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New bans force rich Russians to drop favoured investmen...

Business Maverick

Business Maverick

New bans force rich Russians to drop favoured investment vehicle

The Kremlin in Moscow. (Photo: Andrey Rudakov/Bloomberg)
By Bloomberg
06 May 2022 1

For wealthy Russians, the race to shield their fortunes from sanctions is reaching another level. Starting this month, registering or providing management services to family trusts that have Russian nationals as trustors or beneficiaries will no longer be allowed.

The European Union and Switzerland are banning one of their favorite overseas investment vehicles. Starting this month, registering or providing management services to family trusts that have Russian nationals as trustors or beneficiaries will no longer be allowed. At the same time, EU and Swiss citizens won’t be allowed to serve as a trustee, nominee shareholder or director for the trusts that already exist.

“There will be a large number of situations where trusts will be effectively invalid,” said Natalia Kuznetsova, a partner at Deloitte CIS. “They have to be dismantled or transferred somewhere. This is a very big problem.”

Family trusts in recent years became a popular tool for Russian tycoons to store their wealth away from President Vladimir Putin’s reach and ensure smooth inheritance. Oleg Tinkov, who was sanctioned by the U.K. in March, used one such vehicle – it was based in the British Virgin Islands with a Swiss trustee – to hold his stake in lender TCS Group Holding Plc before it was sold to billionaire Vladimir Potanin last month.

The new restrictions are leaving rich Russians with a dwindling set of options to manage their wealth as the West targets them following Putin’s war. They’re looking at the United Arab Emirates, where they could change the trustee and transfer existing structures with minimum changes, according to Daria Nevskaya, a partner at Moscow law firm FTL Advisers.

Insulating Assets

Sanctions have been a threat for Russian tycoons for years, and some of them started preparing for them as early as 2014, when the nation’s annexation of Crimea unleashed an earlier wave of Western measures intended to punish the Kremlin.

That year, billionaire Alisher Usmanov reduced the stake in his main holding, USM, to less than 50% by selling shares to his managers. The move insulated his main assets, including Metalloinvest Holding Co., from sanctions imposed on him by the US and Europe.

Similarly, when Oleg Deripaska got hit by sanctions in 2018, Evraz Plc’s billionaire owners Roman Abramovich, Alexander Abramov and Alexander Frolov took a preemptive measure to help shelter their assets in case they would be targeted. They split their joint control over the steelmaker into three separate holdings shortly after.

Now Russia’s war in Ukraine is accelerating the push to protect holdings. Some tycoons have transferred ownership to family members, subordinates or friends – like Dmitry Mazepin who offloaded a stake in UralChem JSC to executives at the fertiliser maker after he and his son got sanctioned by the EU – while others re-domiciled their holdings to Russia, a move that Putin has long encouraged with different incentives.

Coming Home

The government introduced low-tax domestic “offshore” zones in 2018 and later raised the cost of keeping assets in traditional havens like Cyprus or Malta to encourage the rich to bring their money home. While at first few chose this option, it’s now gaining popularity due to the barrage of sanctions imposed on Russian billionaires.

The family holding of Said Kerimov, the son of sanctioned Russian billionaire Suleiman Kerimov, and Andrey Guryev, the UK-sanctioned founder of PhosAgro PJSC, both re-domiciled firms to Russian low-tax zones in the past two months. Steel tycoon Victor Rashnikov in March moved a $4 billion stake in one of the country’s biggest steelmakers to Russia from a shell company in Cyprus, just two weeks before he was sanctioned by the EU.

“Many people perceive the transfer of business to Russia as a one-way ticket,” said Alexander Tokarev, a KPMG partner in Moscow. “There are not really many other ways out.” BM

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  • If the oligarchs orchestrated the removal of Putin from power, their lives would be restored to what is ‘oligarch normal’.

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