In summary
This article discusses how Russia’s invasion of Ukraine has influenced the global restructuring of Russian assets and the consequent effects on asset tracing investigations.
Discussion points
- Context regarding the events of the past 18 months
- Selected observations: trends in asset tracing investigations
- Challenges and considerations from a practitioner’s perspective
Referenced in this article
- US Financial Crimes Enforcement Network
- G7
- Central Bank of Russia
- European Parliament
- Financial Action Task Force
- US Department of Justice
- Ukrainian National Agency for the Prevention of Corruption
- Central Bank of the UAE
Introduction
The Russian economy has shrunk by between 2 and 4 per cent since Russia’s invasion of Ukraine in February 2022,[1] while inflation has risen sharply. In the early stages of the conflict, the average Russian citizen may not have felt the economic impacts of the war in Ukraine as Western sanctions did not target critical sectors such as food production and healthcare; however, prominent stakeholders in the Russian economy, fearful of sanctions and other risks, began moving their assets and restructuring their holdings immediately preceding the invasion and continue to do so.[2] Foreign investors have been exiting the country in droves.
Over 1,000 Western firms have either exited Russia or significantly reduced their presence since February 2022.[3] Companies have struggled to navigate the new reality of operating in a country with many financial institutions under sanction, where it is increasingly difficult to access foreign financing. Companies from nations that have imposed sanctions on Russia – such as EU countries, Japan, the United Kingdom and the United States – now need approval from the Russian government to sell their Russian businesses and fear Kremlin expropriation of their Russian assets. Asset values, which are reportedly determined by Russian authorities, are subject to a discount of at least 50 per cent.[4] Furthermore, as of March 2023, Russia requires foreign companies selling their businesses to donate 10 per cent of the sale price to the Russian federal budget.[5]
Some foreign businesses remain, but the value of many of their Russian assets has decreased significantly. In one of several examples, German carmaker Volkswagen wrote down the value of its Russian business by nearly €2 billion in 2022.[6]
Outside Russia, Russian state-controlled entities subject to sanctions are at risk of losing some of their assets as jurisdictions contemplate legal strategies in which frozen Russian assets would fund the post-war reconstruction of Ukraine.[7]Furthermore, the G7 and the European Union have imposed sanctions on the Central Bank of Russia, which, at the start of 2023, held foreign reserves in excess of US$630 billion. Approximately 54 per cent of that total has been frozen by five nations: France, Germany, Japan, the United Kingdom and the United States.[8]
The European Commission estimates that investment of the currently frozen Central Bank of Russia reserves – if invested in liquid assets with a short maturity – would generate 2.6 per cent in returns that could be used for Ukrainian reconstruction.[9] Challenging legal questions would arise from that action, as some experts have suggested it would violate sovereign immunity protecting state assets located abroad.[10]
Reacting to this geopolitical context, those with asset exposure in Russia, those subject to sanctions or at risk of being sanctioned, and Russian state-controlled entities operating abroad have made significant changes to their asset portfolios and the ways in which they conduct business. This article discusses, from the perspective of an asset tracing practitioner, some observations, challenges and considerations that have arisen following Russia’s invasion of Ukraine.
Selected observations
Many aspects of asset tracing investigations have been influenced by the events of the past 18 months. As hundreds of Russian companies and individuals are subject to G7, EU, Ukrainian and other sanctions, any association or link with a Russian business or oligarch anywhere in the world has become problematic. Law firms, corporations, banks and other financial services providers are closely evaluating the risks of associating themselves with Russia-linked businesses and individuals, including those that are not sanctioned.
Furthermore, those tracking the movement of assets have placed even greater scrutiny on certain jurisdictions in which Russian commerce and wealth have concentrated. As Russia-domiciled businesses restructure or relocate, asset tracing investigators face increasing pressure to identify the new centres of mobile wealth and the new support systems. With Cyprus, the United Arab Emirates (UAE), Turkey and other jurisdictions welcoming significant Russian wealth, even if temporarily, those countries have gained strategic importance for asset tracing professionals.
