Richest Russians Repatriate Assets as Putin Turns Tax Screw

20.01.2015

A customer counts ruble notes and coins to pay for goods inside a supermarket in Moscow, Russia. The Russian central bank deployed emergency steps including interest-rate increases and spent $88 billion in interventions to prop up the ruble, which has declined almost 50 percent against the dollar in the past 12 months.

President Vladimir Putin is pushing harder on Russia’s richest citizens to repatriate offshore assets amid a slump in the ruble and the imposition of sanctions by the U.S. and the European Union.

Under new tax rules signed into law by a presidential decree in November, Russian residents will from this year pay a tax of 13 percent on earnings reported by foreign companies and trusts they control. Should authorities prove those entities are managed from Russia and don’t have significant assets or employees abroad, the tax rate increases to 20 percent.

“Many owners have started to move equity ownership of business assets to Russia,” said Artem Toropov, a Moscow-based lawyer at Goltsblat BLP who deals with international tax structuring. "International structures now often imply more tax risks than benefits, though they still in many cases give better asset protection, flexibility of corporate law arrangements and opportunity to solve conflicts via international arbitration.”

Russian policy makers are struggling to contain the country’s worst currency crisis since 1998 after oil prices slumped and the U.S. and European Union imposed sanctions over the conflict in Ukraine. The new tax comes three years after Putin backed efforts to persuade Russian entrepreneurs and officials to repatriate as much as $1 trillion held in offshore centers from Cyprus to Switzerland.

Russian Return

USM Holdings Ltd., a British Virgin Islands-registered company co-owned by billionaire Alisher Usmanov, said on Dec. 19 it had transferred controlling stakes in wireless operator OAO MegaFon (MFON) and iron-ore producer Metalloinvest Holding Co. to Russian units because the companies “have strategic importance for the Russian economy.” Usmanov is Russia’s second-richest person with a $14 billion net worth.

The same day, Vladimir Litvinenko, Putin’s campaign manager in St. Petersburg during presidential elections in 2000 and 2004, said he transferred 4.81 percent of fertilizer maker OAO PhosAgro from an overseas trust to Russia, raising his direct stake to 14.54 percent. Litvinenko is also head of the St. Petersburg Mining University, where Putin got a doctorate in 1997.

The co-owners of Moscow Vnukovo airport, where Total’s Chief Executive Officer Christophe de Margerie was killed in October, also transfered a stake of almost 81 percent from two Cyprus companies to Russian-registered OOO Vnukovo Aliance last week, a company document shows. Vnukovo’s owners changed the ownership structure to satisfy the law, Chairman Vitaliy Vantsev told RIA Novosti on Jan. 16.

Reversing Outflows

Those moves are helping reverse an outflow of assets from Russia over the previous 20 years. The Russian central bank deployed emergency steps including interest-rate increases and spent $88 billion in interventions to prop up the ruble, which has declined almost 50 percent against the dollar in the past 12 months.

All of Russia’s 20 richest people controlled a portion of their fortune through holding companies registered overseas, according to the Bloomberg Billionaires Index. The billionaires control $181 billion of assets.

Russian companies that continue working through overseas entities face higher taxes, said Alexei Ryabov, a partner at Ernst & Young (CIS) B.V. branch in Moscow.

Previously only dividends from foreign companies were subject to tax of 9 percent.

Rule of Law

Alexander Lebedev, who plans to register his Swiss boutique hotel Chateau Guetsch in Russia, said the push against offshore money won’t bring in more budget revenue.

“Russian businessmen are using offshores mainly to protect their assets from corrupt officials or hostile takeovers as there is poor rule of law in Russia,” he said in an interview. “It is not about taxes but the rule of law.”

Lebedev’s U.K. media assets are owned by his son who has British citizenship, which means there is no need to register them in Russia, he said.

Billionaire Viktor Rashnikov in December consolidated his 87.3 percent stake in OAO Magnitogorsk Iron & Steel in one Cyprus company instead of two, a possible precursor to transferring the ownership to Russia, according to George Buzhenitsa, an analyst at Deutsche Bank AG in Moscow.

USM and Phosagro declined to comment as did representatives of billionaires Alexey Mordashov, Mikhail Prokhorov, Oleg Deripaska and Rashnikov.

Not Satisfied

Boris Mints, owner of commercial property investor O1 Properties, is perplexed by the new law, which he says conflicts with legislation in some European nations. He hopes the law will be amended.

“I hired consultants on taxes and international law,” Mints said in a Jan. 16 interview. “They give me the answers, which I am not satisfied with.”

While it may be in the interests of oligarchs to repatriate assets to demonstrate their loyalty to Putin and secure state contracts, Russians with $100 million to $200 million are still seeking offshore havens where property rights are guaranteed, according to Igor Lojevsky, former deputy chairman at Deutsche Bank for Eastern Europe.

The number of Russian clients interested in changing their residence to avoid disclosing their foreign interests has increased, with the most popular destinations being the U.K. and Switzerland, said Toropov of Goltsblat BLP.

“Billionaires with large businesses transfer assets to Russia as they may have got some kind of guarantees that it’s safe,” said Alexander Zakharov, partner at Moscow-based Paragon Advice Group. “Those with smaller assets and weaker, or no, connections to the Kremlin may have try to find the ways to work in foreign jurisdictions as before.”


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