Guernsey: The Bear Awakes

Last Updated: 9 November 2010
Article by Jon Taylor

Most Read Contributor in Guernsey, November 2017

Originally published in Contact, October/November 2010

Following on from the 2009 British/Russo Chamber of Commerce event that took place in Guernsey where Stephen Dalziel the former BBC's Russian affairs correspondence made a presentation to Chamber members, a group of Guernsey businesses known as The Guernsey Russian and Eastern European Financial Forum is already forging new relations with The Bear. Jon Taylor reports.

Russia is a complex mix of extremes from its geography and weather through to the wide ranges of its economic cycles (the last three years alone have seen boom then bust with a strong recovery now underway), and the disparity of wealth.

From a political perspective, outsiders retain the view that Russia remains a communist state; the reality is that the Kremlin is driving capitalism forward at a breakneck pace. It is actively seeking to move away from an overreliance on exports and attempting to attract foreign investment in order to drive future growth.

However, despite the Russian economy returning to positive growth this year, the perception in the global community remains largely one of corruption and mismanagement. Last year, Transparency International, the global civil society organisation leading the fight against corruption, ranked Russia 146th out of 180 in its annual Corruption Perceptions Index.

Whilst this perception has, to date, been fundamental to Western investors' mindsets when considering Russia as an investment destination, there has been steady progress. Indeed, it was announced in September that the long-serving Mayor of Moscow (extremely popular but dogged by persistent claims of nepotism) had been removed.

This attempt to shift the country's long-held perceptions about itself, combined with the huge investment opportunities in the region, is driving the growth of the funds industry in Russia which, in turn, is proving to be an opportunity for Guernsey.

With the aim to take advantage of these opportunities, a working group was formed earlier this year in Guernsey to focus on Russia and other neighbouring economies.

"The Guernsey Russian and Eastern European Financial Forum (GREEFF) is working together with Guernsey Finance to develop and promote the island as a jurisdiction for both investment funds and wealth management, such as trusts and private banking, drawing on the Island's excellent reputation for high-quality support services and robust corporate governance as well as its tax neutrality," said Stuart Phillips, director at PKF and GREEFF chairman.

He brings working relevance to the GREEFF chair as he worked in neighbouring Kazakhstan for one of the major accountancy firms for a number of years in the late 1990s and then in Russia for five years before moving to Guernsey at the end of 2007.

The establishment of this group coincides with Russia-based fund managers and banks seeking to attract investment from abroad.

"There are many large reputable names in Russia, and they are keen to work with well-regarded financial centres such as Guernsey, to help tackle this perception of corruption and help allay some of the nervousness investors feel," said Michel Davy, managing director of Ipes Guernsey and a member of GREEFF.

A qualified Chartered Certified Accountant, he has worked with clients across the private equity asset class and has been instrumental in building Ipes's Russian client base.

Many financial service providers in Guernsey have been working in Russia throughout these turbulent years, building up an impressive list of well-established and well-regulated client contacts including Baring Vostok (see case study), VTB Capital (the investment arm of one of Russia's largest banks) and Raven Russia, leading to a number of success stories.

"Guernsey has some historical business with Russia going back to the start of private equity houses using Guernsey for fund structures. We are now seeing a resurgence in interest spanning different asset classes," said Andrew Boyce a partner in the corporate and finance group of Carey Olsen and also a member of GREEFF.

The Russian Opportunity

There has been much talk of an emerging markets-led recovery and one trend that the firms within GREEFF have seen is a real growth in interest from both European and Russian fund managers seeking to raise funds with European money for inward investment into Russia. Indeed, as the country emerges from the downturn with Q2 GDP up 5.4% and the Russian economy expected to expand by 4% this year (vs. a decline of 7.9% in 2009), opportunities in Russia look set to grow even further.

For its part, Russia has never shirked from aiming high – the Kremlin has long-term plans to turn the Rouble into a global reserve currency. Earlier this year President Medvedev himself appointed one of the country's most powerful politicians to spearhead the Kremlin's latest push to turn Moscow into an international financial centre, a slightly less lofty ambition but one likely to clash with the old perceptions and embryonic state of Russia's regulatory system.