As such, below are two observations stemming from events over the past year and a half:
- To demonstrate or disprove sanctions exposure, there has been an increase in demand for investigations into the assets of unsanctioned Russian companies and individuals.
- There has been an even greater focus on Cyprus, the UAE, Turkey and other jurisdictions where Russian individuals and entities are investing, relocating their tangible assets and restructuring their corporate interests.
Increased interest in tracing assets of unsanctioned Russian entities and individuals
Among myriad other effects, the Russian invasion of Ukraine has increased demand for investigative work that disproves that a given subject – whether a client or a counterparty – maintains ongoing activities or assets in Russia.
A comprehensive asset tracing investigation can determine whether a client is potentially exposed to sanctions, whether through its own interests or those of business partners. This type of asset tracing is in demand by both Western clients worried about exposure to Russia and Russian expatriates who have built businesses outside Russia and now find themselves under close scrutiny.
Beyond concerns over sanctions exposure, ties to Russia more broadly have taken on new meaning since the invasion of Ukraine. Business interests, personal connections and public statements by members of the Russian business community are heavily scrutinised, being viewed through the prism of the post-invasion reality. Increasingly, Russian-born businesspeople in the United States or Europe have encountered problems raising funds, maintaining bank accounts and accessing other services.
Brandishing a list of potential targets drafted by its National Agency for the Prevention of Corruption, Ukraine has actively lobbied the United States, the United Kingdom, the European Union and other nations to significantly expand their sanctions regimes. Even candidates who escape sanctions can suffer reputational fallout.
One example is Italian cement maker Buzzi Unicem. Ukraine’s National Agency for the Prevention of Corruption (NACP) blacklisted Buzzi for allegedly doing business in Russia that sponsors the Russian war effort. Despite Buzzi’s rejection of the allegations and its claims that it has ceased operational work with the Russian subsidiary in question, the company’s shares dropped 4.5 per cent on the Milan Stock Exchange following the NACP’s announcement.[11]
In this reappraisal of ties to Russia, certain business relationships and board memberships have become reputationally, and sometimes legally, toxic. While the impact has been most pronounced in sensitive sectors or businesses with close government ties, it has also extended to less politically exposed sectors of Russia’s economy and been applied to more indirect links. For instance, previously uncontroversial activities and positions in academia have become reputational and potential regulatory hazards. While the individuals in question may have left those roles before or immediately after the invasion, the legacy association to a subsequently sanctioned entity or institution can be hard to shake off.
In this context, demand has increased substantially for investigations that help clients understand potential sanctions exposure and the full extent of an individual’s or an entity’s ties to and assets in Russia. While a subject’s primary business activities may occur outside Russia, certain factors – including personal investments, venture capital activities or ownership of personal property or holiday homes – can indicate a level of connectivity that introduces reputational or regulatory risk. This increased demand is fuelled, in part, by individuals seeking to prove a negative: to demonstrate their lack of ongoing connections to Russia; to document when properties were sold; or to establish the divestment of holdings in Russia-incorporated entities.
Cyprus, the UAE and Turkey as attractive destinations for Russian assets
As a result of the war in Ukraine, Russian assets have been relocated and restructured in foreign jurisdictions – with some prominent oligarchs having moved their assets abroad immediately preceding the invasion. Some countries have strengthened their already relevant position while others have emerged as key nexuses for Russian assets and investment.
In its December 2022 analysis, the US Treasury’s Financial Crimes Enforcement Network reported that, around the time of the invasion, Russian oligarchs took steps to protect their wealth in anticipation of sanctions. They began corporate restructuring and making international fund transfers, sending money to Europe – most frequently Switzerland, the United Kingdom or Cyprus, followed by the Middle East (principally, the UAE, Turkey and Israel).[12] The following section covers the activity in three jurisdictions: Cyprus, the UAE and Turkey.
