The Role Of Offshore Jurisdictions In Russia

This paper will examine the interaction between offshore jurisdictions and Russia, with particular emphasis on the role played by the British Virgin Islands in structuring offshore transactions. This paper will look at popular narratives about offshore jurisdictions, including traditional arguments about round-tripping and corruption, before examining the legal rationale for the use of offshore structures in Russia. It will be argued that the use of offshore jurisdictions arose as a response to deficiencies in the Russian legal system, particularly in terms of Russian law as it relates to property rights, and the related problem of enforcing such rights. In contrast to these perceived deficiencies in the Russian legal framework, offshore jurisdictions provided a stable and modern legal environment, the use of which allowed Russian investors to gain access to Western common law principles of corporate governance, property rights and shareholder rights.

Introduction

This article will examine the use of offshore jurisdictions in Russia, with particular emphasis on the role played by the British Virgin Islands [hereinafter BVI]. The objective of this paper is to understand the reasons behind the popularity of offshore structures in Russian commerce, and to shed some light on the legal rationale behind their use, by examining the interplay between Russian and offshore legal systems.

This is an important area for study, given the significant role that offshore jurisdictions play in Russian foreign direct investment [hereinafter FDI]. The prevalence of offshore structures in Russian FDI is well reported, and it has been observed that in 2012, 11 of the main 40 recipients of Russian FDI were offshore jurisdictions which were seen as acting as a transit platform for the movement of capital to other destinations. Of these offshore zones, three jurisdictions are the largest recipients of Russian FDI, being the BVI, the Cayman Islands and Cyprus. These three jurisdictions have played host to increasing and significant volumes of Russian financial flows, with the growth of outward FDI stocks in Cyprus growing from $206 million to nearly $4 billion in the period between 1998 and 2006, the BVI increasing from almost zero in 1990 to $123.5 billion in 2006 and the Cayman Islands increasing from almost zero to $40.4 billion in the same period.

Given the popularity of offshore finance centres, and the significant FDI flows passing through such jurisdictions, the question then arises as to why offshore structures have been used in Russia. Unfortunately, this is an area in which there is a lack of significant academic analysis and the few studies that address the topic simply focus on questions of tax avoidance, round-tripping and corruption. T he legal rationale, practical use and function of offshore structures are rarely considered. This is a significant deficiency in the existing literature on the topic as legal concerns have been a key consideration behind the use of offshore structures in Russia.

This paper will therefore attempt to redress this deficiency and cast some meaningful light on the role of offshore jurisdictions in Russia, by looking to the legal rationale for the use of offshore structures. It is only by looking at the actual use of offshore structures in practice, and the legal environment which gives rise to their use, that we can achieve an understanding of the purpose behind such structures. In order to understand the rationale behind the use of offshore structures, this paper will examine the ways in which the use of offshore jurisdictions arose as a response to certain deficiencies within the Russian legal system and the difficulties faced by Russian enterprises in accessing international finance. This paper will argue that offshore jurisdictions, such as the BVI, have been used as a platform to overcome legal inefficiencies in the Russian legal system...