Russian Offshore Capital is Seeking New Homes after Sanctions. Where is it Heading?

Wealthy Russian nationals with money parked overseas, especially in the US, UK, and other Western nations are scrambling to find new homes for their wealth and businesses after new threatened sanctions are set to impact in October.

The sanctions are related to the alleged use of the Novichok nerve agent in the UK, and include a request to Moscow to certify that it is no longer using chemical or biological weapons and will not do so in future and agree to on-site inspection to verify compliance. Moscow is deemed unlikely to agree.

Consequently, the next round of sanctions are expected to include termination of residual technical assistance programs, ban on supply of defense-related or dual-use goods or technologies to Russia, and the suspension of all credits and financial assistance.

While some of these measures are already merely reinforcing existing sanctions, others will directly impact upon Russian businesses overseas. Import-export of many products, especially between the US and UK and Russia will be severely hampered, and there is the possibility that Aeroflot may also have its flights to Western nations suspended.

In light of this, Russian money held overseas is now on the move. There are several routes and destinations this huge amount of wealth can and is being dispersed:

• Offshore bank accounts

  Banks in countries such Cyprus and Malta are reporting a huge increase in the establishment of new accounts, with some banks even putting a temporary freeze on new account openings due to the sheer volume. Others are wanting to know that the client will “invest” with the bank, and not just use them for transactional work. Banks such as Malta’s Sparkasse Bank are user friendly, providing that investments are made. Other jurisdictions specializing in offshore incorporation may also offer banking services, such as the BVI, Turks and Caicos, and so on.

• Russian offshore financial centers

  Moscow has been anticipating this move and recently passed legislation to establish “offshore financial centers” that will treat Russian money as being parked overseas and will not impose additional taxes on it. These OFCs are based in Kaliningrad, next to the European Union, and near Vladivostok, in Far East Asia, close to Shanghai. We wrote about these here. The problem with the OFC is one of trust; a lot of money has left Russia over the past three decades, not all of it legally. Other wealthy Russians may not be on good terms with, or mistrust the Kremlin. Either situation will rule this option out for returning Russian capital.

• Sovereign Eurobonds

  The Russian finance ministry has claimed high demand for its proposed sovereign eurobonds, which would help wealthy Russians repatriate their assets. It remains to be seen what the impact will be on the trillions of dollars held overseas by Russian nationals. Should Moscow be able to demonstrate that it can and will operate Kaliningrad and Vladivostok without penalty then these areas may boom, in which case the return of money to Russia will be an unintended boost for the country, driven by the sanctions against it. However, some banks are also now refusing to handle US$ held by Russian nationals overseas, even if they have this money on deposit there. This means Russian nationals with US$ on deposit overseas, notably in the US, may find they are unable to move or access it. Should London take the same view, the situation could become very uncomfortable – Russian money is estimated to own 10 percent of all property in London valued at over US$1 million.

Proportion of wealth held by millionaires:

Another issue is the inherent Russian inequality issue. As economist Thomas Piketty has recently pointed out: Russian wealth is concentrated at a ratio of about one percent owning 48 percent of the national income. The real issue here is that money that is owned by now aging oligarchs – who had intended to pass it along to their families – are now seeing that money being targeted by the West.

In Russian eyes, the sanctions against Russian nationals are a blatant attempt at theft. That same money represents the largest single transfer of assets from one generation to another, ever. The sanctions upon Russia in this format then lead to a simple conclusion: in the battle for the next generation to own this accumulated wealth, will Vladimir Putin succeed in bringing it back to Russia, or will the West continue to hold onto it? Meanwhile, Russian businesses overseas are becoming increasingly trapped in the middle of this massive asset struggle.

Atlas

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