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The Effect Of The Russian Crusade Against Inflation
This article was first published in The Moscow Times, 11 December 2012
The cost of borrowing for business in Russia has increased over the last 2 years and has now reached post-crisis records. The Russian Authorities, through the Central Bank, have demonstrated their determination to suppress inflation and tighten the money supply for Russian banks and the economy as a whole. Taxand Russia investigates how thin capitalisation rules create an obstacle for Russian companies to flourish from foreign investment.
Russian banks and companies have to pay high interest on any borrowings, which is then passed on to consumers in the form of high interest rates for mortgages and consumer credit. This sharply contrasts with the cheap liquidity and cash at rates close to 0% flooding the money markets of developed countries such as the United States, Japan and Europe.
Russia is still perceived as a risky country to do business in. Western banks and other financial institutions willing to lend money to Russian companies make lending conditional upon receiving a guarantee from a non-Russian entity affiliated with a Russian borrower.
According to the Russian Tax Code, loans, credit facilities and other debt obligations of Russian taxpayers to any company may be subject to the Russian thin capitalisation rules, provided that the debt obligation is guaranteed or secured by a foreign shareholder that holds more than 20% of the issued capital. For this reason, even credit received by a Russian company from a Russian bank may be subject to the thin capitalisation rules if it is secured by a foreign parent company or a Russian company affiliated with a foreign parent company. Simiarly the Russian court has ruled that domestic thin capitalisation rules can not be overturned by the non-discrimination clauses of a double tax treaty.
The Russian Tax Authorities and Courts have restricted the ability of Russian borrowers to attract capital and funds at comfortable interest rates from the western money markets which are flooded with cheap liquidity. In doing so, they have joined other branches of governmental authorities in restricting the growth of inflation and/or the outflow of capital from Russia, which may not attract inbound investors.