Worldwide: The Role Of Offshore Jurisdictions In Russia

This paper will examine the interaction between offshore jurisdictions and Russia, with particular emphasis on the role played by the British Virgin Islands in structuring offshore transactions. This paper will look at popular narratives about offshore jurisdictions, including traditional arguments about round-tripping and corruption, before examining the legal rationale for the use of offshore structures in Russia. It will be argued that the use of offshore jurisdictions arose as a response to deficiencies in the Russian legal system, particularly in terms of Russian law as it relates to property rights, and the related problem of enforcing such rights. In contrast to these perceived deficiencies in the Russian legal framework, offshore jurisdictions provided a stable and modern legal environment, the use of which allowed Russian investors to gain access to Western common law principles of corporate governance, property rights and shareholder rights.


This article will examine the use of offshore jurisdictions in Russia, with particular emphasis on the role played by the British Virgin Islands [hereinafter BVI]. The objective of this paper is to understand the reasons behind the popularity of offshore structures in Russian commerce, and to shed some light on the legal rationale behind their use, by examining the interplay between Russian and offshore legal systems.

This is an important area for study, given the significant role that offshore jurisdictions play in Russian foreign direct investment [hereinafter FDI]. The prevalence of offshore structures in Russian FDI is well reported, and it has been observed that in 2012, 11 of the main 40 recipients of Russian FDI were offshore jurisdictions which were seen as acting as a transit platform for the movement of capital to other destinations. Of these offshore zones, three jurisdictions are the largest recipients of Russian FDI, being the BVI, the Cayman Islands and Cyprus. These three jurisdictions have played host to increasing and significant volumes of Russian financial flows, with the growth of outward FDI stocks in Cyprus growing from $206 million to nearly $4 billion in the period between 1998 and 2006, the BVI increasing from almost zero in 1990 to $123.5 billion in 2006 and the Cayman Islands increasing from almost zero to $40.4 billion in the same period.

Given the popularity of offshore finance centres, and the significant FDI flows passing through such jurisdictions, the question then arises as to why offshore structures have been used in Russia. Unfortunately, this is an area in which there is a lack of significant academic analysis and the few studies that address the topic simply focus on questions of tax avoidance, round-tripping and corruption. T he legal rationale, practical use and function of offshore structures are rarely considered. This is a significant deficiency in the existing literature on the topic as legal concerns have been a key consideration behind the use of offshore structures in Russia.

This paper will therefore attempt to redress this deficiency and cast some meaningful light on the role of offshore jurisdictions in Russia, by looking to the legal rationale for the use of offshore structures. It is only by looking at the actual use of offshore structures in practice, and the legal environment which gives rise to their use, that we can achieve an understanding of the purpose behind such structures. In order to understand the rationale behind the use of offshore structures, this paper will examine the ways in which the use of offshore jurisdictions arose as a response to certain deficiencies within the Russian legal system and the difficulties faced by Russian enterprises in accessing international finance. This paper will argue that offshore jurisdictions, such as the BVI, have been used as a platform to overcome legal inefficiencies in the Russian legal system and to manage legal risks in the face of an uncertain political and economic environment.

The rest of this paper is divided into three further sections which consider: (i) common narratives and popular misconceptions about the role of offshore jurisdictions in Russia; (ii) the historical and legal context to property rights in Russia; and (iii) the legal rationale for the use of offshore jurisdictions.

2. Common Narratives about the Role of Offshore Companies in Russia

Before looking at the legal rationale behind the use of offshore jurisdictions in Russia, it will be useful to examine the existing literature in this area in order to understand the popular narratives and misconceptions which frame analysis on this topic. This is important given that most studies in this field assume that offshore structures are either used for the round-tripping of funds or for laundering the proceeds of corruption. It is notable that the studies in this area do not address the legal rationale for the use of offshore structures. As a result, the exclusion of legal issues from this discourse creates an imbalanced and incomplete picture of this topic. Therefore, before looking at the legal context, any discussion of this topic must first consider and address these popular narratives.

2.1. Round-Tripping Claims

The most common argument made about offshore jurisdictions is that they are used to facilitate the round-tripping of funds. Round-tripping is essentially a process whereby funds are moved overseas and then re-routed into Russia through the use of offshore vehicles, which thereby mask the original source of the funds. The traditional rationale given for round-tripping is that, by disguising Russian sourced capital as 'foreign' through the use of an offshore company, the Russian investor will have access to tax or regulatory benefits that are usually reserved for foreign investors.

