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Putin targets offshore firms to help slumping economy

Putin targets offshore firms to help slumping economy

Moscow (AFP) - President Vladimir Putin on Thursday proposed forcing offshore companies owned by Russians to pay taxes into the national budget as the Kremlin faces up to the potential consequences of the country's economic slump.

In his annual state of the nation address, Putin departed from the usual rhetoric of blaming outside cyclical factors for Russia's slowdown which the government predicts will result in growth of just 1.4 percent this year.

He admitted Russia, still dangerously reliant on energy exports, had only itself to blame for the slump, saying the country had to find "new factors" to dynamise its sluggish growth.

With the budget now in need of new sources of income, Putin proposed that Russian offshore companies should be obliged to pay taxes into the treasury at home.

Putin complained that according to experts' estimates last year $111 billion in Russian goods -- one fifth of its exports -- and half of the country's $50 billion of investment abroad had gone through offshores.

He said that in the future, companies with Russian owners but registered abroad would have to pay taxes into the Russian budget and the government would have to create a system to implement this.

"You want to have an offshore, you are welcome. But pay the money here," Putin warned. Russian companies are notorious for their practice of registering abroad and using tax havens like Cyprus to avoid taxes at home.

Finance Minister Anton Siluanov said that the initiative could bring "tens of billions of rubles" in extra income for the Russian budget. Thirty billion rubles is around $1.0 billion. He said the ministry would in early 2014 introduce new legislation on offshores into parliament.

Tycoon Mikhail Prokhorov, a former presidential candidate and owner of the Brooklyn Nets basketball franchise, hailed Putin's move.

"Here the Kremlin has caught onto a global trend -- states are gradually returning capital into the national economies," he wrote on his blog.

However former finance minister Alexei Kudrin warned on Twitter that the measures would not help reduce Russia's chronic capital flight.

Putin acidly noted that state oil major Rosneft's historic acquisition this year of TNK-BP, for which it paid some $45 billion in cash, was the result of transactions made outside Russian jurisdiction.

Rosneft chief executive Igor Sechin, one of Putin's most trusted confidants, however played down the implications of the announcement for his company.

"Some transactions are made through offshores on the insistence of partners. There is no economic logic for us to work through offshores," he said.

Analysts have said that Putin's failure to conduct reforms during his decade-long dominance of Russia has left the economy facing low growth in the next few years as it remains reliant on energy exports.

With the economic data now too bleak to ignore, Putin admitted at his speech in the glittering St George Hall of the Kremlin that Russia only had itself to blame for its woes.

"Yes, of course, we are experiencing the consequences of the economic crisis. But we need to say frankly that the main causes for the slowdown in growth are not of external but internal character."

"On a key indicator like labour productivity, we lag behind leading countries by two or three times. We need to overcome this gap," Putin said.

"We need to activate new factors of development," he said.

Prime Minister Dmitry Medvedev said afterwards that there had been a worsening in all Russia's economic indicators in the first nine months of this year and "industrial production had basically frozen".

Putin meanwhile said that Russia's biggest priority for the years ahead had to be boosting its Siberia and Far East regions, which are hugely rich in natural resources but behind western Russia in development.

"The rise of Siberia and the Far East is our national priority for all of the 21st century," said Putin.