Russian billionaires scramble to reshape their fortunes while they can

Vadim Moshkovich cut his stake in agricultural conglomerate Ros Agro to below 50 per cent before the sanctions hit. Andrey Melnichenko withdrew as a beneficiary of his roughly $US17 billion stake in fertiliser producer EuroChem and thermal coal supplier Suek effective March 9 — the day he and others were sanctioned.

“They might be thinking, I’m going to take my daughter, my wife, my employee or employees, and I’m going to put this stuff in other names. It’s going to show up and it’s going to be documented that I’m not the majority owner.”

Howard Mendelsohn, chief client officer at data analytics firm Kharon

That didn’t stop Italian authorities from seizing Melnichenko’s $US580 million-euro superyacht in Trieste, Italy. There is no justification for Melnichenko to be on an EU sanctions list, and he will be challenging the measures, a spokesman for Melnichenko said in an email Saturday after the seizure was announced.

Sanctions require compliance from industries, and companies have to quickly dig through corporate ownership layers to find, freeze and report relevant accounts. In the US, they share findings with the Office of Foreign Assets Control, or OFAC.

It may take time for financial institutions to identify associated accounts of a sanctioned individual that aren’t already widely known, said Howard Mendelsohn, chief client officer at Kharon, which uses technology and experts to construct the network of relationships around sanctioned parties.

Shuffle time

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Someone who is sanctioned can use that as a window to hire lawyers, consider ownership changes and otherwise move assets around, he said.

“They might be thinking, ‘I might have a little time here before anyone figures out what all my companies are, especially those that are majority-owned,‘” Mendelsohn said. “I’m going to shuffle. I’m going to take my daughter, my wife, my employee or employees, and I’m going to put this stuff in other names. It’s going to show up and it’s going to be documented that I’m not the majority owner.”

In the US, there’s a clear incentive to drop majority control: OFAC’s so-called 50 per cent rule.

It states that property or interests owned by sanctioned individuals must be blocked if people named on the government’s list have a 50 per cent or greater aggregate stake. That makes divesting shares a popular manoeuvre to get under that threshold.

The US Treasury has the power to name and sanction spouses or adult children of sanctioned individuals under a 2021 executive order.

Prior shifts

It’s not the first time Russian tycoons have resorted to shuffling assets. Oil mogul Gennady Timchenko sold an almost 50 per cent stake in a Finnish petroleum distributor days before being sanctioned following Russia’s annexation of Crimea in 2014.

Oleg Deripaska was sanctioned by the US in 2018. To ensure aluminum company En+ Group International PJSC’s was removed from OFAC’s list, he shrunk his stake to 45 per cent from 70 per cent through a complex array of transactions involving a share tender to a state-owned bank, stock transfers and charitable donations.

OFAC lifted sanctions on En+, citing that the majority of board directors were independent.

“When you’re talking about, say, a Russian oligarch, if Oleg Deripaska still has a 33 per cent voting stake, would you vote against him?” said Eric Sohn, director at Dow Jones Risk & Compliance.

Transactions have multiplied in recent days as Russia’s richest sense a closing window. For some, it may be too late.

Roman Abramovich, the billionaire owner of Chelsea Football Club, said on March 2 that the storied sports franchise was up for sale. Yet a week later, the UK sanctioned him and six other Russians, leaving the team in limbo.

As for Mordashov, the major shareholder of one of Russia’s biggest steelmakers, he’s called the Ukraine conflict “a tragedy” and said he doesn’t understand why the EU imposed sanctions on him.

A spokesperson for Mordashov confirmed the recent share transfers, declining to comment further. He’s worth $US19.6 billion, according to the Bloomberg Billionaires Index.

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Russia’s ultra-wealthy have lost more than $US90 billion in the fallout from the Ukraine invasion. With no letup in sight, wealthy and connected Russians are likely trying to protect and shield their interests as authorities’ targets get broader, Kharon’s Mendelsohn said.

“If they’re not listed now, they’re definitely anxious,” he said.