Cyprus
While Cyprus has historically served as a haven for Russians seeking to transfer assets, open bank accounts or obtain EU citizenship through the country’s now-defunct citizenship by investment programme,[13] the Cypriot economy has been closely linked to Russia since the fall of Soviet Union.[14]
Wartime has seen an influx of wealthy Russians. In 2022, Cyprus reportedly received €5.6 billion in Russian deposits.[15] Many individuals have purchased property within Limassol’s popular residential and marina developments.
At the start of 2023, Minister of Finance Constantinos Petrides asserted that since the invasion, Cyprus has been in the process of revoking the passports of sanctioned Russian parties and has seized €105 million in Russian deposits;[16] however, despite these reported efforts, their impact on Russian asset movement is unpredictable in the medium and long term.
Regardless of the success of these initiatives, the UAE and Turkey have emerged as alternative destinations for Russian assets, providing similar incentives without EU regulatory exposure.
UAE
Despite having become a nexus for Russian assets and commercial activity since the start of the war, the UAE, at the time of writing, has yet to impose sanctions in relation to the invasion of Ukraine. Wealthy Russians have purchased real estate and established companies in Dubai, allowing them and their families to qualify for residency. Existing Russian companies have also been restructured using UAE corporate entities.
The Financial Timesreported that Luxhabitat Sotheby’s Dubai has sold ‘between $600mn and $1bn worth of homes to Russians or those from ex-Commonwealth of Independent States countries – all of them for more than $5mn’ in the past year.[17] The influx of Russian wealth has caused the price of Dubai real estate to rise dramatically, and many Russians are relocating their yachts and other moveable assets there.[18] Roman Abramovich’s Boeing 787-8 Dreamliner, reportedly owned through special purpose vehicles registered offshore and targeted for seizure by the US Department of Justice, has been grounded in the UAE since March 2022.[19]
However, the UAE’s laissez-faire attitude towards Russian economic activity within its borders may be shifting because of increased pressure from the United States, the United Kingdom and EU member states, as well as the Financial Action Task Force (FATF). Prior to the war, the UAE was making great strides towards cementing its status as the major international commercial hub in the region and improving its reputation by strengthening anti-corruption efforts and undertaking transparency initiatives; however, in a major setback to this effort, in March 2022, the FATF placed the UAE on its ‘grey list’ of nations that have ‘strategic deficiencies in their regimes to counter money laundering, terrorist financing, and proliferation financing’.[20] “Following the grey list designation, the UAE has claimed to have made progress in addressing some of FATF’s concerns.[21]
Furthermore, Western nations have started imposing sanctions on UAE-registered companies that are affiliated with the Russian state or knowingly assist in the evasion of sanctions. For instance, in February 2023, the European Union sanctioned SUN Ship Management, a Dubai-registered subsidiary of Russian state-controlled shipping company Sovcomflot.[22] The European Union, the United Kingdom and the United States are also pressuring the UAE to take action against Russian re-export of sanctioned goods, such as electronics and microchips, that are transported through Emirati ports.[23]
There are signs the tide is turning, making the UAE a less attractive location for Russian assets in the medium to long term. In March 2023, the Central Bank of the UAE announced that, owing to associated sanctions risks, it was revoking the banking licence of MTS Bank in Abu Dhabi, a subsidiary of Russia’s largest mobile operator, Mobile TeleSystems, on which the United States and the United Kingdom imposed sanctions in February 2023.[24] Furthermore, as the UAE does not offer citizenship to foreigners, Russians planning to reside in the UAE must rely on visas indefinitely, making the jurisdiction less attractive in the long term.