The global economic crisis has identified that Russia is not self-sufficient in its ability to raise capital and that it urgently needed to improve its financial regulations and corporate governance in order to alter its global financial image and bolster investor confidence. For example, foreign shares still cannot be listed on the Russian stock exchange and there is no law against insider trading. While very few would say that these goals are achievable in the immediate short-term, the open acknowledgement of this ambition is the first step in driving the necessary structural reforms.

Indeed, since the crisis, there is evidence of Russia moving away from relying purely on exports of natural resources (oil, minerals, agriculture, etc) to drive the economy, with Prime Minister Vladimir Putin actively seeking to attract foreign investors to drive future growth.

The recent Financial Times special report Investing in Russia confirms the extent of opportunities which exist in the country, noting that senior officials are getting the message out that Russia is not just open to investment but actively courting it. This more outward-facing approach, combined with the underlying strengths of Russia's economy (it is rich in land and natural resources and has a large and increasingly affluent population) and a relative lack of competition for deals in Russia, makes it an attractive destination for foreign capital, provided investors understand the practicalities and can overcome the inherent reticence related to investing into the region.

The Most Pressing Issues for Russia and Private Equity

Private equity is still in its infancy in Russia and there is no doubt that the legacy of overnight capitalism and the instant deregulation of state controlled industries remains apparent.

As part of Russia's drive towards a knowledge-based economy, Putin created the Russian Venture Company (RVK) in 2006 in order to stimulate innovation in the economy. This fund operates through private-public partnerships that take the form of private venture capital funds – 49% of the capital is contributed by RVK and matched by 51% from private investors. However, reports indicate that little private capital has been found and the state remains the dominant player. In contrast though, the growth of the consumer sector, the agricultural/land-based investment opportunities and the sheer size of the economy ensure that Russia is simply too big to ignore – with data from Preqin showing that there are 14 Russian-based fund managers currently fundraising.

A number of foreign strategic players are entering the region and established fund managers like Baring Vostok are bringing their expertise to the country. Similarly, the established players in Russian finance, including the investment arms of the larger Russian Banks such as ALFA and VTB, are establishing investment funds and bringing foreign capital to the region.

With relatively low competition in the market and with experienced managers in short supply, the opportunity to achieve a high margin on investments, as Russia's economy continues to develop, is likely to encourage more fund managers to look to Russia.

However, the ability to exploit opportunities is reliant on specific knowledge and expertise as well as being well-positioned to be a part of the creation phase.

"The importance of having solid expertise on the ground to help navigate through the issues in a jurisdiction like Russia has been demonstrated in the structures that we have seen succeed," said Advocate Boyce.

"While the structuring, regulation and investor relation elements can be conducted externally, the investment process which encounters issues relating to ownership and bureaucracy, must involve considerable on the spot input."

The trials and tribulations of the economic crisis have reminded investors that they must not only understand the asset class they are investing in, but also the intricacies of the particular assets. Hence a need for managers to be able to demonstrate this expertise is paramount and a physical presence of some sort in Russia is almost fundamental to success.

Understanding cultural differences is also of importance when working in Russia.

"From my own personal experience of living and working in Russia, you really benefit from having a local presence and taking the time to build a personal relationship with clients.Our culture is to immediately get the laptop out and start working through a presentation – that won't work in Russia - your business partner wants to get to know you as a person first and then over time the business side will flourish," said Mr Phillips.

Power of Relationships and Adding Value

Mr Davy believes that the development of Russia has by and large been good news for Guernsey and for Ipes.

"We have recently secured a new Russian Healthcare fund to add to our existing portfolio of Russian business which includes the various funds of Baring Vostok Capital Partners," he said.

"Other Russian enquiries have been bubbling for a long time and following a visit to Russia to meet both clients and prospects, you really begin to understand the Russian approach. Like many cultures and in many business forums, meeting people face to face is key to developing the relationship further. Telling people about your business and about Guernsey as a jurisdiction goes a long way to cementing relationships and, more importantly, it allows the fund manager to make an informed decision about which partner and which jurisdiction is a good fit for them."

