
In the wake of 2015’s November G-20 summit, Russian President Vladimir Putin proudly touted that roughly 90 percent of investments into the Russian market came from Asia. World Bank figures put Russia’s 2015 FDI at $6.48 billion against $69.22 billion in 2013, but at least Russia had a statistic to highlight its stated pivot to Asia. Still, advisers might have been tempted to remind Putin that not all that glitters is gold, particularly when it smells terrible.

While China and Asian partners may have given Russia a statistical out in 2015 to claim victory, 2016 showed that there is some truth to the shifting contours of Russia’s sources of FDI due to financial sanctions and its political standoff with the West. In late May, figures run by Interfax showed that firms registered as residents of Singapore accounted for nearly half of Russia’s FDI in 2016. $16.3 billion flowed into Russia from the city-state out of a total of $33 billion, an increase 88 times over from 2015’s figures. The increase isn’t necessarily cause for complete celebration, however; everything is not what it appears to be at first glance.

Diving Deeper Into Russia-Singapore Investment Ties

At a trade promotion expo last November, Russian Deputy Prime Minister Igor Shuvalov stated that 650 Russian companies were operating in Singapore. That should be good news. Singapore is the second best place globally for doing business, according to the World Bank, and, more importantly, the best at protecting minority investors. Russia has dropped to 40th place since 2014, only performing among international leaders in registering property and enforcing contracts, both of interest to oligarchs’ property rights and ability to exploit Russia’s constantly shifting legislative environment.

Last year’s high investment figures may have been buoyed by a visit from Prime Minister Lee Hsien Loong to Sochi in May. He played up the long-term value of a Singaporean business presence in Russia despite sanctions and difficult economic conditions. But Singapore’s companies have not dived into the Russian market despite political rhetoric and political will to conclude a free trade agreement next year.

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In truth, Singapore is not a significant source of genuine FDI. It’s a conduit for “roundtrip investment,” the reinvestment of Russian firms’ or investors’ money into Russia from another country either for tax purposes or else to funnel money into an entity outside the country. Otherwise it serves as a sort of financial middleman.

Last December’s deft Rosneft privatization with partners Glencore and the Qatar Investment Authority (QIA) accounts for about $11.3 billion of the $16.3 billion through a Singapore-registered joint venture. The deal — so confusing as to resemble Dadaist corporate witchcraft — came together in the fourth quarter of 2016 along with 93 percent of all the FDI from Singapore. Fourth quarters generally produce a flurry of deals. Businesses clamor to show investors progress going into the new year, rush to spend capital already outlaid, or else finalize moves made earlier. For Russia, that tendency is amplified by the fact that more of Russia’s budget is parceled out late in the year, budgets dictate a huge portion of orders and spending for the 70 percent of the economy the state owns, and last year’s budget holes had to be plugged with the sale of state-owned assets.

Aside from the Rosneft-Glencore-QIA deal, an Indian consortium led by ONGC Videsh purchased 23.9 percent of the Vankor oil field from Rosneft for about $2 billion last October. ONGC Videsh set up a subsidiary office in Singapore specifically for the initial stake of the Vankor field it purchased in 2015. That brings the FDI total to $13.3 billion of $16.3 billion, all in the fourth quarter of 2016.


Digging up other possible investments gets trickier without good access to documentation and the often obscure, peripheral investment deals that likely make up most of the remainder. Trade between Russia and Singapore has grown, but remains dominated by Russian energy exports to Singapore with very small import totals back by comparison. The fact that 81.5 percent of all of Singapore’s FDI into Russia last year can be attributed to two energy deals speaks volumes.

It’s clear that most investments into Russia through the city-state originate elsewhere, fitting since Russia’s second-largest source of FDI last year was the Bahamas ($5.8 billion) followed by the Bermuda Islands ($2.4 billion). Along with the middleman deals based in Singapore, that accounts for $24.5 billion of last year’s $33 billion total FDI — meaning nearly three-quarters of all FDI came from offshore havens, two in which it is possible to assume that virtually all investments originate elsewhere. It should also be noted that figures from Russia’s Central Bank don’t include Singapore at all for 2016 and show $6.4 billion in FDI from Cyprus. Clearly there’s a messaging issue at play as different groups within Russia push different figures.

Russia’s investment flows appear to be pivoting to Asia insofar as firms registering as residents in Asia are conduits for investment. The figures conceal that business partnerships are diversifying quite slowly and that large energy deals still drive the agenda. Underreported changes in the investment relations between Russia, Singapore, and Asia’s other main offshore – Hong Kong – suggest that Russia’s businessmen are looking for new offshores through which to invest. They’re using offshores as an intermediary for energy deals and struggling to import practices from elsewhere such as Cyprus due to the general incoherence of Russian policy.

The Lure of Offshoring in Asia

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Last November, an existing double-taxation treaty between Russia and Singapore was amended to lower thresholds for tax rates, dividends, and royalties. In other words, it got easier for Russian oligarchs or firms to register companies in Singapore and avoid paying taxes in Russia on income theoretically earned in Singapore. Singapore’s corporate tax rate is lower, 17 percent, than Russia’s, at 20 percent. Much more importantly, Singapore is not as subject to the bureaucratic corruption and the drama that attends most of the Russian business world so long as the profits recorded take place from transactions of some kind in Singapore proper. Despite the agreement, the treaty does nothing to alleviate Singaporean firms’ concerns about the Russian market or costs imposed by poor governance.

