What Happens to Russian Money Abroad — Movchan's Group Senior Partner's Column in Forbes
Rafael Nagapetyants
Feb 1, 2024For holders of Russian passports, the severance of ties with international financial markets has resulted in a head-on collision with restrictions and an actual defeat in rights. Rafael Nagapetyants, Doctor of Economic Sciences and Senior Partner of Movchan’s Group, explains what is currently happening with Russian money in foreign accounts.
The opportunities to save and invest funds abroad periodically arise and disappear (one might add — sometimes along with the assets) — this is one of the basic laws that came into effect since the end of February 2022. It somewhat resembles the disclaimer 'Remember that no past investment results can be guaranteed in the future,' only in a harsher version. What is currently happening with investors, accounts, and money of Russian origin in Europe and the USA?
A Residence Permit is Not Enough
Let's try to look at a Russian passport holder and simultaneously a client of a European bank through the eyes of its compliance department, which is responsible for checking the origin of his money and the content of his documents. If such a person falls under personal or any other European or American sanctions, regardless of the size of the wallet, he has no chance of going unnoticed by compliance.
A European or American bank will require him to close accounts and withdraw assets in the shortest possible time. In the case of ordinary, non-sanctioned Russian clients, there are more options, but all with reservations. First of all, according to ECB recommendations, their Russian client must necessarily have a passport or residence permit of a European country. A basis for residing in the country for more than a year can also be an entrepreneur visa, work visa, or talent visa.
For most banks, as a rule, a residence permit is sufficient. As a rule — but not always. Just recently, I had a case: a Russian client with a European residence permit was buying shares of one of our funds through his bank, the order in the trading system was placed on behalf of the bank in the interest of the client. The investor passed his bank's check for purchasing the fund's shares and the origin of the funds. Confirmation of European residency was sufficient to complete the transaction, but the deal was turned down by the Euroclear depository.
The situation is unpleasant: after the application was approved by the administrator of one of our funds, the money passed another compliance in an American bank where the fund has an account and was credited to the fund's account. But a week later, information came that the securities from the administrator's depository were not transferred to the bank's depository to the client's account. The reason for the refusal was the client's lack of citizenship (not a residence permit) of one of the European countries.
In my practice, there was also a case when a European bank agreed to open accounts for an investor with a non-European passport and purchase shares of our fund on the condition that he publicly renounces Russian citizenship.
Often there is a condition not only for the presence of European documents but also for confirming the very fact of residing in the country. The bank requests paid utility bills, a property ownership agreement, or a rental agreement. Moreover, it is desirable that the addresses of the residence permit and accounts or agreements match.
I will explain with a curious case from my practice: I had a client with a passport from the state of Saint Kitts and Nevis. A beautiful passport, with fish. And the accounts — also very beautiful, with stamps, confirming that he lives in Georgia. The fund administrators who conducted the check asked a logical question: on what grounds does the client permanently reside in Georgia without a residence permit? And the passport with fish did not help here.
But the story with tax residency for those from Russia and their money is not so important yet. Fund administrators and bank compliance departments have different attitudes towards the requirement to provide such information: some ask it as mandatory, some optionally, because the investor at the time of the check may still remain a tax resident of a third country.
Account — A Powder Keg
Accounts of Russian passport holders have a special status, in fact, in many banks we observe the segregation and separate accounting of their banking and investment accounts. Without explanation, the bank may require an increase in the amount in the account. In my practice, there was a case when a client with several million dollars in the account was asked to double the deposit amount. Requirements for the balances of Russian clients' accounts are increasingly equated with the requirements of not a commercial, but an investment bank. An even more unpleasant situation is the notification of Russian clients about the complete closure of accounts in a short period. All this still happens periodically.
The closure of accounts creates a problem with the transfer of assets. With money, it's one story, but changing the place of accounting for securities deposited in Euroclear is almost impossible. This can be done with American securities accounted for in American depositories, but in the future, the client will face significant compliance in another bank. The client is left to sell the securities through his bank at current prices in a short time, most often with a significant discount, which means large losses.
A separate group of questions is accounts in banks of CIS countries. Banks in the Caucasus and Central Asia mostly do not refuse clients, they do not look at the color of the passport, but this loyalty has its price. Want to convert rubles into dollars? Please! Moscow Exchange rate plus 5%. Now the rates have slightly decreased, but the Moscow Exchange rate increased by 3% is not uncommon. We expect that in 2024 the tariffs for transactions will continue to decrease, but they will definitely be significantly higher than the usually accepted tariffs for conversion, account opening, and maintenance, and transfers.
I will separately mention strong changes in tariffs for outgoing payments. Many banks simply cannot guarantee the transfer of dollars to Russian investors, and those who can say: yes, we will do it, but for a modest 2%. Not for the usual bank commission of $20, $30, or even $100, but for 2%. Add to this the commission for opening an account, payment for a personal manager, sometimes a commission for crediting money to the account. As I mentioned, by early 2024 all commissions have slightly decreased, but they are still high and average from 1.5% to 3%.
Imagine that a client conservatively earns about 5–6% in dollars net per year. It turns out that in the first year of investing, he gives almost all his returns to the bank in the form of commissions. Other banks say: maybe we don't have such draconian rates, but there is a recommendation from the Central Bank of our country to commercial banks to maximize the duration of client money on accounts: three months, six months. In one of the countries, recommendations reached nine months. Although these recommendations are not fulfilled by banks in most cases, they nevertheless become a pretext for higher commissions.
Origin Matters
The general approach of hedge funds regarding investments of Russian investors is very individual, one of two situations is encountered: either fund administrators forcibly redeem the shares of Russian investors and return the money to them, or they still make a distinction between previously invested money (before 2022) and today's investments (provided the investor is not subject to any sanctions).
The principle is this: funds invested in past years continue to work, but any new operations or orders fall under new rules. All clients who invested in our funds in 2016–2021, if they personally did not fall under sanction restrictions, remain active investors of the funds, even if they have only one Russian passport and live in Russia.
However, they cannot do anything except redeem the fund's shares and withdraw money. Increasing the investment size or investing in another fund will not work because such operations already fall under the new requirements of the fund administrator.
If earlier it was possible to transfer money from an account in a Russian bank to a fund's account directly, in the current realities, this is categorically impossible. Firstly, this may contradict the current Russian currency legislation, and secondly, fund administrators simply will not accept such funds, and correspondent banks will not transfer them.
Everyone understands that the money was earned transparently and understandably in Russia. There is all the documentary evidence for this, but as with the investor's residency, the transfer of funds directly to the fund's account must be made from a foreign, not a Russian account of the investor with documentary confirmation of how they were transferred there.
What will happen with all this next? The possibilities of investing money of Russian origin are severely limited today, but they exist. We look optimistically at 2024 and plan to apply these opportunities in practice. How these tasks turn into working solutions and how Russians can store and increase capital outside the ruble zone — I will tell in the next material.
