Opinion

The Great Debate

Common ground for Obama and Putin is offshore

Low expectations surround the G20 meeting in St. Petersburg on September 5-6.

President Barack Obama’s decision to cancel the pre-G20 summit with Russian President Vladimir Putin means the big photo op will likely be the two leaders awkwardly trying to avoid each other. The other headline-making issues in U.S.-Russian relations — Syria, nuclear weapons reduction, missile defense — also appear off the table now. There is one timely matter, however, that resonates with Washington, Moscow, and the entire G20 — the continuing fight against offshore tax havens.

The Cyprus financial collapse in March focused world attention on the outsized role played by offshore banking zones in international tax avoidance and money laundering. Though Russian depositors were the primary victims here, Moscow appeared indifferent to this unprecedented expropriation by Cyprus of the assets of Russian citizens. Putin proved unwilling to help those he viewed as tax-evading oligarchs and corrupt bureaucrats — as well as a few legitimate businesses.

Putin has made the fight against offshore tax havens a key plank of his foreign policy. Other world leaders — including British Prime Minister David Cameron and French President Francoise Hollande — have also issued strong statements criticizing sophisticated legal strategies that allow companies to skirt the domestic treasury, depriving the state of critical revenues in this time of economic recession.

The United States supports the global effort to rein in offshore tax havens and has gone one step further by passing the Foreign Account Tax Compliance Act (FATCA). This bill obliges foreign financial institutions to report on bank accounts of U.S. citizens abroad, with a threat of substantial withholding assessments for failing to do so.

This bold assertion of extraterritorial jurisdiction has surprisingly been welcomed by several European Union countries, which see it as a model for their own efforts to fight offshore banking. Russia also has begun negotiations with the United States to ensure that its financial institutions are FATCA compliant.

Russia after Cyprus: Bringing the money home

The Kremlin’s initial outrage over developments in Cyprus – and the island’s shocking expropriation of billions of dollars held by Russian companies and citizens – has given way to mild indifference. “If somebody gets caught and loses money at the two largest [Cypriot] banks, it’s a shame,” First Deputy Prime Minister Igor Shuvalov recently stated, “but the Russian government isn’t going to do anything about it.”

It turns out that the European Union settlement that left Cyprus’s banking sector in shambles has done Moscow a big favor. Not only did the EU take down a major offshore banking center, it helped President Vladimir Putin’s campaign to return to Russia any money stashed away in offshore bank accounts.

This seemingly technical financial issue also reveals a potential sea change in the rules of the game for Russian business.Instead of seeking shelter abroad, Russian companies and financiers may finally have a stake in fighting to protect their money at home

  •