Russians profit from Britain's offshore secrecy

The UK's approach has attracted many post-Soviet billionaires, including some on the run

• David Leigh, Harold Frayman and James Ball
• The Guardian, Tuesday 27 November 2012 18.21 GMT

Ukrainian billionaire Rinat Akhmetov used a BVI company to buy the most expensive flat sold in London, at One Hyde Park. Photograph: Sergei Supinsky/AFP/Getty

Also read HSBC - A case of Discrimination

Britain's friendly regime of offshore secrecy has tempted an extraordinary array of post-Soviet billionaires to descend on London, sometimes to the sound of gunfire.

Vladimir Antonov fled permanently to Britain after his father, Alexander, was gunned down in a Moscow street in 2009. Another associate, German Gorbuntsov, narrowly survived a volley of shots in London last March.

When Antonov bought a luxury yacht in Antibes, the Sea D, he was careful to register its ownership to an anonymous British Virgin Islands (BVI) entity, Danforth Ventures Inc.

He also found funds to try to take over the ailing Swedish car manufacturer Saab, though he did not take control. He did succeed for a while in owning the even more ailing Portsmouth football club.

Antonov is currently on bail in Britain. Lithuanian authorities are trying to extradite him for allegedly looting their collapsed bank Snoras, which he denies.

The allegation that oligarchs exploit Britain's offshore secrecy regime to shift assets out of their own countries is not an uncommon one. One refugee from the law is the Kazakh billionaire Mukhtar Ablyazov, who was allegedly last seen in February heading out of London on a coach to France. Ablyazov has been sentenced to 22 months in jail for contempt of court as the BTA Bank in Kazakhstan attempts to pursue his maze of offshore assets. The bank's lawyers claim Ablyazov has made off with £4bn using BVI and Seychelles companies, nominee directors and layers of front men. Ablyazov denies it.

These billionaires justify their use of British-controlled secrecy jurisdictions because they say they must protect themselves from corporate predators and political enemies in their home countries.

Another fleeing oligarch, the Georgian Badri Patarkatsishvili – a partner of fellow exile Boris Berezovsky– was found dead in 2008 in his Surrey mansion. Patarkatsishvili's business manager, Eugene Jaffe, managed £500m of the Georgian's assets from a central London office through a BVI company, Salford Capital Partners. Jaffe's company was owned in turn by an opaque BVI trust he set up called Montana River.

The wild-west financial landscape of post-Soviet Russia has attracted at least one entrepreneur from the British Isles to exploit the possibilities of the BVI secrecy regime. We have traced BVI entities used in Russia by the man once known as the richest in Ireland, the property developer Seán Quinn. He expanded into schemes for shopping malls in Moscow and Kiev.

He has now declared himself bankrupt and has received an Irish jail sentence for contempt, as the now state-owned Anglo Irish Bank seeks to recover what it says is a missing £2bn.

Other post-Soviet financiers have used Britain's secret offshore facilities for widely different purposes. The London-based Latvian oil trader Evgeny Tikhonov set up an entity in the BVI to hide a total of $2.4m (£1.5m) that his employer, Shell, subsequently convinced a British civil court he was wrongly skimming off from fuel deals. He was, however, acquitted of criminal charges over this.

The fund manager Igor Tsukanov, another arrival in the fashionable west London area of Notting Hill, kept funds in the BVI that will have apparently legally sheltered them from Russian taxes.

Dimitry Sergeev, a mobile phone games entrepreneur from Novosibirsk, whose firm was BVI-registered, faced a potentially costly dispute with a small Manchester supplier over some allegedly unpaid invoices. A source there said: "We decided it was too difficult to bring a legal action in the BVI." Sergeev did not comment.

Undoubtedly the most flamboyant post-Soviet beneficiary of Britain's offshore secrecy regime is Rinat Akhmetov, the richest man in the Ukraine. From a base in the coal-mining Donetsk region, he has personally acquired industrial assets estimated to be worth £11bn. He shifted £136m out of the former Soviet republic in 2007, in order to buy the most expensive flat sold in London, at One Hyde Park.

Asked why he hid behind a BVI company, his company spokesman in the Ukraine said it was "for internal structuring reasons". He added: "Water Property Holdings Limited fully paid all taxes and charges … as required by applicable laws in the UK. This includes payment in February 2011 of stamp duty land tax (SDLT) at a rate of 4% which amounted to £5.467m."

