By James Carden, The American Conservative, 8/15/24

As the Kursk offensive heads into its second week, Ukrainian forces now claim to control nearly 30 Russian villages comprising 1,000 square miles of Russian territory. In a meeting with security advisers at his residence in Novo-Ogaryovo on Monday, Russian President Vladimir Putin directed his ire at Ukraine’s sponsors, claiming, “The West is fighting us with the hands of the Ukrainians.” The Kursk offensive marks a significant escalation in the two-and-a-half-year-long conflict. 

So, what are some of the broader implications of the Kursk offensive? 

A few observations:

1. The Kursk offensive highlights, among other things, the inherent risk of what I would call “non-allied allyship.” Washington has no treaty of alliance with Ukraine, yet the Biden administration persists in acting as though Ukraine is not just a treaty ally—it acts as though Ukraine’s survival in the form it took for three short decades (1992–2022) is essential to the national security of the United States. Washington’s granting of non-allied allyship to Ukraine has led Kiev to act in ways that are detrimental to its own survival—including through Kiev’s refusal to implement agreed-upon provisions of the Minsk Accords, which, if implemented, would probably have demonstrated to the Russians that waging a war of choice was unnecessary.
2. The Kursk offensive also shows, once again, that the idea that “if the Russians are not stopped in Ukraine they will go on to conquer Eastern Europe” is patently absurd. Russia could not conquer Kiev in 2022 and has been fighting a costly war of attrition even since. 
3. Russia remains, however, the world’s leading tactical nuclear power, and as such Ukraine’s raid on Kursk puts it and its military and financial backers, including the US and NATO member states, at risk for retaliation.
4. Despite the success of the incursion and the loss of prestige suffered by Russia, it is important to remember that, on balance, Ukraine is losing the war. According to a new report in the Financial Times, “The amount of territory captured by Russian troops since early May is nearly double that which Ukraine’s military won back at heavy cost in terms of lives and military materiel with its summer offensive a year ago.”
5. The decision by President Volodomyr Zelensky to bring the war to Russia—while no doubt viscerally satisfying to Ukraine and its many supporters here in Washington—will also demonstrate to Moscow that it has no one with whom to negotiate in Kiev and that the decapitation of the Ukrainian military and political leadership is a necessary precondition to achieving their ultimate war aim, namely, Ukrainian neutrality. Kursk is surely a morale boost to Ukraine and an embarrassment for Russia. It will also likely prolong the war. 
6. The incursion into Russia shows once again that President Joe Biden and his national security adviser Jake Sullivan, far from being too cautious—as a number of high profile neocons have alleged— are, instead, facilitating Kiev’s journey up the escalatory ladder. It is a journey to an unknown destination. 
7. Ukraine would not have been able to pull the offensive off without the approval and material support from Washington. As such, the U.S. and Europe are seen as complicit in this highly symbolic attack on Kursk, which is, after all, the site of the largest tank battle in history. The 1943 battle against the Nazis cost the Russians an estimated 800,000 casualties. The conclusion now being drawn in Moscow as they once again face German tanks on their territory is not difficult to surmise. 

In the end, the administration has not been honest about what is actually at stake in Ukraine. Now would be an opportune time for the president or the current vice president to articulate, and without recourse to received ideas such as those about defending “democracy,” why Ukraine’s membership in NATO and the matter of who governs a handful of Eastern Ukrainian provinces is worth risking a war with Russia. If Joe Biden and Kamala Harris do believe it is, they ought to explain why—perhaps during prime time at next week’s Democratic National Convention in Chicago.

YouTube link here.

YouTube link here.

The Bell, 7/26/24

The Kremlin wants to make it easier to seize Western assets

Russia is currently discussing a legal mechanism to seize funds from frozen accounts belonging to foreigners. Officials calculate that even the existence of such a mechanism should reduce the possibility of Russian assets being confiscated in the West. In a worst case scenario, it will allow Russia to fight a new battle of the “confiscation war” in which Russia and the West seek to inflict tit-for-tat economic harm on one another.

