Investments under the shadow of anonymity

Thranslation of the Post on RBC Daily, March 22, 2021

The Ministry of Economic Development proposed to establish a special legal regime for investors in Crimea

Seven years after the reunitfication with Crimea and the start of sanctions, the Russian authorities proposed “special legal areas” for the peninsula. They are designed to stimulate investment from other regions, protecting them from sanctions by the anonymity regime.

The federal authorities decided to attract investment to Crimea by creating “special administrative regions” (OAR) on the peninsula in addition to the existing free economic zone (FEZ). The Ministry of Economic Development of Russia has developed a bill on the introduction of a special legal regime in the territories of the Republic of Crimea and Sevastopol, the main advantage of which will be the confidentiality of investors from other regions of Russia as a way to protect against Western sanctions. The bill is at the disposal of RBC, its authenticity was confirmed by a representative of the ministry.

Earlier, Crimean officials came out with similar initiatives: for example, in 2017, the head of Crimea, Sergei Aksyonov, spoke in an interview with RBC about the discussion of an offshore zone project in Crimea with a guarantee of investors' anonymity.

Protection from sanctions

In 2014, the United States imposed an almost complete trade embargo on Crimea and authorized itself to impose sanctions against any Russian companies doing business on the peninsula. On this basis, the sanctions lists included , for example, the financial holding IFD Capital, the Crimean bank RNKB and the railway operator Grand Service Express. The European Union imposed similar sanctions against Mostotrest and other companies involved in the construction of the Kerch Bridge, the Crimean Zaliv shipyard, etc. When introducing restrictive measures, Americans and Europeans relied mainly on public reports and information from Russian state registers.

Most Russian federal companies do not enter the Crimean market for fear of sanctions that will cut off companies from dollar funding and trade with European partners. The Russian government is trying to compensate for the deficit of private investment in Crimea with budgetary investments (in particular, through the FTP of Crimea and Sevastopol in the amount of more than 1 trillion rubles), but officials of the Ministry of Economic Development admitted that even the execution of the FTP is impeded by sanctions, making it difficult to attract federal contractors.

The bill itself and the explanatory note to it (RBC also has it) does not say anything about Western sanctions, but it proposes a confidentiality regime for information about an investor - a member of the UAR, which reduces the risk of their introduction.

Special administrative regions will be attractive for Russian companies that have already come under sanctions or are at risk of becoming sanctioned, including because of their activities in Crimea, the press service of the Ministry of Economic Development confirmed to RBC. Restricting access to data will help Russian business to carry out investment activities in these regions without fear of expanding the sanctions list and regardless of the region of their "registration", the ministry said.

Special treatment details

Special administrative regions in Crimea and Sevastopol are created "taking into account the geopolitical position of the Republic of Crimea and the federal city of Sevastopol in order to accelerate their socio-economic development and create an investment-attractive environment through the implementation of systemically significant investment projects", follows from the text of the bill.

The UAR will operate throughout the Crimea and Sevastopol, as well as the free economic zone, which has been functioning since the end of 2014.
Russian companies registered in any region can become members of the UAR, but they are not entitled to have branches and representative offices outside the Crimea and are obliged to conduct business exclusively on the territory of the peninsula.
Residents of the UAR will have to conclude an agreement with the governments of Crimea and Sevastopol on the conditions of activity in the UAR and submit an investment declaration, including a feasibility study of the investment project, the number of planned jobs and the size of the average salary of workers, the total volume of capital investments and the annual schedule for their implementation in the first three years.
Investment projects in the UAR should imply at least 150 million rubles. total investment and should be associated with the development of existing and the creation of new industries, the development of transport and other infrastructure, the development of tourist activities, spa treatment, organization of recreation for citizens. The Russian government is given the right to determine other types of activities permitted on the territory of the UAR.
The Russian government can also establish additional requirements for a UAR participant, including the availability of financial resources for the implementation of an investment project, equipment and material resources, as well as "work experience" and business reputation.

Investments under the shadow of anonymity

A fundamental feature of the special legal regime in Crimea will be the ability for companies to combine the status of a member of the UAR (with the regime of anonymity) and the FEZ. In this case, the investor will be able to use the preferential taxation and insurance premium regimes typical for the FEZ, and use other advantages of the FEZ, for example, to receive land plots for rent without bidding.

