(Bloomberg) – Take a look at a map, and Cyprus is barely a blip relative to the vast expanse of Russia. The Mediterranean islands are a mere 0.05% of the size of the world’s largest country.
But for the top 0.05% of Russia – its oligarchs and billionaires – Cyprus is extremely important. It held a substantial portion of their wealth for years, in some cases dwarfing what they had in the homeland itself.
At least, before that Russian troops camped on the border of Ukraine.
In recent weeks, some of the biggest assets held by Russia’s richest people have been pulled out of Cyprus, under pressure from EU regulators on the one hand and Vladimir Putin’s demand to return the money on the other.
Viktor Rashnikov last month moved a $4 billion stake in one of Russia’s biggest steelmakers from a shell company in Cyprus to his home country, two weeks before the European Union approved it.
Steel tycoon Alexei Mordashov made a similar move in February. 28, the same day he was approved. He transferred a $1.5 billion stake in German holiday-tour business TUI AG from a Cyprus unit to one in the British Virgin Islands.
Most recently, a Cypriot holding company for Novatek chairman Leonid Mikhelson personally transferred to him a nearly 14% stake in the Russian gas producer on March 17, according to a regulatory filing on Monday. The position stood at about $4.8 billion when the Moscow Stock Exchange halted trading last month, according to data compiled by Bloomberg. It has not been approved.
And even before the war, Vladimir Potanin – Russia’s richest man, with a net worth of $24.7 billion – was taking assets away from the island. His holding company abandoned Cyprus late last year in favor of a special tax zone in Vladivostok that Putin had set up to encourage the wealthy to bring their money home. It has not been approved.
As Russia increasingly becomes a pariah in the global financial system, billionaires who have long shelved their fortunes abroad suddenly have little choice but to where to put their money. Returning assets to a country staring at economic ruin, keeping them in Putin’s grasp, is a dire proposal. But they are being placed in US, UK or EU jurisdictions, such as Cyprus or the Caribbean, where they face freezes, blockades or possibly seizures.
His best bet is somewhere relatively neutral, said Ronen Palan, a professor and expert in tax havens at City University London. The war in Ukraine has already increased the amount of Russian money flowing into Dubai, whose government has urged a “peaceful” solution to the conflict. Hong Kong is another possibility, although the long shadow of China’s Xi Jinping poses a potential threat to the Russians’ primary aim of driving offshore. Other places include Mauritius and Maldives.
“The main reason for the rich in Russia to withdraw money is to protect their wealth,” Palan said. “It’s not so much about tax avoidance as we think about it in the West.”
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Some 20 Russians are among the 500 richest people in the world. According to the filing, more than half of them use Cyprus holding companies for their core assets, worth a combined $261 billion. Russia has engrossed itself in the island’s culture and economy for decades since the country’s support of the Greek Cypriot majority during its partition. It has developed into a haven due to low taxes, EU membership and a legal system based on English common law.
A handful of billionaires have them in the British Virgin Islands or elsewhere in the Caribbean, a region popular for its strict secrecy. At least three more in Europe use the vehicle. Mikhail Friedmann, Petr Aven and German Khan – all of whom are under EU and UK sanctions – use Luxembourgish entities to control investment firm LeterOne, which has a range of interests spanning energy, retail and telecommunications.
According to the New York Times, Roman Abramovich used shell companies in the Caribbean, including BVI and the Cayman Islands, and an Austrian bank to invest billions of dollars in American hedge funds and private equity firms, including Concorde in Tarrytown, New York. Management said. , Facilitated multiple transactions.
Abramovich took direct control of his $445 million stake in London-based steelmaker Average plc last month, taking over shares of a BVI holding company. Britain approved them on 10 March.
The moves could face challenges as sanctions escalate: German officials said on Friday they had blocked Mordashov’s transfer to the British Virgin Islands during an investigation into the deal. For his part, Mordashov called the Ukraine war “a tragedy” and said he did not understand why they were sanctioned.
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Spokesmen 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 the Magnitogorsk Iron and Steel Works, the company said that Cyprus was becoming “less attractive” for Russian investment and that Rashnikov wanted to use the legal and regulatory advantages in his homeland.
Magnitogorsk Iron and Steel Works said in a March 18 statement that the sanctions against Rashnikov are “baseless and unreasonable”.
Indeed, in some ways the sanctions are helping Putin’s demand to bring home the far-flung wealth of the richest. His ultimatum dates back to the 2014 invasion of Crimea, when an early round of sanctions on oligarchs and billionaires helped enforce laws around so-called de-offshoreisation.
Gennady Timchenko, who was sanctioned by the US for Russia’s annexation of Crimea in 2014, used the Luxembourg firm to build a stake in Novatek more than a decade ago. According to registry filings, that company was put into liquidation in 2017—shortly before the US sanctioned other Russian billionaires, including Oleg Deripaska—and Timchenko now manages its funds largely through Russian companies. They were approved by the UK and EU last month.
Even as an alternative to hiding the money, the amount that the Russians fully channeled to offshore centers could be headed for a spike, said Professor Pawi Karhunen of Aalto University in Espoo, Finland, Which studies the use of Russia’s offshore entities. Not only is the country’s economy in freefall, but an offshore company enables an investor to clear its Russian track effectively.
“If they can somehow hide their Russian origins, they can invest in other companies,” she said.
Former Soviet countries in Central Asia, such as Kazakhstan – though not officially offshore hubs – could become an unofficial medium for cash to leave Russia, City University’s Adhering said. Middle-class Russians have already rushed to open Serbian bank accounts to maintain their ability to transact abroad.
Russian money can fly to America too. Holding company structures can obscure the identity or nationality of the beneficiary and also allow owners to ignore rules on restrictions on beneficial ownership, said Lakshmi Kumar, policy director at non-profit Global Financial Integrity. In the US, for example, minimum disclosure requirements regarding private companies and property ownership increase the likelihood that tainted money will “own itself, inevitably, and exploit loopholes,” she said.
For the US and other countries to effectively enforce sanctions, they “cannot inadvertently serve as a safe haven,” she said.
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To contact the authors of this story:
Benjamin Stuples in London [email protected]
Devon Pendleton in New York [email protected]