• A source told Interfax about the government’s plans earlier this month. And two sources confirmed to The Bell that the authorities are, indeed, drawing up a document that permits the seizure of foreign-owned funds in frozen accounts. It would be used in response to any attempt to seize Central Bank assets abroad.
• The accounts officials have in mind are so-called Type C accounts. These are escrow accounts that appeared in 2022 on the orders of Russian President Vladimir Putinin in response to the blocking of Russian assets abroad at the start of the full-scale invasion of Ukraine. Back then, assets of Russian investors held in accounts at Russia’s National Settlement Depository (NSD) in Europe, and Central Bank assets in Western countries, were frozen. In response, Russia stopped foreign investors from withdrawing funds with the introduction of these Type C accounts. 
• These accounts are credited with interest and dividends paid out by Russian securities. But this money cannot be transferred out of Russia without the express permission of a government commission. In the meantime, it can only be used to purchase Russian government bonds, or pay taxes.
• Type C accounts are an important part of the system of capital controls created in 2022 in response to Western sanctions and the seizure of Central Bank assets. Put simply, it was foreign investors who paid the price for the freezing of Russian assets. The Kremlin clearly hopes – at some point – to be able to exchange the funds held in Type C accounts for frozen Russian assets in the West.
• Last year, Vladimir Chistyukhin, deputy chairman of Russia’s Central Bank, referred to Type C accounts as an “exchange fund,” and called for Russia to accumulate more of them. The term “exchange fund” is normally applied to prisoners or detained spies, who can be traded for Russians held in Western jails.
• Amid discussions in the West about the possible seizure of frozen Russian assets, Putin signed decree № 442 in May. This established a special compensation process for losses sustained by Russia, or the Russian Central Bank, as a result of U.S. actions. The decree enables Russian courts to mandate compensation via U.S.-owned securities in Russia, property rights and shares in Russian companies.
• However, the document currently under discussion will simplify the process of seizing foreign-held assets. Likely, the process would resemble assets forfeiture. Claims will be filed by the Central Bank, or the Federal Property, and the government’s Commission on Monitoring Foreign Investments would be tasked with determining the assets for an immediate  seizure.
• In total, there are about 1 trillion rubles ($12 billion) frozen in Type C accounts. This is far less than the equivalent amount of Russian funds frozen in the west (about $300 billion), but twice as much as the Russian money frozen in the U.S. ($5 billion).
• Washington is the most prominent advocate of seizing Russian assets and transferring them to Ukraine, insisting that such a course of action would be legal. But, so far, Europe has refused to do this. Instead, the U.S. has organized its own scheme: Russian assets are not confiscated, but interest earned from them is transferred to Ukraine via debt. Russia, unsurprisingly, claims this is illegal. However, it is unclear whether the Kremlin regards it as de facto confiscation.

Why the world should care

Even if the mechanism currently under discussion is never used, officials hope its existence might reduce the likelihood of Russian assets being seized in the West (perhaps by encouraging Western companies with assets stuck in Russia to lobby against any such confiscations). If it is used, however, it would be an escalatory step. It would not so much damage Russia’s investment image (which can’t get much worse) as reduce the chances of Russian owners of frozen assets in the West ever getting their money back.

By Krishen Mehta, ACURA, 7/9/24

As of this writing, the US has placed sanctions on over 30 countries, close to one-third of the world’s population. When the pandemic started, the US vetoed the $ 5 Billion emergency loan that Iran had requested from the IMF to buy equipment and vaccines from the foreign market. The Caesar sanctions against Syria, put in place in 2020, have caused a tremendous humanitarian crisis, with 80% of the population having fallen below the poverty line. Studies show that the sanctions on Iraq in the 1990’s caused the death of almost half a million children. The US has repeatedly sanctioned Venezuela’s food distribution program, CLAP, in an effort to bring about the overthrow of the Government of Nicolas Maduro.

Assets being frozen is another extension of Western sanctions. In 2021, about $ 9 Billion of reserves held by Afghanistan in banks across the US and Europe were frozen when the Afghan government fell to the Taliban that year. Since the Revolution in 1979, Iranian assets blocked by the West and which remain in Western financial institutions are estimated at about $ 100 Billion. Venezuela’s gold remains frozen in the Bank of England in spite of repeated appeals by the Government of Nicolas Maduro to have the gold returned. And more recently, Russia’s sovereign wealth of about $ 300 Billion has been frozen by the collective West.