Hong Kong signed a double-taxation treaty with Russia last year, which went into effect on April 1. Though it does not yet apply to dividends, it simplified the process of registering for tax residency. Russia and Hong Kong agreed to liberalize air travel a few weeks ago, a crucial step in making the offshore haven more accessible to Russian businessmen and FSB associates or officers in the business world. Hong Kong has yet to account for much FDI, but the Indian firm KGK, which is investing $500 million into a Vladivostok diamond factory, is headquartered there.

Russian development bank VEB opened an office in Hong Kong in 2014. VEB owns 100 percent of the Russian Direct Investment Fund, a vehicle to bring in foreign capital to invest into Russia. A risky loan portfolio and poor management plague the bank. Meanwhile, China’s FDI into Russia last year was an unimpressive $350 million, ignoring financing deals for energy projects. The treaty with Hong Kong may make the offshore haven the preferred route for future Chinese FDI. However, it’s likelier that Russian oligarchs will be courting VEB’s money and investing into their own country.

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Russia has been an odd exemplar of roundtrip investment because, unlike China, it offered little in the way of incentives for foreign firms to invest. In recent years, the legal environment has shifted such that regional governments can cut taxes on corporate profits and tax exemptions are offered for foreign investors in Special Economic Zones (SEZ), free ports, or industrial parks of different kinds. These incentives are not helpful for investors with little knowledge of the Russian market and little institutional capacity to deal with its malleable relationship with the law.

For example, Russian firms can now prosecute foreign entities for bribery offenses committed outside the Russian Federation “against the interests of the Russian Federation,” a considerable political risk in sensitive industries. There is now no legal exemption from liability if a Russian firm’s employee is caught taking bribes, likely part of why the total value of bribes grew 75 percent between 2015 and 2016 since law enforcement had more leeway to extort.

Russia’s attempts to prevent capital flight and corruption also threaten the value of its double-taxation treaties with Singapore and Hong Kong. New requirements that businesses disclose their beneficial owners — crucial so that foreign investors know who they’re working with — are connected to attempts to stop Russian money from going offshore in the first place.


Recently, a Russian court ruled that a company registered abroad acting as a conduit for income rather than its final recipient would not benefit from the double-taxation treaties Russia has pursued in Asia, an arrangement mirroring that with Cyprus. Attempts to strengthen anti-corruption laws often end up strengthening corruption indirectly by giving enforcers more discretion. Oligarchs are therefore left with one key asset over genuine foreign investors: local knowledge.

Historically, Russia’s corruption has encouraged roundtrip investment while discouraging genuine foreign investment. Only players with local knowledge can navigate or else benefit from corrupt practices. Any tax break or incentive given to foreign investors ends up benefiting oligarchs who can offshore their investment vehicles and save tax money while acquiring assets in Russia. Foreign businesses may move into the market, but tend to be exceedingly cautious without local contacts.

The Far East and Russia’s Foreign Investment Woes

The Far East exemplifies the problem. In the free port of Vladivostok and associated SEZs and industrial parks, investors may pay zero percent tax on profits the first five years and see reductions in their regional taxes and social obligations for longer. Russia’s definition of residency for these zones is such that the business has to have been formed in Russia, not elsewhere. Further, the central administrative office has to be on the territory delineated by the zone even though the commercial projects these firms may be developing often lie elsewhere. Chinese firms have begun entering the Free Port of Vladivostok and firms from India and Vietnam have either committed some money or expressed interest. Visa-free regimes to visit Vladivostok will help the ease of drawing in investors but red flags remain.

The Ministry of Economic Development predicts that the Far East will attract 4 trillion rubles ($67 billion) in investment this year, but it’s only oligarchs’ offshore money that can make that a reality. The Rosneft deal in December has done little to encourage investment, conditions for small businesses remain terrible, and there remains a startling lack of capital in the country, helped by the fact that so much money boomerangs back in from abroad. Federal officials caught up in the networks of corruption defend their own interests instead of creating a stable legal environment, making it exceedingly difficult for foreign firms to enter the Russian market. That spills over into FDI in Russia’s Asia-facing regions.

TASS reported Russian FDI for 2016 at $19 billion, not the $33 billion claimed by other sources, such as Interfax. Definitions within Russia conflict and different organizations fight over sourcing Russian investments to present different narratives. It’s widely acknowledged that attempts to bring Russian oligarchs’ money back into the country will result in a mix of stashing money abroad and reinvestment back into Russia through offshores like Singapore and Hong Kong. Russia may be improving its ties with Asia’s financial offshores, but they’re likelier a way for Russia’s megawealthy to funnel money back into the country with tax breaks as the Far East’s development proceeds.

Russia’s attempts to spur FDI are spurring the reinvestment of its own wealth as oligarchs try to find ways to avoid stricter controls on the outflow of money. It’ll be a long time before the businessmen of Singapore and Hong Kong figure out how to take a cut. Putin may have started touting those statistics a bit too soon.

Nicholas Trickett currently works at a think tank in Washington D.C. He is finishing an M.A. in Eurasian studies through the European University at St. Petersburg with a focus on energy security and Russian foreign policy.