The round-tripping thesis is commonly held by observers of Russian FDI patterns, although the assumptions underlying this theory are often undeveloped. For instance, one study states that 'according to data from the Bank of Russia, Bermuda, the British Virgin Islands and Cyprus were the three largest sources of FDI in Russia as of 2010. This reflects the importance of round-tripping Russian investments via tax-haven destinations.' However, no source is provided for the claim that offshore FDI statistics reflect the importance of round-tripping, nor is this point elaborated further. It is simply accepted as fact. This is unfortunately a common problem in this area of study, as many observers adopt the same approach and take the round-tripping argument as orthodoxy, without support or considered analysis.

A further problem with this approach is that the round-tripping thesis may not be an appropriate tool with which to understand Russian FDI patterns. For example, the round-tripping argument is generally founded on studies concerning the People's Republic of China [hereinafter PRC] where it is commonly argued that PRC investors route funds through offshore companies in order to gain foreign investment benefits. However, Russia has not given preferential tax and regulatory treatment to foreign investors in the same way as the PRC, so some caution is required in relying upon such theories when considering the Russian investment environment. This concern has been expressed by some observers, with one paper noting that, in contrast to the investment environment in the PRC,

[Russian] state policy towards inward FDI has been less supportive or even restrictive. Moreover, in many Russian regions the regional authorities have erected barriers to foreign investors to protect incumbent firms from outside competition than provided incentives for foreign investors. Hence the financial incentives granted to foreign investors are hardly a key explanatory factor for round-tripping behaviour.

Not only is it unsuitable to apply concepts of round-tripping as they relate to the PRC to the Russian experience, but it may also be inappropriate to overstate this concept at all. For instance, the theory rests upon the assumption that the money being routed through offshore centres is Russian money being repatriated through offshore channels. However, this fails to account for the fact that other jurisdictions use the BVI to structure their financial transactions as well as to effect investment into Russia. For instance, a report by the Carnegie Moscow Centre noted that 'Chinese companies often invest abroad through the British Virgin Islands. The investment from the British Virgin Islands is quite substantial in the post Soviet space including Russia. It can be assumed that part of these investments in fact come from China.'

Additionally, it should be noted that other studies have examined the use of offshore jurisdictions (particularly in the Chinese context) and observed that round-tripping is not a significant or sole explanation for the use of offshore structures in FDI patterns. Instead, it has been observed that '[t]ax minimisation through the Caribbean offshore thus seems to be less a motivating factor than property rights, investment seeking and institutional arbitrage.' These other factors are important to bear in mind because offshore jurisdictions perform other roles than tax structuring. As Vlcek notes, '[t]he common portrayal of the [offshore jurisdiction] today as a tropical island "tax haven" fails to acknowledge that it provides other forms of regulatory arbitrage beyond taxation. It may be the home to mutual (hedge) funds, captive insurance and re-insurance firms, trust companies, and shipping registries, as well as an international business company (IBC) registry.' As a result, consideration needs to be given to other factors rather than relying upon undeveloped notions of round-tripping. It will be seen later in this paper that these same motivating factors of property rights, investment seeking and institutional arbitrage, apply equally in the Russian context.

2.2. Corruption Claims

Aside from the round-tripping argument, another common assumption that underlines many studies is that offshore structures are used in Russia for the purposes of laundering the proceeds of corruption.

A number of papers approach this topic through the lens of criminality and assume, as their starting point, that offshore companies are used by Russian investors for corrupt purposes. A good example of this perspective can be seen in a paper by Ledyaeva, Karhunen, Kosonen and Whalley, who assert that the drivers for the use of offshore jurisdictions in Russian capital outflows 'mainly include tax avoidance / evasion, laundering the proceeds of corruption and securing the secrecy of an investor's identity from Russia's corrupt and autocratic authorities.' These are strong charges, and the crucial point to note is that, after making sweeping claims as to the nature of offshore transactions, no source or authority is provided for such assertions. Instead, these claims are posited as an assumed starting point for analysis, on which the research is based, rather than a conclusion reached through neutral research and, consequently, no attempts are made to analyse and test these assumptions.

Similarly, Ledyaeva, Karhune, Kosonen and Whalley assert that given 'the persistently high-level of corruption in Russia, it is reasonable to suggest that corrupt public officials in Russia utilize round-trip schemes via offshore centres for laundering the proceeds of corruption.' Again, no specific source, authority or foundation is provided for such claims. This approach is therefore troubling, as it operates to ascribe a character of criminality to offshore jurisdictions by association rather than through fact, and is based upon supposition rather than analysis. Without hard facts, it is not 'reasonable to suggest' that offshore structures are used for the purposes of laundering the proceeds of corruption. Suggestion is not a sufficient ground on which to conduct analysis or perpetuate myths.

If serious claims are going to be made about the nature and role of offshore jurisdictions, they need to be supported by fact and reasoned analysis. The question then arises as to how, if these types of assertions are accepted, we can test and verify such claims.

