MOSCOW - In 1997, when most Asian countries as well as Brazil and Mexico were going through financial meltdowns, which eventually reached Russia with cataclysmic consequences in 1998, India was in island of fiscal stability. A net importer of natural resources and an exporter of agricultural produce, machined, intellectual and hand crafted products, Indian treasury struggled hard to remain solvent and keep the currency stable.

The cost to national reserves was painful and the government sought ways to beef it up. That was when one of the most successful national tax amnesties anywhere in the world was implemented by the Indian government and promoted through a media campaign that included professional advertising and promotional campaigns featuring sports and cine celebrities. The government proposed to take away 30 percent of declared incomes in exchange for amnesty from prosecution. The results were spectacular. More than 350,000 Indians availed of the amnesty. The amount collected was nearly 15 times more than had been expected. The revenue to the treasury was nearly half as much as national tax collection for a year.

Putting the cart of amnesty before the prosecutorial horse

The key to success, however, was not in marketing or sloganeering, but in credibility of tax collectors and the will of the government to prosecute tax offenders and make life miserable for them. The amnesty followed a series of raids and arrests of some of country’s most respected industrialists. Eventually, more than 350,000 people chose “100 percent peace of mind for 30 percent tax.”

Now, the Russian government has announced a tax amnesty which, if the experience of other nations is an indicator, will never fly.

Alexei Kudrin, the Russian finance minister and father of the proposed amnesty, has refused to set any targets on expected amount of capital inflow. It appears to be no more than a hastily put-together move to appease the president who called for measures to repatriate Russian capital from offshore and tax havens around the globe in his annual address to the Federal Assembly (State Duma and Federation Council) in April.

The Finance Ministry has failed to plug capital outflow from Russia. Why the government thinks tax evaders would want to bring the money back when they continue to launder it each day out of Russia without fear or hesitation defies intelligence. Kudrin has also reassured citizens and tax evaders that no Yukos-style prosecutions should be expected. In other words, Kudrin is simply depending on goodwill and sympathy of thieves to return what they have stolen while assuring them that he will resist all attempts to prosecute them. Unlike in European countries and India which have variously declared amnesties in the past three decades, the list of Russian tax offenders is no secret, and a simple threat of prosecution could have done miracles had Kudrin not decided to put the cart of amnesty before the prosecutorial horse.

Kudrin has failed in changing the manner in which Russian assets are owned, managed and bled right under his nose. Almost all the nation’s natural resources are in the hands of a very few individuals who manage them and/or own them through a web of offshore companies. Government could simply put an end to ownership of natural assets by fly-by-night companies and force the tax offenders to come out of shadows. Corporations with combined charter capital of less than $1 million probably own assets worth $100 billion in Russia. That makes it possible for Russian owners, who are controlling and managing the Russian assets through offshore companies, to pay dividends abroad. When major international corporations buy strategically important Russian assets such as oil wells or aluminum smelters, the acquisition money goes into offshore havens rather than being invested in Russia. Of one of the most celebrated investments in Russia three years ago, an Economy Ministry official told me that less than a fifth made its way to Russia. What was called the “single largest investment in Russia,” was in fact, transfer of funds by European buyers to accounts in the Caribbean Islands.

There are unlimited schemes that oligarchs continue to use to launder money overseas (not necessarily offshore), but three of them stand out: There is almost no limitation on these natural resource corporations borrowing from banks and foreign companies, which are in turn owned by the same Russian businessmen, thus skimming most of their profits as debt repayment at higher interest rates. It is, therefore, not surprising that the indebtedness of most Russian companies that should be swimming in excess cash has reached ridiculous proportions. The level of trust in Russian banks expected to hold the repatriated capital is low or non-existent, banking reform has not been carried out and it should not be expected of any sane persons to bring their life’s savings or stealing to these banks.

Then there is the export route. There was a running joke in Cyprus for many years: companies in the island Republic were importing so much steel and cement from Russia that, the joke went, it would have been possible to build an island the size of Cyprus each year in the Mediterranean. The imports were of course on paper because most steel was then exported to China or other markets, and at times, even resold to Russia itself, while profits were kept by offshore companies.

The third scheme, which has lately been employed aggressively by many Russian oligarchs, is “overseas investments.” Oligarchs transfer capital from their companies under Russian jurisdiction to other, less regulated developing countries by making what they call “strategic international acquisitions,” which in reality are, nothing more than thinly veiled export of capital into overpriced assets. The Finance Ministry has a lot to start with to curb capital export before it can effectively put measures for its repatriation.

