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By John Helmer, Moscow

When Alexander Shokhin was a junior official in the international economic department of the Soviet Ministry of Foreign Affairs in the 1980s, it was plain he was short-sighted. That was because of the glasses he wore – the old Soviet type, super-thick. He’s come a long way since then, and so has sight-correction technology. When Shokhin met President Vladimir Putin at the Kremlin on February 14, his eyewear was much improved. His short-sightedness wasn’t.

Now president of the Russian Union of Industrialists and Entrepreneurs (RUIE), the principal business lobby in Moscow, Shokhin tried telling Putin his clients would agree to paying more Russian tax on their corporate, and maybe personal incomes, if Putin agreed to let them keep legal title of their assets abroad, under the jurisdiction of foreign courts, not Russian. Putin rejected the offer. It was one week before the Ukrainian President Victor Yanukovich was ousted from office in Kiev, and the international position of Russian capital was to be exposed to unprecedented restrictions and risks – from a US Government attack on offshorization, not from the Kremlin’s.

“We are currently working on a proposal for de-offshorization of the Russian economy,” Shokhin told Putin on February 14. “We think it would be good to carry out the approach that you formulated in the words: ‘register where you wish, but keep your money in Russia.’ To be more specific, the idea is probably not so much to try to stop people from registering in offshore jurisdictions, but to have them pay their taxes here in Russia if this is where their companies are actually doing business. We have analysed other countries’ experience. In some cases, offshore jurisdictions are not being used for tax avoidance purposes or for tax evasion, but for other reasons, for example, if foreign partners or investors want to use Common Law to protect their rights. We should therefore focus specifically on the tax aspect of the issue, and in this area there are mechanisms we can use.”


Putin introduced his de-offshorization policy in December 2012. In December 2013, declaring that “since nothing significant has been achieved in this area this year”, the president added the threat of withdrawing state bank credit and budget funding for offshore companies, together with a crackdown on money laundering through capital export.

To Shokhin Putin replied that much more was at stake than tax collection. “If a company is registered in an offshore and claims some kind of [Russian] state support, the state authorities have the right to know who the final beneficiary will be. This issue of the final beneficiary is extremely important. We need to know who owns the company, because it might be registered in Cyprus say, when in actual fact its real owners are sitting in some ‘grey’ or ‘black’ offshore, no one knows who they are, and they do not want to reveal themselves. This always gives rise to suspicions and questions. That is the first point.”

“Second, as you know, there are all kinds of different schemes. A subsidiary company could make a loan to its parent company for example. If the loan is taxed not under Russian tax law but that of the offshore zone, under lower rates, then the dividends are also taxed under lower rates. We have double taxation avoidance treaties with many of these countries, Cyprus for example, and the company has seemingly paid all of its taxes under Russian law, but it has paid them there, not here. There are many such things that we must study very thoroughly.”

“You said that a Russian company’s partners might want to have deals governed by British law, but this does not necessarily mean they need to register the company in an offshore zone. The company could be registered in the Russian Federation and be a tax resident here. You could have contracts governed by British law and could shift arbitration proceedings to Stockholm say. Our Russian laws allow for this, and so there is no need to go to an offshore. In short, there are many questions here that first need thorough study.”

Seven weeks later the US Treasury announced that it had studied the matter. It concluded that sanctions against Russian assets offshore, both individual and corporate, should be imposed as the means to influence Putin’s rule directly and personally.

These sanctions have so far stopped short of a full sectoral attack. But they have already curtailed the flow of international bank credit to Russian banks and corporations. By diminishing the market value of Russian shares, the US attack on Russian offshore capital has also raised the costs and risks of recapitalizing and refinancing. According to US Treasury and Russian Central Bank reports, the US sanctions campaign has also accelerated the export of capital in a reversal of the process Putin told Shokhin he wanted to stop.

The measurable impact on the Russian stock exchange MICEX index has been between 16% and 25%.