Currently, nearly 1,700 companies and individual entrepreneurs are participants in the FEZ in Crimea and Sevastopol. Its term of operation is until the end of 2039. In exchange for the implementation of investment projects, FEZ participants enjoy reduced taxes (for example, zero property tax for ten years), and the most demanded benefit, according to the Ministry of Economic Development, is the possibility of reduced insurance premium rates (7.6%, including 6% for pension insurance). On January 18, 2021, the Russian government expandedbenefits on insurance premiums for the Crimean FEZ: the coefficients were established, necessary to determine the amount of benefits depending on the type of economic activity of the participant who received this status after January 1, 2018. According to the Ministry of Economic Development, residents of the FEZs of Crimea and Sevastopol in 2015–2019 invested a total of 157 billion rubles.

“Despite a fairly large amount of public money invested in the Crimean infrastructure in recent years, the level of investment in the region remains relatively low, given the underinvestment of the Crimean economy during the period of being a part of Ukraine,” says Andrey Piskunov, managing director of the group of government ratings of the NKR rating agency ... In 2017-2019, 71% of all investments in fixed assets in the Republic of Crimea accounted for budget funds (334 billion out of 470 billion rubles), follows from the dataKrymstat. But Piskunov believes that the level of benefits for investors in Crimea should be significantly higher compared to other special tax regimes - as compensation for risk. “In this case, the investor bears an increased risk - in addition to working in a region that is quite problematic from an investment point of view (the level of infrastructure development, logistics, a narrow market, seasonality of demand, personnel, water supply, etc.), in case of loss of anonymity, the investor risks his main a business that may be subject to sanctions, ”he says.

The regime of special administrative regions will allow attracting new investments to the region, taking into account the preservation of the possibility of confidentiality of information contained in the unified state register of legal entities about the participant of the UAR, Senator from Crimea Olga Kovitidi told RBC. Special administrative regions with a regime for protecting information about an investor is a new regime that is not known to the current legislation, notes the deputy head of the Legal Development Department of the CSR Eleonora Vitol. In her opinion, the Ministry of Economic Development seeks to coordinate the new regulation with the existing special legal regimes, such as the free economic zones and special administrative regions in Primorye and Kaliningrad. At the same time, it provides for the elimination of duplication of preferences - "something for which new preferential regimes are usually criticized," says Vitol.

Real estate confidentiality

In response to Western sanctions, the government is already applying regimes for the seizure of public information about legal entities in order to minimize sanctions risks. So, in 2019, the government approved a list of information (for example, about management, assets, ownership structure) that banks and companies can hide from the public in order to reduce potential damage from sanctions. Companies began to take advantage of these opportunities. For example, the Crimean bank RNKB classified its reports . In addition, there are other methods of information closure, for example, the use of a non-public joint stock company (JSC) that does not disclose its members. So, the Crimean developer "Consol-Stroy", introduced in the US sanctions list, almost 100% belongs to Sharkhinsky quarry JSC, whose owners are not disclosed in the Unified State Register of Legal Entities.

The innovation of the proposed regulation will be to restrict public access not only to information from the Unified State Register of Legal Entities, but also to the data of the Unified State Register of Real Estate (USRN). Extracts from it are provided by Rosreestr (in 2020 it moved from the Ministry of Economic Development under the control of the government). Access to the USRN data on real estate objects in the territories of special administrative regions in Crimea and Sevastopol is limited, the bill says. Such information will be provided only to the authorities, off-budget funds, the Central Bank and the courts.

Reducing transparency in relation to Crimean investors increases corruption risks, said George Voloshin, director of the French branch of the British consulting company Aperio Intelligence. “In addition to the obvious questions about the procedure for selecting contract winners, it is necessary to take into account the lack of transparency in the provision of subsidies, tax concessions and other material benefits at the expense of taxpayers,” he says.

Voloshin believes that investor confidentiality mechanism alone may not be enough to stimulate additional investment. "Certainly, some additional state guarantees (from the federal government) will be required in case information about investors still becomes public and they find themselves in the zone of sanctions risk," he says. The authorities will have to exercise strict control over any circulating information, but "in the age of high technologies, it is almost impossible to avoid publicity or leaks," the expert is skeptical.

Author: Ivan Tkachev.

https://www.rbc.ru/newspaper/2021/02/03/6019478c9a794725cd0cce58