Due to these sanctions, almost one-third of the World’s population has been unable to access medicines that are essential to their survival. Article 25 of the Universal Declaration of Human Rights specifies that “everyone has a right to a standard of living adequate for health and well-being” which explicitly includes medical care even in times of conflict. Both international law and the ethical principle of justice require guaranteed access to healthcare, regardless of the person’s nationality or citizenship.

Why Tax Avoidance by Western Multinational Companies (MNCs) is another form of Sanctions

A subject that is not sufficiently discussed or debated is the issue of tax avoidance by Western MNCs which itself acts as a form of sanctions on the developing countries or the Global South. A recent report published by the European Union, The Global Tax Evasion Report 2024, provides an insight into the problem.

(https://www.taxobservatory.eu/www-site/uploads/2023/10/global_tax_evasion_report_24.pdf)

The report states that close to 35% of all profits booked by Western MNCs annually are shifted to tax havens. According to the report, the profit that was shifted to tax havens in 2022 alone was close to $ 1 trillion, and US multinationals were responsible for about 40% of that. That means that US MNCs very likely paid little or no taxes on close to $ 400 Billion of profits in 2022 alone. And this is a practice that has been going on for decades.

According to the IMF, the implications of this profit shifting by Western MNCs to the developing countries is profound and deeply disturbing. The Fund estimates that the tax losses to the developing countries as a result of this profit shifting by Western MNCs is at least $ 200 Billion a year. Page 21 of the report estimates the tax losses for both developing countries and developed countries as a result of this profit shifting. Since this study was done some years back, the actual tax losses that developing countries suffer annually could be even higher than the $ 200 Billion referred to in the report.

(https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Base-Erosion-Profit-Shifting-and-Developing-Countries-42973)

If we consider that taxes are an investment in a country’s future, whether it be for education, environment, health care, and other critical needs, this also means that the developing countries are losing at least $ 200 Billion of investment annually – revenue that rightfully belongs to them. Instead, these funds are routed or transferred to Western MNCs and through them to the collective West. If the IMF estimates of annual tax losses are correct then it also means that over a ten-year period developing countries have lost tax revenue of over $ 2 trillion over the last decade. If this is not another form of extractive colonialism, then what is?

From the perspective of the  developing countries, one could argue that the global tax architecture is rigged in favor of the  West to shift or  expropriate tax revenues that rightfully belong to them. The current international tax system was created almost a century ago by the League of Nations. At that time much of the Global South was still under colonial rule and had little or no say in the design of the system. This system was further codified by the post-Bretton Woods institutions that came into place after the Second World War and it continues to this day. The net result is that it deprives the developing countries of investments that are critical to their future. It should therefore not be surprising  that many of the developing countries are in debt to the IMF, the World Bank, and to Western financial institutions for essential borrowings just to survive. In effect, while these countries have political independence they do not have economic independence.

What can the Global South do to counter this trend? The feasibility of Reverse Sanctions

The Global South can fight back by telling Western MNCs that wish to do business in their jurisdictions that they need to play by rules that are both equitable and reciprocal. At a fundamental level the Global South countries must demand that there be no more tax avoidance by Western MNCs and that there be complete transparency to their operations. The developing countries need to ascertain how much is properly taxable in their jurisdictions and ensure that these taxes are paid to them instead of being siphoned or redirected to tax havens beyond their reach through sophisticated tax schemes that are difficult to challenge. Going forward this needs to be the condition of doing business in the Global South.

In the past, the developing countries were not in a position to insist on these conditions. The technology and capital of the West was needed by the developing countries to bring  their people out of poverty. So they acquiesced to whatever conditions the Western companies required of them. And this resulted in the emergence of an international tax architecture where profit shifting away from developing countries became the new norm.

But times have changed. Today, the Global South has the leverage to fight back.

A new paradigm is emerging. We are moving away from a unipolar world. The Bretton Woods structure is outdated, and the IMF and the World Bank are no longer the answer to the financial and economic needs of the Global South. Other sources of finance, capital, energy, and food security are now available to the Global South. As of November 2023, the BRICS had only five members (Brazil, Russia, India, China, and South Africa), but that month four more members were added (Iran, Egypt, Saudi Arabia, and the UAE). There are now 59 countries that have applied for membership in BRICS.

