Alisher Usmanov, Russia's richest person, moved control of most of his $20-billion fortune in December 2012 to a holding company based in the British Virgin Islands, some 5,600 miles away from Moscow.
The company, USM Holdings, controls Usmanov's most valuable asset, Metalloinvest Holding Co, Russia's largest iron ore producer, through two Cyprus-based subsidiaries - USM Steel & Mining Group Ltd and USM Investments Ltd - according to Metalloinvest's annual report.
"Offshores are the main tool for Russian businessmen to protect their assets from state authorities, rivals and all kinds of raiders," Valery Tutykhin, an attorney with John Tiner & Partners, a Geneva-based law firm, said in a phone interview.
All of Russia's 20 richest people - with a combined net worth of more than $227 billion - control a portion of their fortune through holding companies registered outside the country. The billionaires use the entities to manage, preserve and conceal their wealth -- a tactic that has drawn the ire of Russian President Vladimir Putin. Viktor Vekselberg, 56, holds the majority of his $14.8-billion fortune through Bahamas-based Renova Holdings.
Vladimir Lisin, 56, controls his 85 per cent stake in publicly-traded OAO Novolipetsk Steel, Russia's most valuable steelmaker, through Cyprus-based Fletcher Group Holdings Ltd.
Mikhail Fridman, 49, controls his banking, retail and telecommunications assets through Moscow-based Alfa Group, owned by Gibraltar-based CTF Holdings.
Putin has vowed to bring some of the money home. Last year, he took control of the Federal Financial Monitoring Service, an executive body to combat money laundering. The State Duma, Russia's lower house of Parliament, introduced a series of amendments to existing laws, tightening control over companies' financial transactions.
'Score-Settling'
In a speech to the nation in December 2012, Putin criticised the country's legal system and the elements that led to accusations of wrongdoing, vowing to eliminate the factors that have turned "economic disputes into score-settling."
Putin said in a televised news conference the following week that he "hoped" the billionaires who sold their 50 per cent stake in TNK-BP, Russia's third-largest oil company, for $28 billion, would reinvest the proceeds in their home country.
So far, there's been little money flowing back to Russia. Fridman and his partners at Alfa Group announced on March 18 that they would create a global investment company to pursue energy and telecommunications assets. Two weeks later, through Altimo, a unit of Alfa based in the British Virgin Islands, Fridman offered to buy out minority investors in Cairo-based Orascom Telecom Holding SAE in a deal for as much as $1.8 billion. "
'Enhance Efficiency'
"The formation of a single holding company enables us to optimize business processes, enhance the efficiency of managing subsidiary companies, and provide more opportunities to access international capital markets," Usmanov said in an email response in February.
"The Russia-Cyprus-BVI structure is the most attractive form of holding company," Andrey Goltsblat, managing partner of Moscow-based Goltsblat BLP, the Russian practice of the international law firm Berwin Leighton Paisne, said by phone.
Russian billionaires create companies in the British Virgin Islands because they find its legal system, which is based on British law, more attractive than their own, according to Steven Philippsohn, a senior partner at PCB Litigation, a London-based firm that helps banks track offshore assets held by Russians.
Tax Avoidance
Cyprus-based entities allow them to benefit from lower tax rates available under the double-tax avoidance treaty signed by the Mediterranean island nation and Russia in 1998. Cyprus also caps taxation of dividends paid from Russia at 5 percent and allows tax-free cash transfers to the British Virgin Islands, according to Artem Toropov, a senior associate at Goltsblat.
The transfer of wealth from the Russian state to individuals began when former president Boris Yeltsin kickstarted Russia's privatisation era, David Hoffman says in his book The Oligarchs.
Oleg Deripaska, Russia's 15th-richest man, described Russia's economic environment at the time as one of beatings, boardroom intimidations and public assassinations, according to his written defence in a 2012 London lawsuit.
In 1994, Deripaska established his DKK foundation in Liechtenstein. He was later persuaded by Cherney to use Syndikus Treunhand Anstalt, a Vaduz, Liechtenstein-based nominee trust company, to hold his aluminum assets, according to the suit.
'Clear Shift'
Putin's arrival as a political power in 1999 marked a "clear shift of the political and legal landscape," Deripaska wrote in his defence.
Roman Abramovich, Russia's eighth-richest man, used a maze of offshore entities to build and control his $12.9-billion commodities fortune. According to a lawsuit brought against him in London by Boris Berezovsky, Abramovich shuffled assets, including stakes in oil, aluminum, automobile manufacturing and airlines, between holding companies in Gibraltar, Cyprus and the British Virgin Islands.
Offshore Vehicles
The importance of offshore holdings in Russia was emphasised by Steven Theede, former chief executive of Yukos Oil Co., once Russia's biggest oil producer. He told the Amsterdam Court of First Instance in 2010 that offshore vehicles and international courts were necessary to protect assets because of the government's "manipulation" of the Russian legal system.
Swiss attorney Tutykhin said Russian billionaires will continue to hold their main assets out of Russia, even in the face of Putin's tough talk. "The more restrictions on money flows Russian authorities will impose, the more reasons Russia's rich would have to hold their assets abroad."