Source: http://www.bloomberg.com/

On March 20, two days after the signing in Moscow of the Crimea accession treaty, Putin attended the RUIE’s congress. He spoke publicly and privately. On the record Putin said nothing explicit about the Ukraine conflict. He did reiterate that “entrepreneurs need to understand their responsibility. Our priority stance is that Russian companies have to be registered here, in their home country and have a transparent ownership structure… This is why we set the task of de-offshoring the national economy and are drafting necessary amendments to the regulatory framework…once national companies start paying taxes in Russia, once they stop evading any responsibility for this country, this would lead to the growth of overall trust in business in general…This is key to the progressive development of our nation.”

In exchange, Putin told the oligarchs “we will provide the necessary support to our companies, including in terms of entering global markets; we will defend their interests using the mechanisms of the WTO and other legal procedures.” No record has leaked of what Putin said in the private session. Reportedly, he did most of the talking, explaining in detail the downfall of Yanukovich and the decisionmaking which followed in Crimea. He avoided the problem of sanctions. If the oligarchs had questions for Putin, they didn’t raise them then.

How have Shokhin’s lobby and the corporate owners who dominate the RUIE responded to the US version of de-offshorization? This week each has been asked: What is your understanding of the status of Crimea, the conflict in Ukraine, and the dangers to Russia in the present situation?

At the RUIE Shokhin is not responding. His only publicly reported comment appeared on March 17, immediately after the Obama Administration introduced its first round of sanctions. “It is not that easy to impose sanctions in view of the interdependency between the Russian economy and the world’s major economies,” Shokhin said in an interview with Russia Today Television. “The economies of Russia and the European Union are the most closely connected ones, and thus serious sanctions may eventually harm the economies of such key nations as Germany, for instance, and therefore one thing to note here is that the sanctions will be implemented very cautiously, and the other thing is that they may not actually be any proper sanctions at all.”

Shokhin claimed Russia had countermeasures. “For example, Russia’s trade and economic cooperation with China may somewhat compensate for its deteriorating relationship with the West in areas such as technology, innovations, etc. Western nations will have to decide for themselves whether they are willing to see Russia develop a multifaceted economic alliance with China and form a robust geopolitical powerhouse that could have its own attitude on many global issues (if not challenge the West directly).”

“Sanctions which may go beyond sanctions against certain officials and their accounts, or their travel possibilities and affect the operation of Russian companies would be counteracted by the well-functioning mechanisms of attracting investors and businesses who would boost Russia’s domestic market, and, by securing good growth, would show to the overseas investors the benefits of the Russian jurisdiction.”

European and international bankers report they are sceptical of this assessment, not least of all because they believe the oligarch owners of the major Russian corporations, along with the Russian state banks, are under-estimating the impact on their liquidity, short-term credit, and long-term capital needs. A US banker says that since the sanctions began, his counterparts at the main Russian banks have been working “flat-out” on emergency planning, but keeping their options secret by pretending to be on May holiday. A European banker says his contacts show the chief executive offices are vacant, and the holidaying is genuine. He says: “the ostriches haven’t so much flown as put their heads where ostriches always do.”

Notwithstanding his endorsement of the international courts, Shokhin and his RUIE have taken no action in the European or UK courts to challenge the legality of the sanctions imposed so far – despite the favourable precedents already issued in London and Strasbourg.

John Mann is the spokesman for Roman Abramovich, one of the control shareholders of the Evraz steel and coal-mining group, and of Norilsk Nickel, Russia’s largest mining company. In reply to the Ukraine question, Mann replied: “I am away on vacation May 1 – 11. I will check email occasionally but for urgent matters you can reach me on my mobile or leave a message with [his Moscow secretary].” That number rang without answer.

Abramovich was proposed for US sanctions in an editorial by Russian opposition leader, Alexei Navalny. Abramovich was also identified as a possible sanctions target by British Prime Minister David Cameron. “We certainly haven’t ruled anyone out from this approach but as I say the EU approach and the way it works under the laws we have is that you need to target people who have a direct relationship with the action that has been taken.”

In the London press, the only sanctions which are reported to be occupying Abramovich’s mind are those he should take against Jose Mourinho, the manager (below, left) of his less than successful football team.