In addition to BRICS, much of the Global South is now a participant in China’s Belt and Road Initiative (BRI). As of December 2023, 151 countries had become members of BRI. The BRI, sometimes referred to as the New Silk Road, is a global infrastructure development strategy adopted by China in 2013 to invest in more than 150 countries and international organizations. And a number of developing countries have already benefited from this initiative.

As an alternative to the IMF and the World Bank, the BRICS now have their own New Development Bank. The purpose of this Bank is to help mobilize resources for infrastructure and sustainable development in the Global South. Trade is taking place in currencies other than the dollar, resulting in less control and mandates by legacy Bretton Woods institutions. As a result, the Global South has leverage today that it has never had before. It can assert the conditions for MNCs to do business in their jurisdictions. If they assert this leverage effectively they can stem (if not stop) the corporate tax avoidance that has been taking place for decades.

Specific actions that the Global South can take vis-a-vis Western MNCs to level the Playing Field?

On June 7, 2024, the United Nations published a draft Terms of Reference (ToR) on a UN Convention on International Tax Cooperation. This sets out the basic parameters for a future tax convention that will address priority areas that affect developing countries. These include the taxation of the digitalized and globalized economy, taxation of income derived from cross-border services, tax related illicit financial flows, and prevention and resolution of tax disputes. The Global South should be fully engaged with the UN on the new Tax Convention even though the United States and much of the Collective West opposes it. The UN Convention is the opportunity now for developing countries to take control of their own tax destiny and to move it away from the policy making bodies of the OECD.

In addition, the Global South should pursue certain additional steps to help reduce tax avoidance by MNCs. These include:

(a) Country by Country Reporting, whereby MNCs would be required to disclose their activity in each jurisdiction where they do business. This will bring transparency to the use of tax havens, and the profit shifting that may be taking place currently. This should be a condition for doing business in the Global South. 

(b) Formulary Apportionment and Unitary Taxation: This involves the quantification of certain apportionment factors to help determine the revenue that is properly taxable in each jurisdiction. Developing countries can demand that this formula be applied to MNCs doing business in their jurisdictions. It is the most fair way to ensure that profit shifting is not taking place. 

(c) Impose withholding taxes on all payments to subsidiaries of MNCs that are located offshore. Payments to related subsidiaries in tax havens is perhaps the most common way for MNCs to shift income from developing countries. By imposing a withholding tax on such payments, developing countries protect revenue that is rightfully theirs. 

(d) Bilateral investment treaties should be phased out. These treaties lock the developing countries into certain payment mechanisms that are not always favorable to them. They generally favor the investing country. Since 2016, India has terminated 77 of its Bilateral investment treaties. Other countries can learn from this experience and revisit their own existing treaties.

(e) Review of long-term agreements with MNCs to ensure that they provide both the developing country and the MNC a fair share of benefits from the underlying project. Whether it is mining, refining, or other aspects of the value chain, it is important to ensure that no tax abuse has crept in since the project was initiated and that it remains a win-win for both parties.

Conclusion – Negotiating fair practices, not seeking confrontation

The approach that is being suggested above is one of negotiating fair practices that are equitable to both sides and not to seek confrontation.It is important that developing countries take control of their own tax future, and take concrete steps to stem the current tax avoidance. Otherwise they will continue to lose access to investments that are critical for their future. As the global economy moves to a more multipolar world, and the West is not the only game in town, it is time for developing countries to assert their own conditions for western MNCs that wish to do business in their jurisdictions. The annual tax loss of about $ 200 Billion is not small change, it rightfully belongs to the developing countries, and should not be routed to tax havens.

If Western MNCs do not wish to abide by these rules, they can exercise the option of going to other jurisdictions. But the reality is that developing countries hold most of the resources that the Western MNCs need. That was true during the colonial era, and remains largely true now. So the options for the MNCs to go elsewhere are also somewhat limited. While such a step might be seen by some as ‘imposing sanctions in return’ the fact is that this is perhaps the only way for the Global South to access resources that are rightfully theirs. It is the only way for them to protect and sustain their own future.

Krishen Mehta is a former partner at PwC, and now a Senior Global Justice Fellow at Yale University. He is also a co-editor of a book, Global Tax Fairness, published by Oxford University Press.