One answer is to look to the courts as a source of fact. If offshore structures are used, as some authors suggest, for the purpose of laundering the proceeds of corruption, then these structures, and any claims or evidence of impropriety in respect of such structures, will ultimately come before the courts. As a result, the courts would also provide a key source of factual evidence to support such assertions. If these assertions are correct, then one would expect to see a significant number of court judgments concerning allegations of corruption and criminality.

In order to test these theories, research was conducted on all the judgments available at the Eastern Caribbean Supreme Court, where such judgments were made by the BVI courts and either concerned Russian parties or related Russian business or assets. The BVI was used as a sample jurisdiction given that it is the leading offshore jurisdiction within Russia in terms of FDI flows. In addition, the BVI has a robust legal system and a dedicated commercial court, ensuring that there would be a wide and easily available selection of judgments to review.

This research found that there were 41 relevant judgments concerning Russian parties or enterprises located in Russia. Of these judgments, there were 7 cases in which fraudulent, dishonest or unlawful conduct was alleged, amounting to 17% of all judgments. Of these 7 cases, there were no judgments in which fraudulent, dishonest or unlawful conduct was proven to the satisfaction of the court. What this research clearly shows is that corruption is not a significant issue before the courts in terms of the use of offshore structures in Russia, given that only 17% of cases alleged such issues and that in no case was any allegation of fraudulent, dishonest or unlawful conduct proven. Based on this review of BVI cases, there is simply no grounding in proven fact or law to justify the corruption allegations raised by some academics and journalists.

The question then arises as to why some authors persist in ascribing notions of criminality to offshore structures in Russia, when there is clearly a lack of analysis underlying such assumptions and an absence of factual grounds to support these assertions. It would tend to suggest that some of the existing studies and journalistic reporting on this topic are unsound. It would also suggest that many studies may be tinctured by an inherent bias on the part of the observer.

The question of bias is important, as the fact that these claims are made on the basis of assertion rather than supported fact suggests that common perceptions on the use of offshore structures in Russia is informed by value judgments. In a sense, it can be seen that many observers of Russian business operate with innate or unconscious anti-Russian bias, where it is assumed (rather than established) that Russian commercial practices must necessarily involve corruption. T his bias therefore infects popular perceptions towards the use of offshore structures in Russia as, given the lack of understanding of the legal and commercial rationale behind the use of such structures, an assumption is made that their use must simply be a product of nefarious intent.

It can be seen that this anti-Russian bias has a long history and arises frequently where Russian business practices are involved. To take one example, this bias could be seen in relation to the failed bid by the Russian company Severstal for Arcelor where The Wall Street Journal reported that there was a 'mounting frustration in Moscow at a perceived anti-Russian bias in European business' and The New York Times similarly reported that 'many Western investors still look at Russia in "comic book terms, as mysterious and mafia-run".' Given the narratives concerning the use of offshore jurisdictions in Russian FDI, it would appear that this comic book characterisation also extends into journalism and academic analysis. This frustration is shared by some contemporary observers of Russian FDI. For instance, one paper notes that there were problems with creating 'a positive and attractive image of Russian business abroad [due to] the extendedly created politicised typologies of Russian multinationals' and another paper observed that Russian investors face 'a strong degree of suspicion in most parts of Eastern Europe and in the developed world . . . [even though] Russian investors have frequently transformed bankrupt enterprises into thriving companies and are regarded as effective owners and employers.'

Aside from questions of bias, many studies also exhibit a lack of understanding as to the nature of offshore transactions. For example, many studies fail to address the legal rationale for the use of offshore jurisdictions, despite the fact that offshore structures are created in a legal context (given that offshore companies are creatures of law, created for legal purposes and governed by legal rules). This is an important consideration and, again, an examination of the BVI court judgments gives insight as to the real concerns surrounding offshore structures. An analysis of the court judgments relating to Russia reveals that, rather than criminal enterprise, the main concerns before the courts related to property rights, shareholder disputes and questions of corporate governance. The types of structures under consideration were joint ventures, holding companies and investment vehicles. In most cases, these were ordinary commercial disputes concerning normal business activities and standard types of investment structures that one would expect to see in a normal and mature legal environment.

The rest of this paper will therefore dispense with the bias and unreliability of common narratives about offshore jurisdictions and instead show how a legal analysis is essential to understanding the role that offshore structures have played, by looking at aspects of the Russian legal system that gave rise to the demand for offshore vehicles and aspects of offshore jurisdictions that made them suitable for use by Russian investors. The Paper will explore how the need for legal certainty has been a key driver of the use of offshore jurisdictions, which has been an issue of key importance given historical deficiencies and uncertainties in Russia's legal and financial infrastructure.

To view the full article please click here.

Previously published in the Russian Law Journal.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.