When Russian troops on their way to invade Chechnya were shot in the back by Chechen sympathizers in the neighboring republic of Ingushetia, Moscow newspapers observed wryly that the battles were technically not in Russia but in an "off-shore" zone.


This is no joke. Since June, Moscow has designated Ingushetia, a smallish region in the Caucasus which is part of the Russian Federation, as a "zone of economic preference."


In many ways, Ingushetia acts as an offshore free-trade zone, like the Channel Islands off Britain or Bermuda off the United States. Russian companies registered in Ingushetia receive extraordinary tax concessions. Value-added tax is halved, profit tax is cut by a third and almost all other budget taxes are waived completely.


You may well wonder why the government would choose Ingushetia -- wracked by an ethnic war in 1992 and in a state of emergency ever since -- as the site for Russia's version of Monaco or Liechtenstein.


When I visited Ingushetia in 1992, it did not have the luxury hotels or discreet lawyers usually associated with international tax havens. From shots of refugees on television, I guess they are in even shorter supply today.


The creation of Ingushetia as a tax haven was in fact a sort of non-budgetary slush fund. It was a typically Russian way of winning a few key friends in Ingushetia who would stay loyal to Russia.


Officially, the tax breaks are supposed to attract foreign and Russian investment and develop a free-market infrastructure in the region. But the way the project operates leaves many questions unanswered.


The republic of Ingushetia delegated responsibility for running the scheme to the privately owned Bank for Investment and Innovation, or BIN, which has set about marketing the tax haven in Russia.


It has run a series of surreal television commercials in which high-powered executives with crisp collars listen approvingly to a presentation of the economic benefits of operating out of Ingushetia.


Most of the executives would be happy to hear that in order to be part of the scheme, they do not actually need to go to Ingushetia. BIN's offices and bank account are all in Moscow. In fact, the whole idea that any money will actually end up invested in Ingushetia is a hoax.


As an intermediary, BIN earns a considerable amount out of the whole exercise, and it would indeed be interesting to know who the shareholders of this otherwise unknown company are. Perhaps some of the money then filters down to government bodies in Ingushetia.


In the week before the invasion of Chechnya, Moscow signed a second decree giving Ingushetia an even more preferential status. Ingush-registered companies now pay only a 10 percent profit tax and are freed of all other taxes. All you have to pay is a registration fee of about $5,000 for foreign-owned companies and $4,000 for Russian companies.


The daily newspaper Segodnya simply interpreted the decision to increase the scope of the Ingush tax haven as "a trade-off in exchange for the loyalty of Ruslan Aushev (Ingushetia's president)" as Russian troops crossed his fiefdom.


Either the bribe was insufficient or Aushev could not keep his part of the deal, because Russian troops have encountered ugly resistance in the region.


The most perplexing question is why the Russian government used the bizarre mechanism of a tax haven as a way of promoting its Caucasus policy. After all, the whole point of invading Chechnya was to ensure that it remained under the same laws as the rest of Russia.


If you actually wanted to set up a tax haven, you could choose other more suitable regions like Sheremetyevo Airport, Kaliningrad or Nakhodka in the Far East, which could turn into mini free-trade zones like Shenzhen in China.


But if the only goal was to bribe a few local politicians or to help develop an impoverished region, why not just give them money direct?


The answer is probably that Russian bureaucrats have always loved to operate by handing out special dispensations. Russian even has a special word (l'got) for just this practice. The bureaucrats can pretend to obey the laws but their influence rests on their power to break them and selectively administer them.


The other attraction of creating a tax haven, rather than a common or garden slush fund, was that a tax haven sounds economically enlightened. Of course, no one will ever be able to audit how much it costs in reduced tax collections.


Anyway, in case you are a Western company director looking for an exciting, commercial hub for your international or CIS operations you should consider the Ingush option quickly. The decree creating the Ingush tax haven sets a limit of 15,000 companies which can claim tax privileges from the scheme and by the end of October, some 3,000 had already registered.





Geoff Winestock is a Moscow-based correspondent for the Journal of Commerce.