As Russia increasingly becomes a pariah in the global financial system, billionaires who have long sheltered their fortunes overseas suddenly have far fewer options for where to put their money. Repatriating assets to a country heading for economic ruin, putting them within reach of Putin, is a disastrous proposition. But so does keeping them in the US, UK or EU jurisdictions, like Cyprus or the Caribbean, where they face freezes, blockades or possibly seizures.

Their best bet is somewhere relatively neutral, said Ronen Palan, professor and expert on tax havens at City University London. The war in Ukraine has already spiked the amount of Russian money flowing into Dubai, whose government has called for a “peaceful” solution to the conflict. Hong Kong is another possibility, although Xi Jinping’s shadow in China is a potential threat to the Russians’ main outsourcing target. Other spots include Mauritius and the Maldives.

The Maldives are still a safe haven for the assets of Russian oligarchs.Credit:Getty

“The main reason rich people in Russia withdraw money is to protect their assets,” Palan said. “It’s not so much about tax evasion as we think in the West.”

About 20 Russians are among the 500 richest people in the world. Worth a combined $261 billion, more than half of them used Cypriot holding companies for their top assets, according to filings. Russia has mingled with the island’s culture and economy for decades, ever since supporting the country’s Greek Cypriot majority when it was divided. It thrived as a haven thanks to low taxes, EU membership and a legal system based on English common law.

A handful of billionaires have assets in the British Virgin Islands or elsewhere in the Caribbean, a region popular for its strict secrecy. At least three other vehicles in use in Europe. Mikhail Fridman, Petr Aven and German Khan – all of whom face EU and UK sanctions – are using Luxembourg entities to control investment firm LetterOne, which has stakes spanning energy, retail and telecoms .

Roman Abramovich used shell companies in the Caribbean, including the BVI and Cayman Islands, and an Austrian bank to invest billions of dollars in US hedge funds and private equity firms, according to the New York Timeswho said Concord Management in Tarrytown, New York, facilitated many transactions.

“The main reason the rich in Russia withdraw money is to protect their assets… It’s not so much about tax evasion as we think in the West.”

Ronen Palan, professor and expert on tax havens at City University London

Abramovich took direct control last month of his $445 million stake in London steelmaker Evraz PLC, transferring shares of a BVI holding company into his own hands. The UK sanctioned him on March 10.

The measures could face challenges as sanctions escalate: German authorities said on Friday they had blocked Mordashov’s transfer to the British Virgin Islands while they investigate the deal. For his part, Mordashov called the war in Ukraine a “tragedy” and said he did not understand why he had been sanctioned.

Spokespersons for Mordashov and Abramovich declined to comment. A representative for Rashnikov did not respond to requests for comment. At the time he transferred his stake in Magnitogorsk Iron & Steel Works, the company said Cyprus was becoming “less attractive” to Russian investment and Rashnikov wanted to take advantage of the legal and regulatory advantages of his home country.

Magnitogorsk Iron & Steel Works said in a March 18 statement that the sanctions against Rashnikov were “baseless and unfair.”

Russia's fourth-richest person, Alexey Mordashov, has transferred part of a $1.5 billion stake in German holiday travel company TUI AG from one Cypriot entity to another in the Virgin Islands British shortly after being sanctioned.

Russia’s fourth-richest person, Alexey Mordashov, has transferred part of a $1.5 billion stake in German holiday travel company TUI AG from one Cypriot entity to another in the Virgin Islands British shortly after being sanctioned.Credit:Bloomberg

Indeed, in some ways, the sanctions are contributing to Putin’s demand for the wealthy to bring their distant wealth home. His ultimatum dates back to the 2014 invasion of Crimea, when an initial round of sanctions against oligarchs and billionaires helped push through so-called de-offshorization laws.

Gennady Timchenko, who was sanctioned by the United States in 2014 for Russia’s annexation of Crimea, tapped a Luxembourg company to take a stake in Novatek more than a decade ago. That company went into liquidation in 2017 – shortly before the US sanctioned other Russian billionaires, including Oleg Deripaska – and Timchenko now largely manages his fortune through Russian companies, the documents show. filed in the register. It was sanctioned by the UK and the EU last month.

Even if options for hiding money dry up, the amount funneled to offshore hubs by Russians overall could be set to increase, said Paivi Karhunen, a professor at Aalto University in Espoo. , in Finland, which is investigating Russia’s use of offshore entities. Not only is the country’s economy in freefall, but an offshore company allows an investor to effectively clean up their Russian tracks.

“If they can somehow hide their Russian origin, they can invest in other businesses,” she said.

Former Soviet countries in Central Asia, such as Kazakhstan — while not officially offshore centers — could become informal conduits for cash leaving Russia, said City University’s Palan. Middle-class Russians have already rushed to open Serbian bank accounts to preserve their ability to transact abroad.

Loading

Russian money could also end up in America. Holding company structures can obscure the identity or nationality of the beneficiary and also allow owners to circumvent beneficial ownership sanctions rules, said Lakshmi Kumar, director of policy at nonprofit Global Financial Integrity. . Minimum disclosure requirements regarding the ownership of private companies and assets in the United States, for example, increase the likelihood that tainted silver will “rebrand itself, essentially, and exploit loopholes”, she said.

For the United States and other countries to effectively enforce sanctions, they cannot “inadvertently serve as a safe haven”, she said.

Bloomberg

The Business Briefing newsletter features top stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.