Goosing Blockchain; Russia’s new Diet.

Paul Goncharoff

Peering into the internet of things (IoT) like blockchain, DLT, smart contracts, cryptocurrencies, a noticeable proportion of the superstars in these areas are Russian.  

That being said, and if true, then why isn’t Russia leading the world in the blockchain, DLT, and cryptocurrency space? One answer is simple, these are new generation world-changing tech applications that are for most not broadly or truly understood, despite the noise in the media and over cups of coffee. Change threatens, disruptive technologies do disrupt the status quo, the boat rocks, and fear is the product of not knowing.

The other is the Russian cultural tendency to prove and re-prove ideas or proposals ad nauseam lest a dreaded mistake is made. Mistakes in Russia are like the dreaded ‘Skvoznyak/Сквозняк’ (draft), or circulating fresh air in a stuffy apartment, it must be shut off, stopped immediately lest we all catch our death. Mistakes aren’t often seen as valuable learning tools here, and those who make them, despite best intentions are almost always punished somehow. It is what it is, and it is slow to evolve. Government officials everywhere, and their perceived job security to some degree are affected by this mindset. Despite all that, Russia has not been a total laggard in adopting aspects of blockchain technology.

Despite difficult, conflicted, and an often-tempestuous acceptance curve by bureaucracy there are many active, gifted Russians working from the inside who are making their global mark in these industries, they are laying the golden eggs of the future today.

People such as Vitalik Buterin the creator of Ethereum. Ethereum, a true Faberge egg, is the second-largest cryptocurrency by market capitalization, second only to Bitcoin. He astutely commented awhile back saying: “In the future, when the blockchain will be used everywhere, the role of the state will change, as well as other intermediaries. They, most likely, will form the rules of the game, but there will be a program code that will monitor the implementation of the rules. And human intervention, such as a bureaucrat, will be minimized”.

Then there is Pavel Durov, a businessman, programmer, billionaire, and founder of the social network VKontakte (VK) and the cross-platform messenger Telegram, as well as other projects. The roster goes on and on, especially in the deepest bowels of programming and codes. Sadly, neither of them lives in Russia today as the legal and tax framework for their activities is still evolving, and to date have not been supportive of true development and implementation work.

Official Russia sees what is happening and has recently acknowledged that these technologies and disruptive changes are an irreversible juggernaut despite perceived threats to the status quo. Better to get out of the way and support this goose rather than both get run over messily.

Almost unremarked inside Russia was a significant legal step just taken by the Kremlin in acknowledging Cryptocurrencies as an asset class. This is remarkable not just for Russia, but for any developed or developing sovereign country at this point in time. It is now legal for Russians to trade in and own cryptocurrencies, just as long as they do not settle business with them inside of Russia. Also, according to the new law, which is to start January 1, 2021, separate taxation rules will be established for Russian IT companies, namely: reduction of income tax rates, the introduction of reduced insurance premium rates, and application of zero VAT.

So, instead of being shut down or otherwise abused, Russian IT companies will be able to pay a profit tax at the rate of 3% instead of 20%. At the same time, 3% of the tax will be transferred to the federal budget and 0% – to the regional budget. Those entities that have the right to reduced income tax rates will be able to pay insurance premiums at the rate of 7.6% (instead of 14%). The conditions for applying reduced contribution rates will be similar to the conditions for using reduced income tax rates. The realization of exclusive rights or rights under a licensing agreement on software will be exempt from VAT.

On the people side, to stem the applicable brain-drain and attract talent back into Russia, some tax-friendly moves are in place. When an individual has been in the Russian Federation for a period of from 90 to 182 calendar days inclusively during 2020 (from January 1 to December 31), he or she can obtain or retain the status of a tax resident of the Russian Federation which when compared to N. America or the EU is a real boon. This apparently will continue, even intensify in the years ahead. Any other path would be a terminally cooked goose, and that lays no golden eggs.

Paul Goncharoff, August 1, 2020