Russia is weighing tax incentives for allies if Western firms pull out

Moscow is working on tax breaks to try to attract companies from India and other friendly nations as European and US firms continue to leave the country over geopolitical concerns, two people aware of the discussions said.

This comes amid growing trade between the two countries, fueled by India’s rising appetite for discounted Russian oil and efforts to regulate bilateral trade in rupees. Russia has risen from 25th place in the previous fiscal year to become India’s 5th largest trading partner, with total trade growing from US$8 billion to almost US$40 billion.

“The Russian authorities plan to make it easier for investors and companies from friendly countries to enter the Russian market under a special tax condition that includes a reduction in the tax rate. The details of the initiative will be further explored with the professional community,” said one of the two above.

“Tax breaks have been discussed but the main concern remains in the form of a payment mechanism. The rules were announced by the Reserve Bank last year, Vostro banks were also opened, but no transactions took place,” the second person said.

The first person said several solutions to the payment problem are being considered, including the formation of a new common electronic currency that would not be tied to the dollar. Details of such a currency are not known.

Government officials had admitted that the rupee settlement mechanism is still in its early stages and that there are “teething troubles” over the exchange rate and repatriation of funds.

About 20 private and public Indian banks have opened special Vostro accounts to facilitate rupee trading. Accounts were opened by lenders such as UCO Bank, State Bank of India, HDFC Bank, Yes Bank and IDBI Bank, as well as Russian lenders such as Sberbank, Gazprombank, Credit Bank of Moscow and VTB Bank.

However, most banks are awaiting RBI SOPs regarding the Rupee Settlement Mechanism.

Last month, Secretary of State S. Jaishankar warned that two-way trade between India and Russia rose to a record $45 billion between April 2022 and February 2023 due to Indian purchases of cheap Russian oil and that the imbalance must be addressed “ very urgent”.

Jaishankar said addressing the imbalance means addressing the barriers – be they market entry barriers, non-tariff barriers to trade, or related to payments or logistics. According to a report by the Social Science Research Network, around 8.5% of EU and G7 companies had divested at least one of their Russian subsidiaries by the end of November 2022.

“In April 2022, a total of 2,405 subsidiaries owned by 1,404 EU and G7 companies were active in Russia. Our results show that less than 9% of this group of companies have divested at least one of their subsidiaries in Russia,” the report added. However, the investigation found that even after a Western company has decided to exit and made a public commitment to do so, it could still ultimately fail because it may not find a buyer willing to pay a high enough price.

Moreover, even after a buyer has been found and the price has been agreed, the Russian government can erect obstacles that hinder or delay the sale or ultimately prevent proceeds from being transferred abroad, the report added. Inquiries to the Russian Embassy in India and the Ministry of Commerce remained unanswered as of press time.

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