Abramovich investments highlight Cayman’s unknown Russia exposure

The most visible symbols of the hunt for Russian riches have been the yachts, aircrafts and mansions that offer tangible evidence of extreme wealth.

But the attention on these physical, photographable, luxuries may be diverting focus from the much larger Russian financial assets that may also be subject to sanctions.

Tracing Cayman’s exposure in the more obscure, but potentially much larger, area of investment funds is more challenging.

Chasing the Chelsea billionaire

Perhaps the most famous of all Russian oligarchs, Roman Abramovich’s wealth extends far beyond the ownership of Chelsea Football Club, which he is now being forced to sell.

The New York Times reported on Monday that the now-sanctioned Abramovich had invested billions in US hedge funds and private equity funds over the past two decades.

Using a circuitous investment strategy involving a small Austrian private bank and a string of offshore companies, the origin of the funds remained unknown to most involved.

The newspaper detailed one such transaction in the form of a US$20 million investment made by a British Virgin Islands company through a Cayman Islands fund.

None of the fund’s directors, including from Cayman Islands governance firm Highwater, nor the fund manager, were aware that the investment, facilitated by small New York advisory firm Concord Management, had come from Abramovich, the article stated.

It added that the fund’s administrator GlobeOp, now owned by SS&C Technologies, had also not raised any red flags or indicated higher than usual money laundering risks because a so-called politically exposed person may be involved.

Even if the fund managers had known the money had come from Abramovich, they may have accepted the investment, because he was not sanctioned at the time.

Since Russia’s invasion of Ukraine, Abramovich has been sanctioned by the UK and the EU for his close ties to President Vladimir Putin.

However, investigators at financial services firm State Street, filed several suspicious activity reports as early as 2015 and 2016 related to US hedge fund investments made by Abramovich through shell companies in Cyprus and the BVI, Buzzfeed reported last week.

State Street investigators alerted the US Treasury to court records that showed Abramovich had made “substantial cash payments” in Russia for “political patronage and influence”.

They also detailed that the corporate structures that held the approximately $1.3 billion in US fund investments from 2001 to 2016 had frequently changed, potentially to conceal their ownership, the report said, citing documents from a 2019 leak of several thousand FinCEN suspicious activity reports.

Financial institutions must file suspicious activity reports under anti-money laundering laws and regulations. By definition, the reports identify transactions that appear suspicious and may lead to further investigation by law enforcement but are not necessarily evidence of any wrongdoing.

‘Krysha’ or corruption?

The court records referenced by State Street stem from Abramovich’s legal battle with former business partner Boris Berezovsky, which played out in London’s High Court in 2012.

In the case, Berezovsky claimed Abramovich had used threats of expropriation to force him to sell his stake in oil company Sibneft at a significant undervalue – for $1.3 billion.

Abromovich’s defence was that Berezovsky had never been a beneficial owner of any Sibneft shares. Instead, the substantial cash payments to Berezovsky had been made so that Abramovich and Sibneft would enjoy Berezovsky’s political patronage and influence.

The High Court judgment goes on at length to explain that this type of support was known in Russia as “krysha”, a term that literally means roof but was also widely used to describe “protection” services provided by organised crime.

“Krysha”, according to Abramovich’s claim, was indispensable to building a major business in the conditions in Russia following the fall of the Soviet Union in the 1990s, where the effective rule of law was largely absent and legal processes were defective.

Rather than representing nepotism or corruption, such payments, worth hundreds of millions of dollars, were owed to existing power structures in Europe’s “Wild East” at the time, his legal team suggested.

In March, Labour MP Chris Bryant quoted from in an internal UK Home Office document in the House of Commons, suggesting that the British government disagrees with that interpretation.

“I’ve got hold of a leaked document from 2019, from the Home Office, which says in relation to Mr Abramovich: ‘As part of HMG’s [Her Majesty’s government] Russia strategy aimed at targeting illicit finance and malign activity, Abramovich remains of interest to HMG due to his links to the Russian state and his public association with corrupt activity and practices,’” Bryant told Parliament.

Russian assets in Cayman unknown

It is not known how much money of the estimated more than $800 billion in Russian offshore assets is held in Cayman companies and other entities.

Traditionally, Cyprus and the BVI have been the preferred locations for Russian asset-holding companies.

A 2018 report by advocacy group Global Witness suggested that five times more Russian money is held in British Overseas Territories than in the UK itself.

The report followed the poisoning of Sergei Skripal in Salisbury. It stated, based on data from the IMF and Russia’s central bank, that money invested in the overseas territories accounted for 12% of all Russian investments outside of Russia.

Whether Russian assets held offshore and invested through Cayman would be classified as Russian is not clear.

$2.6 billion Cayman investments directly from Russia

Statistics from the Central Bank of Russia indicate the country’s portfolio investments in the Cayman Islands amounted to $2.6 billion as of 30 June 2021, the latest available figure.

Of this, $2.06 billion were invested in equities and $553 million in debt.

Given the size of investment flows through Cayman each year, this would represent less than 1% of all portfolio investments.

Ireland has the largest exposure to Russia’s portfolio investments with $25.3 billion. Irish-domiciled funds, in turn, held almost €13 billion of Russian stocks and bonds as of last September, at a time when the Moscow stock market peaked at a record high, the Irish Times reported.

The US ($21.2 billion) and the UK ($17 billion) trail Ireland, while Cayman is number seven in the world for Russian portfolio investments, according to Central Bank of Russia statistics.

Missing US Treasuries

However, not everything is captured by these statistics, as information on cross-border flows and financial counterparties can be incomplete or difficult to attribute.

When, in 2018, Russia’s central bank reportedly sold $81 billion of its $96 billion holdings of US Treasuries to avoid future sanctions, $38 billion went missing in official data.

Two economists at America’s Council on Foreign Relations concluded that to protect the bonds against US seizure, Russia had simply moved the Treasuries, mainly to Belgium, the home of custodian bank Clearstream, and to the Cayman Islands.

Whether these approximately $15 to $20 billion in Russian-held US Treasuries are still in Cayman is not clear. As of Jan. 2022, Cayman entities owned US government bonds worth about $271.1 billion.

Russia’s foreign debt mainly raised in Europe

Another potential source of financial exposure to Russian assets comes in the form of special purpose vehicles for bond issuances and other types of fundraising.

Statistics by the Bank for International Settlements show that companies from emerging market economies tend to raise most of their debt through offshore affiliates.

China is by far the largest, with Chinese companies raising funds mainly in the Cayman Islands or the British Virgin Islands.

Russian companies, in contrast, borrow mainly in advanced economies such as the Netherlands, Luxembourg or Ireland.

Dublin’s International Financial Services Centre (IFSC), for instance, is home to €36 billion of assets in Russian-linked SPVs used to raise funding.