Alisher Usmanov (Red Book-3), like Abramovich, registers a fortune and a residence in the UK; lists two of his assets, Megafon and Mail.ru, on the London Stock Exchange (LSE), and is engaged in professional football there. Navalny also included him on his proscription list as among “the oligarchs whose media outlets parrot the regime lines.” The spokesman for Megafon referred the Ukraine question to Yulia Mazanova at Usmanov’s iron-ore and steel holding, Metalloinvest. Mazanova doesn’t answer her office telephone, and isn’t replying to emails.

Usmanov’s Russian rival in the telecommunications sector, Vladimir Yevtushenkov, has also kept his silence on the current questions. Ekaterina Tsukanova, spokesman at Yevtushenkov’s Sistema holding, confirms he has said nothing. On the political risks of their business, both Usmanov and Yevtushenkov have been much more voluble about Uzbekistan. In his financial reports, Yevtushenkov’s MTS telecommunication assets in Ukraine are considerably more valuable than those he lost (temporarily) in Uzbekistan.

Mikhail Fridman – with Vimpelcom the third telecommunications oligarch in Russia – is also exposed in Ukraine through Alfa Bank. A recent transaction of his required a ruling by the German government that it was unimpeded by the sanctions. According to Fridman’s spokesman Dmitry Skibitskiy, Fridman is saying nothing.

Anastasiya Mishanina of Severstal, the steelmaker owned by Alexei Mordashov, said: “No, he [Mordashov] did not make statements. He generally tries not to comment on political issues.”

Arseny Palagin, spokesman for Igor Zyuzin and the Mechel steel and coal-mining group, said that neither the owner nor the company has made any statements on Ukraine or sanctions. Nor are they intending to. Mechel owns coalmines in the US, which are currently closed because they are lossmaking at the current price of coking coal. Zyuzin has been trying to sell the assets for months.

Alexey Sadykov, the spokesman for Oleg Deripaska (Red Book-5) at the Basic Element holding, said: “The answer to all your questions — no.” In January, Deripaska said he believed the most important of his assets in Ukraine, the Nikolaev Alumina Refinery, was in “the safe zone in the south”.

TMK is the largest steel pipemaker in Russia, and with several plants in the US and Canada, the third largest pipemaker in the world. Its owner, Dmitry Pumpyansky, said through his spokesman that he has not made any statements about Ukraine.

Sergei Vykhukholev, spokesman for Victor Rashnikov, owner of Magnitogorsk Metallurgical Combine (MMK), said the same of Rashnikov.

lisin_putinVladimir Lisin (Red Book-2, and right) controls, not only the Novolipetsk Metallurgical Combine (NLMK), whose stock is listed on the LSE, but also the Amsterdam-based UCLH holding of ports and cargo terminals, railroad and shipping fleet which has been planning an LSE listing. Lisin did not respond to the questions; he has said nothing publicly. However, he authorized the European branch of NLMK to send out a letter warning governments in the European Union, where NLMK operates steelmills, that if they adopt US sanctions, they may backfire on the mills. A Lisin spokesman, Caroline Marlair, said at the time “the letter is not a threat, it is a letter of prevention … to make people aware of the possible consequences.”

Vagit Alekperov, chief executive and control shareholder of LUKoil, has made no public statement. But his office said it could not answer the Ukraine question until after May 12 “because everyone is on holidays now.” The company disclosed on April 3 that its Ukraine subsidiary was selling its Crimean petrol stations and oil depot to a Russian subsidiary, LUKoil-Yugneftprodukt; the latter is registered in Krasnodar city and operates a petroleum supply network for southwestern Russia. According to the company release, “the deal was closed with the aim to optimize the management system of the company’s sales network in the area and to improve the petroleum-supply pattern”.

Evgeniy Timoshinov of Summa Group, the Novorossiysk port operator and logistics holding of Ziyavudin Magomedov, said the group has made no statements. “We are a business, not a political organization”. In the past Magomedov has been outspoken on Asian political strategy, as well as on expanding the trade in Ural-blend crude oil through Rotterdam.

