Russian Investments Into Asia – Using Singapore As An Optimum Base

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Op/Ed by Chris Devonshire-Ellis

Sanctions imposed on Russia means Russian capital needs to find new homes for generating healthy returns. We explain why when it comes to Asia, Singapore is the most viable option.

Corporate Russia, supported in part by matching Kremlin policies, has been reaching out to find new homes for its investment capital needs for the past five years. With sanctions introduced in 2014, investment funds and private equity have been looking for new opportunities to invest in. Increasingly, but not exclusively, that has meant Asia, and I discussed Russia’s new Asian export markets in the piece “Russia’s New Developing Asian Export Markets”

Russian outbound investment has also been increasing. According to CEIC, Russian outbound investments reached US$12.2 billion in Q4 last year. That is a new trend and one driven by the need, having absorbed the opportunities for investments into Russia following sanctions, to now push that into global markets. Of that, an estimated 50% is now bound for Asian holdings – roughly about US$24 billion per annum, although the upward curve is now steep.

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Russian Overseas Direct Investment October 2017 – December 2018

The Impact Of US Sanctions Upon Russian Businesses And Asian Banking
Investment though is a different beast from exporting, although they are often intertwined. Is also requires a more significant infrastructure in terms of legal structures and finances, and there are questions to be answered here, some of them sanctions related as the United States has imposed strict regulations on the movement of Russian money around the world. That has spooked some banks in certain jurisdictions such as Hong Kong, which has already faced previous United States blacklisting over financing irregularities (mostly relating to trade with North Korea) with some of its larger banking institutions having been subjected to hefty fines in the past. While that is more a hangover from lower standards from mainland China spilling over into Hong Kong’s financial sector, it has been enough to render the establishment of bank accounts from Russian companies in Hong Kong extremely rigorous, to almost impossible, even for non-sanctioned businesses. Singapore, which doesn’t have that historical issue, is accordingly more sympathetic to Russian banking needs and more amenable to opening up accounts from Russian companies. We know, because Dezan Shira & Associates the firm behind Russia Briefing, handles numerous Russian clients in Asia and we have first hand experience of the issues at stake though our long standing presence in both cities.

In short, this affects where a Russian business might be better positioned in Asia. Singapore or Hong Kong? The practical answer, at least for now, is Singapore.

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The Singapore Advantage For Russian Investors
As mentioned, it is easier for Russian businesses to establish bank accounts in Singapore, although the banks will conduct the usual “know your client” protocols. Corporate establishment in Singapore is also relatively quick and easy, while dealing with Singapore’s Government regulatory authorities is also precise and efficient.

Russia also has a Double Tax Treaty (DTA) with Singapore, which allows tax relief in certain trade and service areas and mitigates against the prospects of being taxed in both countries. It also permits, through the use of substituting Profits Tax for Withholding tax mechanisms the ability to discount Profits taxes by 5-10% through the charging of IP fees and so on. (Professional advise needs to be taken to arrange this with the Singaporean authorities). A copy of the Russia-Singapore DTA can be viewed from our firms Asiapedia website here

It should also be noted that Singapore is currently in negotiations to create a Free Trade Area between it and the Eurasian Economic Union, which is likely to significantly reduce tariffs on products traded between Russia and Singapore, in addition to the other members of the EAEU – Armenia, Belarus, Kazakhstan and Kyrgyzstan. With Russian exports to Singapore already in the US$3.5 billion bracket, the upcoming Singapore-EAEU FTA can be expected to have a major positive impact on this. Russian businesses not already in the market should be seriously thinking about claiming their space in this expanding trade corridor.

The Singapore Plus Three – Free Trade Agreements With ASEAN, China & India
Singapore has other major advantages too. It is a member of the ASEAN regional free trade bloc, and as such enjoys free trade on most goods and services between it and Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Thailand and Vietnam. Russian businesses already exporting to these markets might find it makes more profitable sense to do so via a Singaporean subsidiary to take advantage of the countries membership of ASEAN. It makes no difference if the shareholders are Russian – as long as the incorporation is based in Singapore it is eligible for ASEAN’s free trade.

Singapore also has Free Trade Agreements with China and India. The Singapore-China FTA can be downloaded here and the Singapore-India FTA here. Again, Russian nationals can incorporate a company in Singapore to take advantage of these agreements. They provide significant tariff reductions on Singapore-China and Singapore-India trade.

This is even more apparent as a wise tax-reducing structure when one considers that Russia itself has DTA with many countries in Asia. Often these overlap with DTA that Singapore has, meaning Russia-Singapore-Asia tax efficient mechanisms and structures are relatively straightforward to implement.

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Singapore can also be used as a base to reach out to other markets. These include Australia, which is less than a 5 hour flight from Singapore, and which also has a DTA with the country, and which runs as a complimentary partner to the ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA) which in turn brings New Zealand into Singapore’s free trade tax sphere of influence. Sri Lanka, already a popular winter home for many Russians, also has a DTA with Singapore. The well established Russian export markets of Japan, South Korea & Turkey also have DTA with Singapore, while the Singapore-European Union Free Trade Agreement was signed off just a few months ago and is also shortly to come into force.

Singapore Opportunities For Russian Start Ups
Singapore also provides incentives for foreign owned Start-Ups. These include tax breaks, lower profits tax rates and other benefits. We wrote about these in the article “Singapore’s Start Up Eco-System”

What To Read
Our firm has been based in Singapore for over a decade now and is well entrenched in the Singaporean business community. We have produced the following publications of use to Russian investors considering Singapore as an investment destination in addition to intelligence concerning the rest of ASEAN. These publications are available on a complimentary basis, however a one-time access subscription is required.

Singapore is a primary investment destination for Russian businesses and investors looking at Asia, as it possesses an excellent regulatory and financial services reputation together with superb infrastructure and ease of doing business rankings. It is currently ranked 2nd globally according to World Bank data.

Singapore’s plethora of Double Tax and Free Trade Agreements are complimentary to those that Russia also has throughout the region, and this means it is also an excellent Asian Headquarters for Russian businesses that are looking at investing in the manufacturing or services industries, or take part in other investment opportunities elsewhere in Asia. This will only increase and significantly expand the total trade volume in the Russia-Singapore trade corridor as pending deals such as the Singapore-EAEU FTA and the Singapore-EU FTA come into effect. However, it is important that Russian investors appreciate that the timescale to get involved in this will be limited – many other Russian businesses are already in the market and competition will only increase. Like all capital markets, it is the best-established and entrenched that will prosper the most – meaning now is the time for Russian businesses to start looking at Asia, and in Asia, giving serious consideration to Singapore as the primary destination.

 

About Us

Russia Briefing is produced by Dezan Shira & Associates. The firm has offices in Singapore as well as throughout the ASEAN nations, China and India, possessing some 28 regional offices. Please contact us at singapore@dezshira.com for assistance into Singapore and the Asian markets, or visit us at www.dezshira.com.

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