New bans force wealthy Russians to ditch their favorite investment vehicle

(Bloomberg) — For wealthy Russians, the race to protect their wealth from sanctions is reaching another level.

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The European Union and Switzerland ban one of their favorite foreign investment vehicles. Starting this month, registering or providing management services to family trusts that have Russian nationals as trustees or beneficiaries will no longer be permitted. At the same time, EU and Swiss citizens will not be allowed to serve as trustees, nominee shareholders or administrators for trusts that already exist.

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

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

The new restrictions leave wealthy Russians with fewer options to manage their wealth as the West targets them after Putin’s war. They are considering the United Arab Emirates, where they could switch trustees and transfer existing structures with minimal changes, according to Daria Nevskaya, partner at Moscow law firm FTL Advisers.

Insulating assets

Sanctions have threatened Russian tycoons for years, and some of them began preparing for them as early as 2014, when the nation’s annexation of Crimea sparked a wave of Western measures aimed at punishing the Kremlin.

That year, billionaire Alisher Usmanov reduced the stake in his main holding company, USM, to less than 50% by selling shares to his managers. The move shielded its major assets, including Metalloinvest Holding Co., from sanctions imposed on it by the United States and Europe.

Similarly, when Oleg Deripaska was hit with sanctions in 2018, the billionaire owners of Evraz Plc, Roman Abramovich, Alexander Abramov and Alexander Frolov, took preemptive action to protect their assets in case they were targeted. They split their joint control over the steelmaker into three separate holdings shortly thereafter.

Now, Russia’s war in Ukraine is accelerating pressure to protect assets. Some tycoons have transferred ownership to family members, subordinates or friends – such as Dmitry Mazepin who sold a stake in UralChem JSC to executives of the fertilizer maker after he and his son were sanctioned by the EU – while others have redomiciled their assets to Russia, a move that Putin has long encouraged with various incentives.

Go home

The government introduced low-tax nationwide ‘offshore’ zones in 2018 and then increased the cost of keeping assets in traditional havens like Cyprus or Malta to encourage the wealthy to take their money home. While at first few people chose this option, it is now gaining popularity due to the barrage of sanctions imposed on Russian billionaires.

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

“A lot of people perceive moving business to Russia as a one-way ticket,” said Alexander Tokarev, a KPMG partner in Moscow. “There really aren’t many other exits.”

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