London has more to lose than most when it comes to scaring off oligarchs
Some of London’s charms
THE charity ball planned for this May by the Friends of Dulwich College, a school in South London that charges £5,500 ($9,100) a term in fees, was to have been a lavish affair. With a Russian theme, and a lot of Russian parents on the organising committee, it included Aeroflot among its sponsors. In the light of the Ukraine crisis, though, it has been quietly cancelled. Presumably the idea of the well-heeled-and-educated whooping it up as Cossacks and babushkas was thought untimely.
Russian wealth has permeated the upper reaches of society in Britain more completely than in any other Western country. The amount of money that post-Soviet oligarchs have pumped into “Londongrad” means, say critics, that David Cameron’s government will never crack down on them, no matter how incensed it is by Russia’s enormities. Accidentally revealed briefing notes stating that London’s financial centre, the City, should not be closed to Russians seemed to bolster the case.
Britain grants three-year “investor” visas to foreigners who invest £1m or more in government bonds. Two years later they can buy residency for £10m as long as they have held on to the bonds. Russians were granted 433 of these visas between the third quarters of 2008 and 2013, more than any other nationality. Only the Chinese came close, with 419. Dulwich is one of dozens of smart British schools and universities that have made room for the oligarchs’ children. According to the Independent Schools Council, 8.3% of private schools’ non-British pupils last year were Russian. That could mean up to £60m a year in fees. The number of Russian pupils has doubled since 2009.
Oligarchs are keen buyers of London mansions and penthouses. According to Savills, an estate agency, 4% of buyers in “prime central” areas, such as Chelsea and Westminster, are Russians, spending £6.3m on average. Interestingly, another estate agent says that he recently got a “peculiar” call from a Russian client eager to sell two large properties immediately, which might possibly be connected to the crisis.
The number of properties registered to Russians understates the true total by failing to capture offshore structures fronted by nominees, of which Russians are particularly fond. Britain’s offshore satellites, in particular the British Virgin Islands, known for their secretive shell companies, do well out of this. A leading BVI lawyer says that Russian clients make up 15-20% of his business. Only the Chinese are as active. The lawyer notes that business from Russians is up slightly in recent weeks.
London is the main foreign capital-raising venue for Russian firms, many of which crave a listing there to gain international financial respectability. Some 28 Russian firms, with a market value of £260 billion, are listed on London’s main exchange (compared with just two in New York). Another 15 Russian-focused firms are on the AIM market for growth stocks. Dozens more have depositary receipts (special overseas shares) that are traded in London. Some $46 billion of Russian stock has been sold in London IPOs since 1996, according to Dealogic.
The fate of offerings in the pipeline—including a bank and two retailers—is now uncertain, more because of market conditions than from a fear that listings might be blocked. Underwriters sneaked in an offering by Lenta, a supermarket chain, days before the crisis erupted. Its share price subsequently tumbled by 15%.
Transactions in London don’t just puff up the issuing firms’ reputations. They have the same effect on the wallets of the investment bankers, lawyers, accountants and spin-doctors who offer advice. The fees are particularly juicy for underwriters. Fees on debt offerings by Russian firms in London have been running at almost $300m annually in the past few years, according to Thomson Reuters.
Silks have done well too. Between March 2008 and March 2013, almost two-thirds of all litigants in the High Court’s commercial division came from overseas. The largest contingent was Russian, say lawyers. Senior barristers have come to expect a “Russian premium” of up to £1,500 an hour (on top of the “brief fee”), according to The Lawyer, a trade paper. Some call it the “Sumption effect”, after a barrister who bagged somewhere between £3m and £10m for representing Roman Abramovich, the billionaire who owns Chelsea football club, in a legal battle with the late Boris Berezovsky, another expatriate tycoon. The case generated legal costs of around £100m.
With so much at stake, it is not surprising that British officials are thinking twice before going after the oligarchs. The City is a more international financial centre than Wall Street, which is fuelled by a vast domestic market, and attacking Russian plutocrats would not just have costs in itself; it might also scare off plutocrats from other countries. “The British are not convinced that cracking down on its Russian rich will hurt Putin, and they know that persecuted wealth would eventually leave for places like Hong Kong and Dubai,” says an adviser to Russian investors in Britain.
Listing requirements for share offerings by oligarch-owned companies were made a bit stricter just before the latest crisis. Further tightening could follow. But barring a serious escalation in other parts of Ukraine, says the adviser, the oligarchs expect to continue enjoying their “gentlemen’s agreement” with Britain, which leaves them free to spend as they like as long as they stay within some limits, such as not trying to buy big financial institutions.
If Britain did decide to get tough on oligarchs on good terms with Mr Putin, it would face problems. It would be hard to justify picking on businessmen who, however chequered their backgrounds, played no role in stirring up trouble in Crimea. Seizing Chelsea from Mr Abramovich, as some have proposed, would be a banana-republic response—even if it might please Arsenal fans and those who blame house prices on foreign wealth.
There is also the small issue of the rule of law. The Russians’ overpaid counsel would have a field day picking holes in the legality of sanctions or seizures. London is full of lawyers experienced in asset-recovery litigation, and well versed in exploiting the difficulties of linking this pool of money to that crime. The most egregious kleptocratic excess can be devilishly hard to establish to the satisfaction of the courts. This may explain why the sanctions announced this week were against officials with undisputed links to Russian decision-making over Crimea.
There is another, more promising set of targets, however: the people in charge of state-run Russian companies, some of whom are known to have expensive pads and business interests in Western capitals. A plush Hampstead house, for instance, belongs to the son of Vladimir Yakunin, the head of Russia’s railways and a chum of Mr Putin’s. But go after bosses at a firm like Rosneft, and you risk traumatising your own corporate titans. BP has a 20% stake in the giant state oil producer.