Alisher Usmanov, Russia’s richest person, moved control of most of his $20 billion fortune last year to a holding company based in the British Virgin Islands, a collection of more than 60 isles 5,600 miles away from Moscow.
The company, USM Holdings, controls the billionaire’s most valuable asset, Metalloinvest Holding Co., Russia’s largest iron ore producer, through two Cyprus-based subsidiaries, USM Steel & Mining Group Ltd. and USM Investments Ltd., according to Metalloinvest’s annual report.
“Offshores are the main tool for Russian businessmen to protect their assets from state authorities, rivals and all kinds of raiders,” Valery Tutykhin, an attorney with John Tiner & Partners, a Geneva-based law firm that specializes in wealth management, said in a phone interview.
BILLIONAIRE TAX HAVENS
All of Russia’s 20 richest people -- who have a combined net worth of more than $227 billion, according to the Bloomberg Billionaires Index -- control a portion of their fortune through holding companies registered outside of their home country.
The billionaires, most of whom built their fortunes during the violent and unpredictable post-communist economic environment, use the entities to manage, preserve and conceal their wealth -- a tactic that has drawn the ire of Russian President Vladimir Putin.
Viktor Vekselberg, 56, holds the majority of his $14.8 billion fortune through Bahamas-based Renova Holdings. Among the company’s assets is a 7 percent stake in United Co. Rusal, the world’s largest aluminum producer.
Vladimir Lisin, 56, controls his 85 percent stake in publicly traded OAO Novolipetsk Steel, Russia’s most valuable steelmaker, through a Cyprus-based holding company, Fletcher Group Holdings Ltd. Mikhail Fridman, 49, controls his banking, retail and telecommunications assets through Moscow-based Alfa Group, which is owned by Gibraltar-based CTF Holdings.
Putin has vowed to bring some of the money home. Last year, he took control of the Federal Financial Monitoring Service, an executive body aimed at combating money laundering. The State Duma, Russia’s lower house of parliament, introduced a series of amendments to existing laws, tightening control over companies’ financial transactions.
During his campaign for a third term last year, Putin, 60, said that he was considering a one-time tax on entrepreneurs who acquired state assets at “unfair” prices in the 1990s.
In a speech to the nation in December, Putin criticized the country’s legal system and the elements that led to accusations of wrongdoing, vowing to eliminate the factors that have turned “economic disputes into score-settling.”
Putin said in a televised news conference the following week that he “hoped” the billionaires who sold their 50 percent stake in TNK-BP, Russia’s third-largest oil company, for $28 billion, would reinvest the proceeds in their home country.
“Russia was and always will be the basic platform for investment,” the billionaires -- Vekselberg, Fridman, Len Blavatnik and German Khan -- said in a joint statement released six days after Putin’s comments. A fifth partner, Alexey Kuzmichev, wasn’t part of the announcement. “In Russia, in particular, they plan to invest most of the proceeds from selling their shares in TNK-BP.”
So far, there’s been little money flowing back to Russia. Fridman and his partners at Alfa Group announced on March 18 that they would create a global investment company to pursue energy and telecommunications assets. Two weeks later, through Altimo, a unit of Alfa based in the British Virgin Islands, Fridman offered to buy out minority investors in Cairo-based Orascom Telecom Holding SAE in a deal for as much as $1.8 billion.
Usmanov, who recently spent $100 million buying Apple Inc. (AAPL) shares, combined control of his assets into USM in the British Virgin Islands in December.
“The formation of a single holding company enables us to optimize business processes, enhance the efficiency of managing subsidiary companies, and provide more opportunities to access international capital markets,” he said by e-mail in February.
It also allows the billionaire and his associates, Ardavan Farhad Moshiri and Vladimir Skoch, to whom longtime Usmanov partner Andrey Skoch transferred the assets, to pay less tax and avoid the Russian legal system. Katja Ulanova, a spokeswoman for Usmanov at RLM Finsbury in London, confirmed the billionaire’s holding structures and declined to comment further.
“The Russia-Cyprus-BVI structure is the most attractive form of holding company,” Andrey Goltsblat, managing partner of Moscow-based Goltsblat BLP, the Russian practice of the international law firm Berwin Leighton Paisner, said by phone.
Russian billionaires create companies in the British Virgin Islands because they find its legal system, which is based on British law, more attractive than their own, according to Steven Philippsohn, a senior partner at PCB Litigation, a London-based firm that helps banks track offshore assets held by Russians.
Cyprus-based entities allow them to benefit from lower tax rates available under the double-tax avoidance treaty signed by the Mediterranean island nation and Russia in 1998. Cyprus also caps taxation of dividends paid from Russia at 5 percent and allows tax-free cash transfers to the British Virgin Islands, according to Artem Toropov, a senior associate at Goltsblat.
