Returning to a Private Haven: How Russian Businessmen Are Addressing Sanctions and Succession Issues.
Asset Protection
Since May 2022, the EU, as part of its fifth package of sanctions, has prohibited the creation of new trusts for Russians. Many countries, including Cyprus, Switzerland, and Liechtenstein, have banned the provision of services for managing family trusts where Russian citizens are settlors or beneficiaries.
Many Russian business owners are grappling with the same problem: what to do with their assets located in the West? Business owners are forced to act based on their current capabilities and limitations, while the unpredictability of the situation has grown exponentially.
Therefore, to avoid sanctions and protect their funds, some business owners are divesting from foreign assets and repatriating capital to Russia, others are choosing friendly countries, such as the UAE. There are also those who keep a significant portion of their wealth in cash in undisclosed locations.
Inheritance Issues
Meanwhile, the combined wealth of Russians on the Bloomberg Billionaires Index is approximately $350 billion, and their average age is 63. This means that in the coming decades, they will need to make decisions about transferring assets by inheritance, and should already be addressing the issue of effective asset management.
Some have already begun this process, for example, Vladimir Evtushenkov, who has already transferred assets to his son, while others are still seeking solutions.
Personal Foundation
Against this backdrop, Russia is creating conditions for the repatriation of assets. This includes amendments to the Civil Code of the Russian Federation (introduced by Federal Law No. 287-FZ of July 1, 2021), allowing for the creation of personal foundations. The ability to establish personal foundations in Russia became available on March 1, 2022, when these amendments came into force. Such foundations can hold any assets: businesses, real estate, shares, etc.
Personal foundations are intended to be an alternative to foreign private foundations and trusts. These foundations are designed to help entrepreneurs effectively manage their assets during their lifetime and after death.
Currently, personal foundations are classified as non-profit organizations, but the Ministry of Economic Development is actively reforming their regulatory framework, RBC reports. They will be removed from the oversight of the Ministry of Justice and exempted from annual reports and inspections.
Furthermore, the Ministry of Economic Development proposes granting personal foundations the status of a qualified investor. This will allow them to invest in a broader range of securities, including high-yield securities, provided they comply with anti-money laundering and counter-terrorism financing requirements.
One of the goals of the amendments is to simplify the state registration of personal foundations. The decision on state registration of a foundation will be made not by the Ministry of Justice (which typically registers non-profit organizations), but by the Federal Tax Service (FTS) — similar to commercial organizations. Personal foundations can only be established, reorganized, and have their constituent documents amended based on an application certified by a notary. The notary will also be responsible for verifying that the personal property transferred to the foundation is worth more than 100 million rubles (this is the minimum contribution amount for personal foundations).
The changes are expected to come into effect on September 1, 2024.
The pioneer in establishing a personal foundation in Russia was Khachatur Arushanov, a businessman and one of the pioneers of Runet (the Russian internet), who also participated in the launch of Russia's first business TV channel, RBC-TV, in 2003.
The only Forbes-listed billionaire to transfer assets to a personal foundation in Russia was Igor Kesaev, co-owner of the 'Krasnoe & Beloe' and 'Bristol' stores, who was sanctioned in 2022.
A personal foundation is held by the family of Timur Akhmerov, founder and CEO of the IT company 'Bars Group' (part of 'Rostec'), as well as by Foat Komarov, former State Duma deputy from 'United Russia' and founder of the 'SMP' group, which owns oil companies in Tatarstan.
As of June 15, 2024, according to the Unified State Register of Legal Entities (EGRYUL), only 36 foundations are registered in Russia.
Alternative
Despite the initiatives of the Ministry of Economic Development, Russian businessmen currently prefer to establish funds in countries that have not supported sanctions, such as the UAE, Forbes reports. The number of such structures significantly exceeds the number of Russian funds.
Billionaire Vladimir Lisin transferred his stakes in NLMK and First Cargo Company from Cyprus to Abu Dhabi.
The UAE offers favorable conditions for establishing trusts and foundations. Despite the introduction of corporate tax, personal funds can obtain the status of an unincorporated partnership, and the tax liability is transferred to individuals. In the UAE, individuals' income from investments, property sales, and rentals is exempt from income tax.
In addition to the UAE, Russians are establishing trust/fund structures in jurisdictions such as Bahrain, Mauritius, Seychelles, Curaçao, and Hong Kong.
- https://www.bloomberg.com/news/articles/2024-05-08/russian-billionaires-find-war-in-ukraine-has-created-new-succession-challenges
- https://www.forbes.ru/finansy/507622-eto-licnoe-minek-povysit-konfidencial-nost-fondov-sostoatel-nyh-rossian
- https://www.rbc.ru/economics/07/03/2024/65e829cf9a7947b91323df44?from=copy
- https://regulation.gov.ru/Regulation/Npa/PublicView?npaID=146185