The Real Risks of Doing Business in Russia

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Every day there is a new story on corrupted power in Russia and the United States’ efforts to combat it. We know the key players.  Many are oligarchs who acquired government assets after the fall of the Soviet Union. We know their games, including evading sanctions by transferring assets from one business to another.  The key question is how do we properly protect US business and political interests?  

The US sanctions on Russian interests most recently began in 2014 during the Ukrainian crisis of the annexation of the Crimea. The US and other countries sanctioned powerful Russians and their businesses.  Many of the principals under sanctions are oligarchs, like billionaire Oleg Deripaska, who have played an important role in supporting improper conduct of the Russian government. 

As a Putin ally, Deripaska and his related businesses, including United Co. Rusal PLC (Rusal), have been under investigation by the West for years and he has been barred from entering the United States.   Just last week, the United States Department of the Treasury lifted sanctions on several Russian businesses, including United Co. Rusal PLC (Rusal) but sanctions are still in place against Deripaska personally.

Treasury officials have defended lifting sanctions because Deripaska reduced his “direct and indirect shareholding stake in these (sanctioned) companies and severed his control.” The deal agreed to by the US government requires Deripaska to transfer business interests to, among others, the sanctioned Russian-state bank VTB.

Treasury has said that by removing Deripaska from a position of control over certain entities the interests of the US will be protected.  This decision will reportedly also help minority shareholders of Russian entities and others allegedly unfairly harmed by the Office of Foreign Asset Control (OFAC) sanctions.

In widely published reports, VTB Bank is known for funding oligarchs.  The transfer of Deripaska assets to VTB will likely enrich Deripaska by hundreds of millions of dollars and will relieve him of substantial debt. 

The Rise of Oligarch Power

The first generation of oligarchs acquired substantial businesses and even entire industries after the fall of the Soviet Union and during the Boris Yeltsin era.  In the murky world of post-Soviet commerce, where state assets were up for grabs, oligarchs became increasingly wealthy by arranging with the new Russian government to gain control of businesses, and in exchange paying tribute to government officials.  

The second generation of oligarchs, including Deripaska, has flourished by supporting Vladimir Putin both financially and politically. Now there may be as many as 100 Russian oligarchs.  Their ties and relationships with each other, the Russian government, off-shore banks, and Russian and global businesses, make the wiring in a large telecom box look simple by comparison.  They are organized, smart and structure their relationships in complex and sophisticated ways to enrich themselves, their friends, colleagues and the Russian government.  

Our Experience with Deripaska and Oligarchs

A large US public company considered the purchase of a Russian business worth approximately five billion dollars from Deripaska for a price of about one billion dollars. After investigating the situation, we advised our client that they should back away from the deal.  This was simply too good to be true.

We concluded that despite having all the proper documentation signed and sealed, the client would never truly “own” the Deripaska business.  Our findings showed Deripaska’s long history of questionable business activities, including allegations of violence, bribery, and corruption.  We believed that it was highly likely that Deripaska would never relinquish control over the business. At best, he would likely repurchase it within short order at a major loss to our client, the new owner.  

Our client walked away from this deal based upon our findings. 

In another case, our global client sought a business partner for Russia.  The business team identified an oligarch owner of a Russian business as an ideal partner.  Our due diligence findings were that the oligarch had a checkered past and was personally under OFAC sanctions. 

When told of our findings, the oligarch responded by divesting his interests in the business to others as a cure for the sanctions and bad history problem.   The client went forward with the new owners, against our recommendations, as it believed it had fixed the problem.  As of today, the client is owed tens of millions of dollars by the “new ownership,” which we firmly believe is still the sanctioned oligarch.  As Roger Daltrey of The Who once sang, “Meet the new boss, same as the old boss.”

The Path Forward

Global businesses can find themselves in precarious situations when engaging in Russian commerce.  Understanding the role of the Russian government, the complex dealings of oligarchs, and the current political systems will go a long way to achieving success and limiting harm in Russia and other challenging markets.   Performing due diligence, competitive intelligence, and other pre-transactional homework is vital to protecting your organization and its assets.

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