The transfer of wealth from the Russian state to individuals began when President Boris Yeltsin kick-started Russia’s privatization era, declaring in an April 1992 speech a future with “millions of owners, not hundreds of millionaires,” according to “The Oligarchs,” a book by journalist David Hoffman published in 2003.
Yeltsin’s moves led to the so-called loans-for-shares program, which allowed a small number of private banks and the entrepreneurs who led them to make loans to the Russian government in exchange for liens on state assets. When the government defaulted, those entrepreneurs took control of large swaths of the country’s oil, aluminum, precious-metal and mining assets. They soon moved those assets offshore.
Oleg Deripaska, Russia’s 15th-richest man, described Russia’s economic environment at the time as one of beatings, boardroom intimidations and public assassinations, according to his written defense in a 2012 London lawsuit. The suit was brought by exiled Russian businessman Michael Cherney, who claimed he was owed money for his stake in United Co. Rusal. Deripaska, 45, called him a mobster who extorted money in return for protection.
In 1994, Deripaska established his DKK foundation in Liechtenstein. He was later persuaded by Cherney to use Syndikus Treuhand Anstalt, a Vaduz, Liechtenstein-based nominee trust company, to hold his aluminum assets, according to the suit.
Syndikus provided credit cards to government and business contacts in Russia, including the country’s deputy minister of industry, the chairman of the Russian Federation on Metallurgy, directors of important aluminum plants and their wives, and Yeltsin’s tennis coach, according to the suit.
Putin’s arrival as a political power in 1999 marked a “clear shift of the political and legal landscape,” Deripaska wrote in his defense, and allowed the billionaire to free himself from the grip of organized crime.
Deripaska and Cherney met on March 10, 2001, at the Lanesborough Hotel in London. At the meeting, the billionaire agreed to pay $250 million that he says was his final protection payment, according to his defense, denying Cherney ownership claims in part because Liechtenstein law only enforces agreements “which are clear and free from uncertainty.”
Deripaska settled his suit with Cherney last September, agreeing to pay him $200 million over six years, according to Russian newspaper Vedomosti. Vera Kurochkina, his spokeswoman at Rusal, didn’t respond to requests for comment. Dmitry Radyshevsky, Cherney’s spokesman in Israel, said he declined to comment.
Roman Abramovich, Russia’s eighth-richest man, used a maze of offshore entities to build and control his $12.9 billion commodities fortune. According to a lawsuit brought against him in London by Boris Berezovsky, Abramovich shuffled assets, including stakes in oil, aluminum, automobile manufacturing and airlines, between holding companies in Gibraltar, Cyprus and the British Virgin Islands.
One asset was a 50 percent stake in OAO Sibneft, the oil company he acquired for $100 million in 1996 and sold to state-controlled Gazprom in 2005 for $13 billion. Berezovsky sued for $6.8 billion, which he said was his rightful share of the business. Abramovich, he said in the suit, had intimidated him into selling it.
Berezovsky lost the case in August, with the judge labeling him “an unimpressive and inherently unreliable witness who regarded truth as a transitory, flexible concept.” Seven months later, the 67-year-old Berezovsky was found dead in his Surrey home near London.
Through his spokesman, John Mann, Abramovich, 46, declined to elaborate on the legal arguments filed with the court.
The importance of offshore holdings in Russia was emphasized by Steven Theede, former chief executive of Yukos Oil Co., once Russia’s biggest oil producer. He told the Amsterdam Court of First Instance in 2010 that offshore vehicles and international courts were necessary to protect assets because of the government’s “manipulation” of the Russian legal system.
Theede and former Yukos executives have been battling state-controlled oil company Rosneft over Yukos since 2003, when its founder, Mikhail Khodorkovsky, was detained and imprisoned in Siberia for tax evasion.
After the arrest, tax authorities saddled Yukos, at the time the country’s biggest taxpayer, according to Yukos Library spokeswoman Claire Davidson, with a charge of more than $3 billion in tax liabilities. Declared bankrupt by a Moscow court in 2005, Yukos was ordered broken up and sold to Rosneft.
Theede and his managers began moving Yukos assets into a network of offshore subsidiaries in April 2005, placing control of the company’s non-Russian holdings into a Dutch foundation that Rosneft lawyers called a “faceless, ownerless entity,” according a 2010 legal filing in the British Virgin Islands Commercial Court.
In the action, Rosneft lawyers said that they had won control of the subsidiaries, and their profits would only be paid when the directors “found it fit to do so.” The case remains unsettled. Darya Ermolina, a spokeswoman for Rosneft in Moscow, didn’t respond to requests for comment.
Swiss attorney Tutykhin said Russian billionaires will continue to hold their main assets out of Russia, even in the face of Putin’s tough talk.
“Cash transfers from Russia will become more complicated, and there will be more control over cash inflows into the country,” he said. “The more restrictions on money flows Russian authorities will impose, the more reasons Russia’s rich would have to hold their assets abroad.”
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