Legal use of BVI entities to disguise Russian movement of funds into British companies, also appears to be widespread. In one example we have unearthed, a British-registered firm, Pennard Chemicals Ltd, with an address at rental offices in Cannon St in the City of London, has had declared revenue over the last 3 years of more than 100 million euros, described as commission on unspecified Russian deals. Pennard Chemicals named director, The Hon Andrew Moray Stuart, with an address in Mauritius, is one of the sham nominees the Guardian/ICIJ research has identified. The shareholder, Imex Executive Ltd, is a BVI entity set up by a Moscow incorporation agency. In turn, its sham nominee directors include Jesse Hester in Mauritius and a sham nominee shareholder, Brenda Cocksedge. These nominees sell their names, without exercising genuine control or ownership. The real owner, according to company records we have seen, is named as Ivan Kovlachuk.

Brain drain or not, the right to emigrate is fundamental

S A Aiyer

Socialists like health minister Ghulam Nabi Azad won't admit it, but they rather liked the Berlin Wall. They think it's morally right to keep citizens captive at home, unable to migrate for better prospects. Azad has proposed not a brick wall but a financial one: he wants all doctors going to the US for higher studies to sign a financial bond that will be forfeited if they do not return.




Sorry, but the right to emigrate is fundamental. States can curb immigration, but not emigration. The UN declaration of human rights says in Article 13, "Everyone has the right to leave any country, including his own." Article 12 of the International Covenant on Civil and Political Rights incorporates this right into treaty law. It says: "Everyone shall be free to leave any country, including his own. The above-mentioned rights shall not be subject to any restrictions except those provided by law necessary to protect national security, public order, public health or morals or the rights and freedoms of others." The public health exception relates to communicable diseases, not a shortage of doctors.



Hitler didn't give German Jews the right to migrate. Communist East Germany thought it had a right to shoot citizens attempting to escape over the Berlin Wall. The Soviet Union mostly had strict curbs on emigration, but allowed the mass exit of its Jews to Israel after the 1967 war in which Moscow backedthe Arabs. Moscow imposed a "diploma tax" on emigrants with higher education, to claw back the cost of their education. Israel often picked up the bill, leading to sneers that the Soviet Union was selling Jews. International protests obliged Moscow to abolish the tax.



Like the Soviets, Azad wants to claw back sums spent on educating doctors. Like East Germany, he seeks to erect exit barriers by denying Indian doctors a 'no objection certificate' to practice in the US. The right to emigrate does not enter his calculations: Azad does not want this azaadi!



Many Indians will back him, saying the brain drain imposes high costs on India. Well, all principles have some costs, but that's no reason to abandon them. Azad wants curbs just on doctors, but the principle applies to all Indians. Would India be better off if it had kept captive at home economists like Amartya Sen and Jagdish Bhagwati? Three Indian migrants to the US have won Nobel Prizes-Gobind Khurana (medicine) Chandra Shekhar (physics) and V Ramakrishnan (chemistry). Had they been stopped from leaving India, would they have ever risen to such heights?



Cost estimates of the brain drain are exaggerated or downright false. Remittances from overseas Indians are now around $60 billion a year. NRI bank deposits bring up to $30 billion a year. Together, they greatly exceed India's entire spending on education (around $75 billion). Even more valuable are skills brought back by returnees.



Remittances skyrocketed only after India made it easier in the 1990s for students to go abroad. One lakh per year go to the US alone. The number of US citizens of Indian origin has tripled since 1990 to three million, and the US has replaced the Gulf as the main source of remittances.



The brain drain has anyway given way to brain circulation. Youngsters going abroad actually have very limited skills. But they hugely improve their skills abroad, mainly through job experience, so returnees bring back much brainpower.



Indian returnees were relatively few during the licence-permit raj, because omnipresent controls stifled domestic opportunities. But economic liberalization has created a boom in opportunities of every sort, so more Indians are returning. Azad should note that the fast expansion of private hospitals has attracted back many doctors. Scientists, software engineers, managers and professionals of all sorts have flocked back. This carries a simple policy lesson: create opportunity, not barriers.



Millions of Indians will not come back. Yet they do not constitute a drain. They have become huge financial assets for India through remittances and investments.



They have also become a foreign policy asset. Three million Indian Americans now occupy high positions in academia, Wall Street, business and professions. They have become important political contributors, and two have entered politics and become state governors (Bobby Jindal and Nikki Haley). Indian Americans have become a formidable lobby, helping shift US policy in India's favour, to Pakistan's dismay.



However, these are secondary issues. The main issue is human freedom. The UN declaration of human rights recognizes the right to migrate. This fundamental freedom has more value by far than the financial or foreign policy value of the diaspora. Never forget this in the brain drain debate.