Old proven thieves are better than new, untested ones

For the reassurance of other, not so politically charged tax offenders as those who are planning to fund a regime change or revolution in Moscow rather than repatriate their monies to support it, Kudrin has been making comforting statements in the last months that Yukos was the last prosecution and other businessmen have nothing to fear. Since the first recorded tax amnesty of 30 B.C. in Egypt, it is understood that people who can be amnestied are either those in prison or facing prison sentences in return for financial compensation and promise of good behavior. But Kudrin has already said bad behavior will not be punished because he is seemingly afraid of being labeled as authoritarian as the president in some western newspaper editorials. He has surrendered his authority for the sake of vanity and acceptance in western media and bases his amnesty plan on empathy from tax offenders and thieves. This is while other members of the Putin administration are offering gubernatorial appoints to the worst tax offenders of the country.

Take the case of Russia’s capital exporter-in-chief, Roman Abramovich, who is now the richest man in Britain. He has recently been offered an extension of his governorship of the remote Chukotka region. If stories planted in press by his own public relations managers are to be believed, Abramovich spends nearly 0,10 percent of his wealth each year on the 50,000 inhabitants of the Chukotka region. In return, he “reluctantly” enjoys privileges of a governor, an amnesty from prosecution and, not to forget, the right to sell natural resources of the region that happen to include precious gold mines. The argument of those who want him to continue as governor is that other probable candidates from among local politicians and bureaucrats would steal as much as Abramovich spends each year on the population. Russia certainly has enough regions to find a gubernatorial position for each of the major tax offenders and Kudrin’s plan could be undermined by those who think thieves should be given power, and not threatened by it. The supposition perhaps is that old proven thieves have stolen enough and can be trusted, while new unproven thieves cannot be trusted. In offering an olive branch, Kudrin and his colleagues have uprooted the whole olive tree while other are cleaning the forest to appease tax offenders.

As worst offenders await their appointments to governorships, just who Kudrin has in mind as availing this amnesty is not clear, because in reality, it only leaves middle-class Russians sweating it out to make a living as legal or illegal migrant workers, working off their professional skills unwanted in Russia. Or perhaps, it could be Russian prostitutes working on the Turkish coast.

Even Kudrin does not have confidence in the Russian economy

The amnesty comes at an awkward moment. Kudrin has recently announced his intention to invest savings in the Stabilization Fund, now brimming at nearly $25 billion from oil taxes, into blue-chip securities on the western capital markets. This is not exactly a seal of confidence in the Russian market from the finance minister, who does not wish to invest Russian government’s own money in Russia. After goofing up on the subsidy monetization, he and his fellow “liberal” Cabinet member in charge of economy, German Gref, have resisted all calls to invest any parts of the Stabilization Fund in the country. They are asking those with internationally invested capital to have the faith they find unable to muster themselves. Russian investors know these companies too well to invest in them, after all, they own and manage them.

Much of Russian capital overseas is still hidden under multi-layer wraps of fiduciary, trust and nominee accounts gathering dust in secret accounts across the globe. Only some of Russian capital overseas is under professional management and seeks competitive returns. It changes jurisdiction either because of fear or for compelling opportunity. Kudrin is not about to get any cooperation from his counterparts in G8 to track, far less prosecute Russian nationals in their respective countries where they are usually welcomed as saviors of stagnant local economies.

A better approach

Kudrin could have done better by creating compelling investment opportunities and sweetened the deal with an amnesty. It is about time he created a number of investment funds for attracting investment into land, agriculture, creation of new industry and home enterprise. The focus of these investments must be the creation and support of small-and medium-sized companies. The Russian government must display faith in Russian entrepreneurs and Russian opportunities by allocating no less than $50 billion over the next five years to these objectives A sizeable commitment of this scale alone would unlock the Russian opportunity and bring substantial investor capital to accompany government commitment. An amnesty could be an important element in that approach.

For nearly a decade, foreign businesses have been drawn to Russia because of its geopolitical, historic and intellectual strengths. They have been driven back by the corrupt bureaucracy and strong-arm tactics of a handful of Russian business tycoons that work in cahoots with equally corrupt politicians. More than an amnesty, investors — foreign and Russians alike — need protection from corrupt bureaucrats and industrial-banking rackets run by oligarchs.

Kudrin must turn his attention to fiscal policing of national civil services to curb corruption and work closely with prosecutors to weaken the oligarchy. Only then can he build confidence in the government and system, in its fairness and strength, to create opportunity and defend investors and entrepreneurs from rogues. The hoarders of capital can only be drawn by an opportunity that no investor would want to miss.

After all, who is afraid of Alexei Kudrin?