Accessing & Funding Investments & Projects in Russia's Far East Opportunities via China, Hong Kong and the Belt & Road Initiative - Dezan Shira & Associates

Russia's Far East has been the recipient of 32% of Russia's total foreign direct investment in recent years, as priority to develop Russian ties with China, and improve export capabilities also to Mongolia, Japan, South Korea. Vladivostok is fast developing as a Far Eastern Asian metropolis, and is the financial and services hub for the Primorsky, Khabarovsk, Yakutia and Kamchatka regions where most of the opportunities lie. Far Eastern regional growth is currently three times higher than the Russian average, while Moscow appears finally relieved that the old Vladivostok generation, bought up and living in military compounds and educated during the Cold War, have finally reached retirement age and have been replaced with a more modern, outward looking, younger population. That change has been rewarded in terms of lifestyles - Vladivostok now boasts a Mariinsky theatre, its football team is on the up, and it has a world class faculty of 15,000 students at the Far Eastern University.

"There are opportunities in Russia if British businesses chose to look for them"

The development of Russia's Far East has received another boost - China's Belt & Road Initiative. China and Russia are developing a political alliance to hedge against the United States, but more importantly for trade are also reconnecting old rail and trade links that were dormant during the Cold War. China's growing and vast appetite for energy resources is impacting on the Russian Arctic in Yakutia, where pipelines are bringing much needed supplies into China's North-East regions and beyond. India has also started shipping LNG gas from Yakutia. There are opportunities in Vladivostok for the development of the next generation of Arctic Container shipping, and Russia, China and India are all discussing shipbuilding projects to develop such vessels to transport Russia's massive energy reserves. British suppliers to such industries have an opportunity here.


Road, rail and related infrastructure projects are almost snowing on the Russian Far East as I have witnessed the Presidents of Mongolia, Japan, India and China all make proposals and release funding to get their companies involved. For British businesses, the RBCC is well positioned to provide data on what projects are available for British participation. There is a lot happening in Russia that is not under any form of sanctions, and background checks are relatively easy to conduct in terms of due diligence. The access is there - as long as one asks for the data.

In terms of funding, however, there are some interesting options, not least as conducting this through China or Hong Kong.

British businesses have a long track record of having invested in China the past 30 years, and limited liability subsidiaries of UK companies are considered as Chinese, although at the same time having the benefit of enjoying some perks only available to foreign investors. Some of these can be turned to use as Russian investments. There are practical examples as well as financial ones. China's Foreign Investment Law has been overhauled as from 1st January 2020 and eases up considerably the ability for foreign investors in China to participate in Chinese procurement contracts. Many of these are Belt & Road related, and Russia is just next door. Additionally, China has now approved the establishment of "Project Joint Ventures"- a vehicle invested in by both Chinese and foreign stakeholders that exists purely for the length of time of a particular project, after which profits can be distributed and the venture wound up - perfect for the myriad of Belt & Road infrastructure development projects not just in Russia, but along the entire Belt & Road Initiative - now counting some 152 countries.

Financially, there are benefits here too for existing British companies invested in China. Profits tax in China runs at between 15-20% depending on the industry category. But repatriating those profits back to the UK attracts an additional 10% dividends tax. This means that getting involved in purchasing in China for Russian infrastructure project needs will both reduce profits, and mean an investment can be made using the 10% saved on what would otherwise have been a dividends tax. Accounting departments in the UK should be looking at the implications of this if their employers wish to invest in Russia and have an existing China subsidiary.

Another factor to invest in Russia worth considering is Hong Kong. Despite recent social unrest, the territory remains a vibrant financial hub - the world's largest IPO was realized in Hong Kong in late November and raised US$11.2 billion. Hong Kong also has a Double Tax Treaty (DTA) with Russia, and this gives the potential of significantly reducing taxes in many areas. Should a British entity either have, or establish (a simple and inexpensive process) a company in Hong Kong, it qualifies to use the Hong Kong-Russia DTA. Hong Kong’s profits tax rate is very low. Incorporated entities are subject to profits tax on two-tiered system.

The first HKD 2,000,000 ( about £200,000) of profits are subject to profits tax at 8.25 percent with the remainder subject to profits tax at 16.5 percent. This is quite low when compared with China’s corporate income tax rate (CIT) of 25 percent. Capital gains and receipts that are capital in nature are also not subject to tax. Hong Kong also has a very expansive tax treaty network and does not impose withholding taxes on payments of dividends and interest. Used correctly these can be used to offset taxes in Russia or when engaging in bilateral trade. As a result of the DTA, Russian business in Hong Kong increased 57% in 2017, the year the DTA was implemented, and it continues to grow.

There are opportunities in Russia if British businesses chose to look for them. Using either your Hong Kong or mainland China operations to both search for these and structure them may be an easier route than looking at the Russian Far East from London, where it can seem a very long way away. Flight times from Hong Kong to Vladivostok are just under 5 hours, from Shanghai 3 hours, and from Beijing 2 hours.

Chris Devonshire-Ellis is the Chairman of Dezan Shira & Associates, Maria Kotova heads up the practice Russian desk. The firm has been established since 1992 and possesses offices across Asia including 12 in China and one in Hong Kong. Contact: russia@dezshira.com or visit www.dezshira.com


Bulletin Online
Bulletin Online

Date Published:

23 January 2020

Author:

Russian_Far_East_regions

Chris Devonshire-Ellis & Maria Kotova, Dezan Shira & Associates