On March 11 in the tiny Pyrenees principality of Andorra, local authorities raided Banca Privada dAndorra as part of an internationally coordinated investigation. The bust, which triggered the collapse of a Spanish subsidiary of the bank the next day, pursued funds held by individuals and state-affiliated entities engaged in criminal enterprises. Chief among its targets were Russian investors, including people reputed to be underworld figures with connections to the Kremlin.
Andorra is far from the only haven for Russian private wealth to face scrutiny in recent years. During the recapitalization of Cypruss banks in 2013, following the crisis that saw a haircut of up to 40 percent imposed on uninsured deposits, most of the unguarded funds were reportedly of Russian origin, filtered through shell companies on the island. Such unwanted attention has pushed affluent Russians to look for new places to stash money abroad.
Meanwhile, geopolitical events have made it tough for non-Russian banks to take on Russian clients. In March 2014, Western governments led by the U.S. and the European Union issued sanctions against the Russian Federation in response to its annexation of Crimea and subsequent confrontation in eastern Ukraine. These measures included a freeze on the foreign-held assets of dozens of former and current high-ranking Russian officials and businesspeople with close ties to the administration of President Vladimir Putin.
In the first decade of the new century, Russian business leaders supplanted Middle Eastern royalty as the major target for investment advisers and real estate salespeople in financial centers from Dubai to London to Miami. Between Putins rise to the presidency in 2000 and the escalation of tensions in Crimea last year, the term oligarch became synonymous in the West with yachts, mansions and privately owned professional sports teams. Wealth managers were only too happy to help.
Five years ago the prevailing stereotype was that wealthy Russians were the easy bid whenever you had a high-priced asset that you wanted to sell, says Richard Taglianetti, senior managing director at Corinthian Partners, a New Yorkbased investment bank. With the combination of the Ukraine crisis and a slide in oil prices battering the ruble, affluent Chinese investors have usurped the role of most coveted international client group among U.S. wealth managers, notes Taglianetti, who oversees selection of alternative investments for his firms family-office and ultrahigh-net-worth clients.
Advances in tracking technology have made the latest sanctions against Russian individuals much swifter than in the past. Banks in Europe, developed Asia and North America were quick to report affiliations with anybody singled out by regulators. From a big-picture standpoint it represents a real culture of compliance on an international level, says Felicia Smith, vice president and senior counsel for regulatory affairs at Financial Services Roundtable, a Washington-based advocacy group representing the 100 largest U.S. financial institutions. In years past there was often an attitude that only the U.S. cares about this when it came to enforcement measures, Smith adds. Today it is a very, very different story.
Smith cites this greater cooperation among policymakers plus the higher reputational risk faced by banks and brokerages that flout international understandings in the age of global media as two reasons that private capital can no longer remain anonymous.
Besides straining relations between Western and Russian financial institutions, sanctions have made Russians less confident in foreign banks. We all understand that our Western partners want to have deals with us, but we all have to wait until the sanctions will end, says Kirill Yurin, a vice president in the investment brokerage division at Moscow-based conglomerate Regions Group of Cos. and a former government relations adviser with the State Duma, Russias lower house of parliament.
The rising importance of Asia, particularly China, for trade and finance may convince many Russians to turn away from the West for financial services, Yurin says: If our new Eastern partners will give us better terms, then we will shift to their market. As Chinese commercial lenders publicly push to boost market share in the wake of Russian sanctions, there are signals that private client groups at Chinas primary banks are following a similar script.
One Russian national who asked not to be named expresses concern about holding assets in the West, despite the fact that he isnt targeted by sanctions and has no ties to authorities. No matter who you are, if you hold your money in dollars, francs, pounds or euros overseas, a government can simply confiscate your account and hold you [liable] to provide proof that you are doing nothing wrong, he says. Such suspicions make it likely that wealthy Russians will seek out friendlier homes for their rubles.