Turkey
Turkey has also emerged as a popular destination for Russian assets. In the early months of the invasion, Turkish officials, including President Recep Tayyip Erdoğan and Foreign Minister Mevlüt Çavuşoğlu, seemed to encourage Russian oligarchs to relocate their assets to Turkey.[25] And they did: a February 2023 media analysis of marine traffic data shows Turkey to be the only Mediterranean country that has continued to attract superyachts believed to be beneficially owned by Russian oligarchs.[26]
A prominent example is Roman Abramovich’s superyachts. Two have been in the country since March 2022, while two others were moved there from Antigua in July 2022, following an unsuccessful seizure attempt by UK authorities.[27] In early 2023, Turkey also received the Irina VU, a Sunseeker yacht reportedly linked to sanctioned businessman Alisher Usmanov that was reportedly brought to the country, in violation of sanctions, from a marina in Croatia, where it had been impounded.[28]
According to data from the Turkish Statistical Institute,one-quarter of the Turkish homes sold to foreigners in 2022 were sold to Russians – an amount that doubled in one year, perhaps because Turkey offers citizenship with a minimum real estate investment of approximately US$400,000 or with various forms of deposits starting at US$500,000.[29]
In 2022, Russians established more than 1,300 firms in Turkey, a 670 per cent increase from the previous year, according to data from The Economic Policy Research Foundation of Turkey.[30] Meanwhile, Turkish companies have sought Western firms’ Russian assets, which are being offloaded because of Western fear of ties to Russia and other risks, such as massive devaluations.[31] Unlike Western foreign investors, many Turkish companies are retaining ownership of their assets in Russia.
Turkey is in a unique position: it is a member of NATO and a supplier of arms to Ukraine, yet a major trading partner of Russia. It has been reliant on Russian energy imports following devastating earthquakes in February 2023. Like the UAE, Turkey has emerged as a trans-shipment point for semiconductors and other electronics that can be used for military purposes and has been heavily criticised by the United States and the European Union as such.[32] In March 2023, Turkish officials reportedly announced that Ankara would block the trans-shipment of goods sanctioned by the European Union.[33]
While it is difficult to predict how relevant Turkey will remain as a destination for Russian assets in the long term, particularly given the country’s economic instability in recent years, it is likely to remain a popular destination in the near term.
Challenges and considerations
Asset tracing investigations are facing new challenges and other considerations to which they must adapt to be effective. Unsurprisingly, the Russia has begun restricting access to public record information that was once widely accessible. Furthermore, corporates and individuals with sanctions exposure, or that are seeking to obfuscate their links with Russia generally, are restructuring their asset portfolios and utilising nominee relationships to a greater extent, and pressure strategies that once provided leverage in sovereign-related disputes appear to be losing their edge.
Accessibility of information
Until the Ukrainian conflict, information relevant to asset tracing investigations was relatively accessible in theRussian public domain. Since the turn of the millennium, a wealth of data has been available in the public record, from litigation filings to extensive corporate, property and financial records. A plethora of government websites provided detailed information on various sectors of Russia’s economy. As a result, successful asset trackers required only knowledge of where and how to retrieve information and familiarity with new tools and resources as they became available.
Access to public information began to be limited in 2014, when Russia annexed Crimea and launched its military operation in eastern Ukraine. The restrictions increased in February 2022. Access to Russian government websites and the websites of some state-owned companies has been denied to users outside Russia or rendered useless by reduced connection speeds. In the first six months after the invasion of Ukraine, at least 10 Russian state departments removed access to information, citing the need to protect themselves from ‘unfriendly countries’ (ie, those imposing sanctions). In February 2023, the State Duma, the lower house of the Russian Federal Assembly, passed a law allowing any department of the Russian state to withhold or suspend access to data.
The Central Bank of Russia has stopped publishing details about its international or gold reserves and has allowed Russian banks to withhold financial statements and ownership information. Companies listed on Russian stock exchanges have been exempted from requirements to publish corporate information until summer 2023. Russian government officials are no longer required to publicly declare their annual income and assets.
The Russian government notes these measures have been taken to protect against sanctions-related risk, but they have also removed transparency from many aspects of life in Russia. The Federal Treasury no longer discloses budget details, relieving itself of accountability and making it impossible to analyse how public funds are distributed. The property register closed its doors in March 2023. Now, data can be retrieved only with the owner’s permission. More than ever, investigators face serious challenges in accessing public record information in Russia.
Some obstacles can be overcome through collaboration with sources that can access information available inside Russia. But this collaboration comes at a cost: it risks branding as ‘foreign agents’ Russian non-governmental organisations, journalists, investigators and ordinary citizens.
