Russia’s MinFin plans tax incentive to boost domestic investment

Russia’s Ministry of Finance plans to abolish taxes on long-term investment vehicles in Russia to encourage domestic investment into funds.

At the beginning of June, the Duma approved some amendments to the Tax Code. Some of these are related to Russian government debt, or the so-called OFZ bonds, the most widely traded bond in the local market.

The new legislation stipulates that brokers and custodians no longer have to charge withholdings taxes on government bonds, which until now have stood at 15%.

This spells a significant cost cut for investors in Russian government debt, making the market more attractive to investors from both outside and inside the country.

Following the liberalisation of the local bond market, the Ministry of Finance plans to harmonise taxation across all other instruments to match the incentives created for bond investments.

Alexey Moiseev, deputy finance minister of the Russian Federation, says Russia lacks a domestic investor base. “There tends to be more issuance [of bonds] to international financial centres, and we don’t want that,” he says.

The new legislation would involve exemption from taxation for longer term investment vehicles to encourage a move away from the short-term focus of the local investor base. The aim would be to make investment easier for Russian pension funds in particular.

Alex Krunic, executive director at JP Morgan Chase, said: “The Russian stock market has so far failed to provide long term investment vehicles to domestic investors.”

“We don’t want Russia to be a speculative market. We want people to develop a longer investment horizon, rather than try and make a quick buck and get out,” he continued.

The hope is that tax incentives will encourage local investors to think longer term and shift focus away from spending their wealth or moving it to jurisdictions outside Russia, to saving for the future in local investment schemes.

A strong local investor base is just as important to a growing economy as foreign investment, market practitioners agree. This is because a local pool of money guarantees stability of the securities market.

For Russia, encouraging local investments into the economy is as important as attracting foreign money. Sergei Sinkevich, head of primary market at the Moscow Exchange Group, says Moscow does not prioritise one task over the other.

“They are parallel work streams, and one is not more important that the other,” he says. He adds there are various programmes in place which aim to simultaneously boost both types of investments.

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