopolitics are steadily easing away from diplomacy and re-entering the era of “us and them” demon branding. Even the central banks are now micromanaging, rate influencing, and not keeping to their original non-political mandates. Policies by the U.S. Federal Reserve, the Bank of Japan and the European Central Bank are eroding traditionally conservative models that fostered savings, investment and economic growth. For the Bank of Russia, which oversees lenders and the country’s financial system as a whole, its entire “ideology” of regulation is in an active process of simplification and change endeavoring to distance Russia from the effects of increasingly vicious circles of rates, currency and debt experimentation. This includes a process of rebalancing and de-leveraging from overweight US Dollar, and Euro positions.

Well, the business of politics and such related circles of influence do have direct as well as ripple effects of the conduct of trade and business in general. The first thing then that enters my limited commercial mind then is “where do I diversify my risk”? After all, black swan events will happen, more so in such stressed political, military and economic times. Game changing events will occur, always where and when we do not expect them at all. The search for safe havens is with steadily increasing urgency becoming a key business conundrum.

Perhaps by having a business operating in the ‘West’, and a double operating in the ‘East’ might make sense to consider if for no other reason than safety/survivability through diversification. Depending on how you go about registering the entities, perhaps the risks associated with the various free market ‘sanctions’ in vogue today, or other liberally applied political restrictions can be avoided and their damage mitigated. My personal view is that free and unfettered trade is the highest sustainable diplomacy, political or economic.

To this end, I would like to gloss over some regional possibilities, and brief snippets. While I am a fan of the Eurasian markets, for the sake of this overview I will stick to the BRICS.

It seems that Russia in fact has the most liberal and favorable tax laws among all BRICS countries, with the lowest corporate income tax, personal flat rate income tax regardless of income, and the ability to write off (one-time) 30% depreciation costs for tax purposes. If you are involved with education or healthcare as an institution, there is zero tax on profits. If conducting long-term direct investment there is no capital gains tax.

It is a telling indicator that over the past several years the number of applications by foreigners to become tax residents of Russia has increased dramatically. Now, a simple flat tax of 13% on income is easy to file, and a fair burden when compared to many countries. That alone may be an attractive reason to start looking into such diversification.

Since the advent of sanctions, a number of manufacturers and producers have started new operations in Russia. For example: OBO Betterman (Germany) manufacturing lighting fixtures in Lipetsk, RBPI (Norway) state of the art pig farm in Nizhny Novgorod, Sewon Group Co., LTD (South Korea) in Primorye for its paper packaging plant. The list goes on, from automobile seats for Renault, wind turbines and soy farming/processing for China, pharmaceuticals, clothing, insulin production and so on. Whatever the initial reasons for establishing operations in Russia, be they not wanting to lose market share, growth restricted by political regulation, or advantageous costs and an educated workforce. What has emerged is the realization among foreign businesses now operating here are the efficiencies, quality and costs of doing business inside Russia. It is competitive and logistically advantageous in connecting with a growing number of markets, Eurasia included.

Today nineteen special economic zones (SEZ) are operational according to OPKO Russia Market Partners. All are close to the borders of Russia from the Baltic to the Pacific. These SEZ’s are worth considering as initial sites to establish operations in Russia and grow from. The SEZ’s include highly developed infrastructure and logistics standards. Tax incentives of ten years at 0% on land, property and transport, a free customs zone on site enabling import without customs duty or VAT, and physical connection to power grids without charge.

It is worth mentioning that the PMI (production manufacturing index) for August 2016 was 50.8 or 0.8% growth. For September, it was 51.4% and should continue to grow for the rest of the year. This indicates that Russian economy has made some inroads deleveraging from the price of oil & gas, and has gone past the worst of the sanctions effects. In addition, having been shut off from the US Dollar since 2014, new robust sources of internal ruble financing as well as a basket of non-western currencies for investment are now routinely accessed, and are yielding strong positive ruble returns.

Whatever path to globally diversify you choose, it’s worth keeping in mind that not everything bandied about as ‘commonly known’ is based on reality or the facts. I say this as a foreign executive in Russia. This country is a popular punching bag, an almost biblical case of “visiting the iniquity of the fathers upon the children, and upon the children's children”. The Soviet Union is long gone, yet the perceptions and views persist and color the geopolitics of life even today. Russia is a 24-year-old country (with a vast historic/genetic memory) which has established itself in an entirely new political and economic market reality. The country offers much to those open to evaluating it for themselves, dispassionately. This is a market worth getting to know and getting involved in. The best way is simply to take a bit of time, visit, learn, see and do it more than just once. The reality, I assure you, will be a welcome, and rewarding revelation made especially clear when contrasted with descriptions by ‘accepted’, presumably respected sources.

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