Introduced in 2012 as a reaction to protests against Putin’s return as president, the Foreign Agent Law has been broadened significantly and now applies to anyone deemed to be under ‘foreign influence’ or to be receiving ‘support’ from outside Russia. Although vaguely defined, the Treason Law, another draconian measure introduced in 2012 and expanded since, makes it easy to label someone as a traitor or a dissident, which can lead to a prison sentence of up to 20 years for espionage. The March 2023 arrest on espionage charges of Wall Street Journal reporter Evan Gershkovich is a sobering reminder that investigative work in Russia has become a very risky business.
In this context, asset investigators must protect human sources while triangulating information from those databases that remain available. It can be expected that access to data will continue to be restricted, suggesting that information should be preserved while still obtainable.
Fortunately, most Russia-related asset tracing work is international, and useful information can often be found in other jurisdictions. Even as Russia withdraws from the integrated world economy, tactics remain available that can be effective in international asset tracing investigations.
Ownership restructuring and use of nominees
Russian entities have taken steps to restructure the ownership of their corporate and tangible assets in response to, or anticipation of, sanctions or to distance themselves from Moscow generally. The use of nominee relationships has flourished as individuals and companies seek to conceal their ownership of assets. In April 2023, for instance, press covering the ‘Oligarch files’ data leak reported that Roman Abramovich used a Cypriot firm, MeritServus, to transfer beneficial ownership of 10 of his multibillion-dollar trusts to his children several weeks prior to Russia’s invasion.[34]
As a result, regulatory authorities are increasingly scrutinising the mechanisms, nominees and firms employed by sanctioned individuals, such as UK law firms engaged by Wagner Group chief Yevgeny Prigozhin or the use of his elderly mother as a nominee. Further, elements of the Cypriot system that can be used to circumvent sanctions or conceal assets have not escaped examination.[35] Offshore service providers, used to structure asset ownership through shell companies and trusts, are a primary target of European regulators, particularly in light of their reported use by sanctioned individuals and entities.[36]
Asset tracing practitioners must adapt to this dynamic environment. Those tasked with deconstructing complex holding structures must decipher nominee relationships that are sometimes not identifiable in the public record, meaning human intelligence gathering and applications for disclosure orders may be needed.
Sovereign assets
In sovereign disputes, certain pressure strategies may have arguably lost their effectiveness. With the Russian government and state-owned entities increasingly ignoring established rules, it seems unlikely they will be susceptible to pressure to meet at the negotiating table.
This repositioning is emblematic of the country’s broader disengagement from the world economy, evident within the past year in disputes over Russia’s failure to fulfil contractual obligations. International arbitration proceedings have been initiated against Russian energy companies to recover billions of dollars lost to under-deliveries and other contractual breaches.[37] This includes RWE’s arbitration proceedings against Gazprom, for instance.
The war also revivified a long-standing case targeting Russian assets: in April 2022, following a six-year stay, a US court approved the enforcement of the US$57 billion award against defunct state oil entity Yukos, citing concerns the war will make it more challenging to enforce against state assets.[38]
The Russian government is likely to create significant impediments to sovereign asset recovery.[39] For instance, in the aviation sector, Russian state-owned airlines such as Aeroflot operate a fleet of foreign-made leased aircraft. In March 2023, as sanctions took effect, the Russian state passed a law allowing airlines to re-register their planes, effectively appropriating an estimated US$10 billion worth of leased aircraft. Since then, Aeroflot and other airlines have simply ignored requests by aircraft leasing firms in Bermuda and Ireland to return the aircraft, leading to a swathe of claims in London courts.
Conclusion
To understate the case, the past year and a half has been a memorable time for asset tracing practitioners working on Russia-related investigations. With no sign that President Vladimir Putin is considering disengaging from Ukraine, sustained movement of Russian wealth is likely to continue just as sanctions regimes have been reinvigorated by the war, fuelling demand for asset tracing work. Faced with a shrinking Russian public domain and a government hostile to unauthorised disclosures of information, investigators have to be flexible, innovative and creative to produce tangible results for their clients.
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