Post Soviet Privatisation - A policy of mass destruction

http://www.cam.ac.uk/research/news/a-policy-of-mass-destruction/

A new study reveals how a radical economic policy devised by western economists put former Soviet states on a road to bankruptcy and corruption.

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A new analysis showing how the radical policies advocated by western economists helped to bankrupt Russia and other former Soviet countries after the Cold War has been released by researchers.

The study, led by academics at the University of Cambridge, is the first to trace a direct link between the mass privatisation programmes adopted by several former Soviet states, and the economic failure and corruption that followed.

Devised principally by western economists, mass privatisation was a radical policy to privatise rapidly large parts of the economies of countries such as Russia during the early 1990s. the policy was pushed heavily by the International Monetary Fund, the World Bank and the European Bank for Reconstruction and Development (EBRD). Its aim was to guarantee a swift transition to capitalism, before Soviet sympathisers could seize back the reins of power.

Instead of the predicted economic boom, what followed in many ex-Communist countries was a severe recession, on a par with the Great Depression of the United States and Europe in the 1930s. The reasons for economic collapse and skyrocketing poverty in Eastern Europe, however, have never been fully understood. Nor have researchers been able to explain why this happened in some countries, like Russia, but not in others, such as Estonia.

Some economists argue that mass privatisation would have worked if it had been implemented even more rapidly and extensively. Conversely, others argue that although mass privatisation was the right policy, the initial conditions were not met to make it work well. Further still, some scholars suggest that the real problem had more to do with political reform.

Writing in the new, April issue of the American Sociological Review, Lawrence King and David Stuckler from the University of Cambridge and Patrick Hamm, from Harvard University, test for the first time the idea that implementing mass privatisation was linked to worsening economic outcomes, both for individual firms, and entire economies. The more faithfully countries adopted the policy, the more they endured economic crime, corruption and economic failure. This happened, the study argues, because the policy itself undermined the state’s functioning and exposed swathes of the economy to corruption.

The report also carries a warning for the modern age: “Rapid and extensive privatisation is being promoted by some economists to resolve the current debt crises in the West and to help achieve reform in Middle Eastern and North African economies,” said King. “This paper shows that the most radical privatisation programme in history failed the countries it was meant to help. The lessons of unintended consequences in Russia suggest we should proceed with great caution when implementing untested economic reforms.”

Mass privatisation was adopted in about half of former Communist countries after the Soviet Union’s collapse. Sometimes known as “coupon privatisation”, it involved distributing vouchers to ordinary citizens which could then be redeemed as shares in national enterprises. In practice, few people understood the policy and most were desperately poor, so they sold their vouchers as quickly as possible. In countries like Russia, this enabled profiteers to buy up shares and take over large parts of the new private sector.

The researchers argue that mass privatization failed for two main reasons. First, it undermined the state by removing its revenue base – the profits from state-owned enterprises that had existed under Soviet rule – and its ability to regulate the emerging market economy. Second, mass privatization created enterprises devoid of strategic ownership and guidance by opening them up to corrupt owners who stripped assets and failed to develop their firms. “The result was a vicious cycle of a failing state and economy,” King said.

To test this hypothesis, King, Stuckler and Hamm compared the fortunes between 1990 and 2000 of 25 former Communist countries, among them states that mass-privatised and others that did not. World Bank survey data of managers from more than 3,500 firms in 24 post-communist countries was also examined.

The results show a direct and consistent link between mass privatisation, declining state fiscal revenues, and worse economic growth. Between 1990 and 2000, government spending was about 20% lower in mass privatising countries than in those which underwent a steadier form of change. This was the case even after the researchers adjusted for political reforms, other economic reforms, the presence of oil, and other initial transition conditions.

Similarly, mass privatising states experienced an average dip in GDP per capita more than 16% above that of non mass-privatising countries after the programme was implemented.

The analysis of individual firms revealed that among mass-privatising countries, firms privatised to domestic owners had greater risks of economic corruption. Private domestic companies in these countries were 78% more likely than state-owned companies to resort to barter rather than monetary transactions. This was revealed to be the case after the researchers had corrected the data for firm, market and sector characteristics, as well as the possibility that the worst performing firms were the ones privatised.

The study also revealed that such privatised firms were less likely to pay taxes – a critical factor in ensuring the failure of the policy, which western economists predicted would generate private wealth that could be taxed and ploughed back into the state. However, firms that were privatised to foreign owners were much less likely to engage in barter and accumulate tax arrears.

“Our analysis suggests that when designing economic reforms, especially aiming to develop the private sector, safeguarding government revenues and state capacity should be a priority,” the authors add. “Counting on a future burst of productivity from a restructured, private economy to compensate for declining revenues is a risky proposition.”