New bans force Russian billionaires to drop favoured investment vehicle

Billionaire Oleg Tinkov used family trusts to hold his stake in lender TCS Group Holding before it was sold to fellow billionaire Vladimir Potanin last month. PHOTO: NYTIMES

NEW YORK (BLOOMBERG) - For wealthy Russians, the race to shield their fortunes from sanctions is reaching another level.

The European Union and Switzerland are banning one of their favourite overseas investment vehicles - family trusts.

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 will not 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 Ms 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. Billionaire Oleg Tinkov, who was sanctioned by Britain 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 before it was sold to fellow 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 Mr Putin's war. They are looking at the United Arab Emirates, where they could change the trustee and transfer existing structures with minimum changes, according to Ms 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 per cent by selling shares to his managers. The move insulated his main assets, including Metalloinvest Holding, from sanctions imposed on him by the United States and Europe.

Similarly, when metals tycoon Oleg Deripaska got hit by sanctions in 2018, Evraz's billionaire owners Roman Abramovich, Alexander Abramov and Alexander Frolov took a pre-emptive measure to help shelter their assets in case they were 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 oligarch Dmitry Mazepin, who offloaded a stake in UralChem 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 Mr Putin has long encouraged with different incentives.

Coming home

Moscow 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 is now gaining popularity due to the barrage of sanctions imposed on Russian billionaires.

The family holding of Mr Said Kerimov, the son of sanctioned Russian billionaire Suleiman Kerimov, and Mr Andrey Guryev, the British-sanctioned founder of PhosAgro, both re-domiciled firms to Russian low-tax zones in the past two months. Steel tycoon Viktor Rashnikov in March moved a US$4 billion (S$5.5 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 Mr Alexander Tokarev, a KPMG partner in Moscow. "There are not really many other ways out."

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