At the office of Vladimir Potanin (Red Book-4), spokesman Anton Muravyev said that Potanin has spoken about the sanctions risk for Norilsk Nickel, but nothing more. On March 20, after the RUIE meeting with Putin, Potanin told Itar-Tass that Norilsk Nickel “is ready for the possible imposition of sanctions by the European Union due to the accession of Crimea to the Russian Federation.” However, he added: “ the company does not expect serious consequences. For quite a long time we have been thinking about how we would react if those or other sanctions would be imposed . Though neither we nor our partners expect these sanctions, we have worked out certain protective measures, including the use of more foreign currency accounts, and we have considered [what] steps [to take] in the markets of Southeast Asia.”

Following the escalation of the US sanctions campaign, Potanin called in Bloomberg to respond. His company, he said, has already begun reorienting its mine production strategy to Russia, eliminating offshore operations in South Africa and Australia. “The strategy presented by Norilsk in October [2013] has proved to be sustainable in the current market and geopolitical situation,” he said. Norilsk will be presenting its strategy in London on May 19. Potanin said: “I see Indonesia as the key nickel price driver for the time being. The rest of the factors have only marginal influence.” He added that Norilsk was continuing to sign long-term supply contracts with European clients and to keep its customers in the US There had been no problem arranging a $750 million loan refinancing in April. “ The interest from the banks in this deal, and the cost of borrowing show that our Western partners, just as we do, do not believe in the scenario of additional sanctions. It’s not realistic as both sides will suffer.” Raffeisen (Austria) and Unicredit (Italy) were the banks in this deal.

Just one of the Russian oligarchs has spoken personally and explicitly about the Ukraine conflict. This is Mikhail Prokhorov (Red Book-1). His US assets include substantial real estate investments in New York, and the basketball team, the Brooklyn Nets (formerly New Jersey Nets). On March 6, Prokhorov wrote on his blog: “Like everyone else, I have been closely following the Ukrainian events. First of all, I urge the European Union and the United States, together with Russia, to investigate the facts of the snipers who fired on the Maidan.” After quoting Lenin on the relationship between politics and economics, he said the Ukrainian economic collapse “was too big for the EU, the US or Russia to solve alone… Therefore, we have to solve the problem together. The longer we drag on with the decision, the higher the exit price will be. And I’m not talking about the financial costs, but about the… humanitarian disaster.”

At the end of March it was reported in the New York press that Prokhorov was in negotiations to transfer Onexim Sports and Entertainment, owner of the Brooklyn basketball franchise, to Russian registration. Onexim said it had commenced discussions with the National Basketball Association (NBA) in 2013. “At that time, the league indicated its willingness to work with us in the event we needed to reregister the ownership vehicle of the Nets as a Russian entity to comply with the Russian law regarding candidates for political office. This is a long process, which may or may not come to fruition, and nothing is imminent.” The NBA has said it has “received no application nor is there a process underway through our office to transfer the ownership of the Nets to another company.”


On April 17 Prokhorov published a 2,700-word essay in Kommersant. The confrontation with the west, he argued, is giving Russia “an opportunity to solve many long-standing issues and thus have a chance at a major breakthrough. Conducting its own independent political line, especially in the tough geopolitical confrontation, is impossible without economic mobilization . The main objectives of this mobilization are searching for new domestic sources of economic growth; increased immunity to sanctions; an increase in incomes economically justified [to sustain] domestic demand.”

Prokhorov’s case for state support rejects Soviet methods, and he is critical of Putin’s administrative methods. “After 15 years of building the power vertical Russia has much more administrative power than the USSR (the number of state officials in Russia is 2.2 times higher than it was throughout the Union). At the same time there is a greater dependency on natural resources (for export oil comprises 67% now compared with 18% in 1987). The growth model based on public investment and bureaucratic control has exhausted itself. The deteriorating external conditions for the Russian response to the new political challenges will have to make a breakthrough with market-based methods.”

Prokhorov promotes state measures to benefit his banking business, and proposes state bank spending on the Russian stock market to revive flagging share prices. He doesn’t mention his 17% shareholding in Rusal, but this would benefit from the proposal to invest state funds in “no more than 10%-15% of the current amount of the free-float shares” to trigger a multiplier rise in equity value.

Prokhorov’s spokesman says the second part of his strategy plan will be published after the May holidays.

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