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From the Managing Director's desk

Putin and the international exchange of tax information


22/04/2015

A nemzetközi adóinformáció-csere egyezmények lehetséges hatásaiPutin won, Putin wins, Putin will win?...

Time Magazine, one of the world’s most prestigious publications, has chosen the year’s most influential person. To be precise, he was not chosen, but voted for. The result proved rather interesting, with Russian president Vladimir Putin coming out on top, even though there were no other politicians in the top 10. President Obama could only manage 11th. And in all this on the basis of a vote in which 58% of the voters live in the USA, and another 5% in Canada. This means that some two thirds of the voters were North American.

Putin and his team are often accused in the western press of manipulating results, in both local and international events. It is very difficult to imagine quite how they could have manipulated or bought this result, though. The outcome, however, was undoubtedly rather disappointing for Obama, who, after all, was „playing on home soil”. This is a particularly large slap in the face for the American president in the light of the tenseness of the current situation in east-west, US-Russian relations. Nor can he hold out too much hope of securing votes by horse riding bareback, being photographed while fishing half naked, or throwing an opponent to the ground on the judo tatami like Putin. Obama has probably missed that boat, and there is unlikely to be another one in his time...

But what does this have to do with the international agreements on the exchange of information?

More than you might think.

The process will certainly have winners and losers. The USA undoubtedly wants to be one of the winners. This is all too clear from their current behaviour. At the same time, the USA wants to enter into agreements with the rest of the world whereby the United States receives information, but doesn’t give out information. Naturally, they are able to justify this very completely, but the formal explanations bore scant resemblance to the truth. The essence is that if the Americans were able to succeed in forcing the international community to accept this version, then capital would undoubtedly flow their way. In this scenario, every country in the world would be forced to provide the details of accounts being held within their shores, while the USA, thank you very much, just sits on the information. Naturally, capital would begin to flow in the direction of the American banks and brokerage companies.

This, however, would totally disrupt the system internationally. Other financial centres such as London, Frankfurt or Tokyo would be totally justified in demanding a similar „privelege”. The English in particular, on the basis of the „special relationship” would be outraged. The banks and financial institutions in the City react strongly to the slightest loss, and the pumping out of capital by the USA would have a particularly sensitive effect here. If the same privelege is granted to the English, then the Germans will not just sit back quietly and accept the situation for long. And so on and so on, and the avalanche begins...

On the other hand, if the USA enters into so-called reciprocal agreements, then they would basically be playing by the same rules as everyone else. They would give and receive information. This, however, would mean a virtual blanket bombing of the American financial system. If they give out information, then several trillion dollars of foreign capital, which currently enriches the American financial sector, would probably be withdrawn from the New York Stock Exchange very quickly indeed. Not to mention the foreign money accumulating in the American banks. Certainly not a small amount!

If the USA chooses to go down this path, then they will certainly lose, in fact, they are likely to be the biggest loser in the process.

So who will be the big winner?

Vladimir Vladimirovich Putin.

The Russian president, who in this case won’t even have to lift a finger and will see the Russian coffers bulging to breaking point, while losing nothing.

What is the reasoning behind this?

The amount of foreign deposits held in Russia is basically negligible. The banks are not full of offshore money syphoned out of the west, and the foreign investment companies and funds active on the stock exchange are primarily backed by Russians who are merely reinvesting through foreign structures the money which they managed to sneak in to offshore accounts earlier.

According to official estimates, the amount of corruption money in Russia is somewhere in the region of 400 billion dollars per year. The amount of capital flowing out of the country legally each year is between 50 and 100 billion dollars. If we say that on average over the last 25 years 100 billion dollars has left Russia each year, then we are still talking about approximately 2.5 trillion dollars. All that money has been deposited somewhere around the world, with the ultimate beneficial owners as Russian individuals.

If Russia is included in the exchange of information process, then the Russian authorities, without having to work particularly hard for it, are going to find themselves with information on which Russian citizens have accounts abroad, and how much is in them. From here, it is only a small step to „request” that they repatriate the money and pay tax on it. Assuming, that is, that they only decide to tax such funds. One thing is certain, and that is that the Russian budget is going to be bolstered, legally, by funds on a scale never seen before, which will boost the economy to new highs.

And it is this which will cause problems for the west, and in particular the USA.

In my opinion there is no chance that they would like to hand such an opportunity to their age-old foe, the Russians. In a world where wars are fought over the distribution of much smaller amounts, and given the tenseness of the current  situation, would they really want to see Russia become so much stronger financially almost overnight? While at the same time, the USA itself is losing out on account of a detrimental international agreement, which they themselves, in their all too often arrogant style, are responsible for.

I am not at all convinced that the western politicians have thought this through to its conclusion. This, however, should not surprise us, as today’s politicians are not exactly famous for their ability to look to the future.


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