On why they chose Guernsey, director of investor relations for Baring Vostok, David Bernstein, whose primary role is facilitating direct communication with existing and future investors, believes it is due to a combination of factors.

"It comes down to the relationship and one's experiences with the people, their professionalism and most importantly their understanding of the context of how we do business, in particular taking due time, being responsive and flexible to adapt to our needs," he said.

Carey Olsen has also seen increased business for its Guernsey office coming from Russia.

"Guernsey is attractive largely because of its reputation. As Russia strives to be a mainstream investment destination, it will seek and comply with the regulations of the well established financial centres," said Advocate Boyce.

"The challenge in bringing business to the island is two-fold. Fund managers need to be able and willing to provide the information needed to satisfy Guernsey's robust regulatory requirements and equally, as a jurisdiction, we need to be able to adapt to the needs of Russian based funds without compromising our regulatory integrity."

Mr Bernstein agrees that reputation is important for investors and that Guernsey has a reputation as a jurisdiction that takes compliance and anti-money laundering very seriously. This is particularly important for funds looking to attract foreign investors as they prefer the association with Guernsey, since it helps to overcome the nervousness often associated with Russian investments.

Peter Niven, chief executive of Guernsey Finance, said: "To be successful in taking advantage of the opportunities available we need to make sure that we get the Guernsey brand known and understood and this includes reinforcing the message that the Island offers good governance and robust yet pragmatic regulation. Guernsey Finance is focussed on raising awareness of the island and its strong reputation while at the same time facilitating business opportunities for the rest of the team who we are working with very closely."

The Threat – Or is it Just Propaganda?

There is much talk these days about the EU AIFM directive and the impact which it might have on Guernsey and other offshore jurisdictions. There is no question that jurisdictions within the EU are ramping up their marketing campaigns – notably Ireland and Luxembourg are promoting themselves as the next jurisdiction for investment business.

"Like Guernsey, they are targeting Russia and we have seen a Russian prospect fall away from our Guernsey pipeline as a result, it seems, of extensive relationships between the respective Russian and Luxembourg Ambassadors. The lobbying is at the highest level it seems," said Mr Davy.

Mr Phillips said that the external competition proves the need to be proactive to ensure Guernsey meets the needs of investment managers going forward and that this would be one of the key aims of GREEFF.

"Guernsey has a very strong offering and I am confident that the island will continue to benefit from the growth of the Russian economy. We are hoping to work with Guernsey Finance to take a delegation to Russia next year, with the aim of expanding our contact base and developing a number of new opportunities. Russia looks set to continue to grow, and we're certainly bullish about the Bear."

GREEFF can be contacted at or search for Guernsey Russian Forum on LinkedIn.

Case Study: Baring Vostok Capital Partners

Baring Vostok Capital Partners is one of the leading private equity houses operating in Russia and the CIS. The Baring Vostok Private Equity Funds have invested over $1.2 billion in 54 companies since 1994, and currently have committed capital of $2 billion for new investment.

The Funds' portfolios are diversified among financial services, oil and gas, consumer products, telecommunications, and media.

Since 2005, for five years in a row, Baring Vostok Capital Partners has been voted 'Russian Private Equity Firm of the Year' by readers of Private Equity Online and Private Equity International in their annual Global Private Equity Awards.

During a recent interview with David Bernstein, Director of Investor relations at Baring Vostok, a number of subjects were discussed including on why Russia is showing signs of greater activity than other jurisdictions;

"Its down to opportunity," said Bernstein.

"Organised Private Equity is still relatively under-developed in Russia and there are only a small number of Private Equity Funds with institutional investors. Hence new fund managers are trying to set up or spin out.

"At a macro level, there are some foreign strategic investors who understand that there is plenty of opportunity in Russia, which offers higher growth, richer margins and less competition than their home markets.

"Once investors can get over the initial fear of investing in Russia then they can open themselves up to the smart, energised business entrepreneurs that can create wealth for them.

"We believe Russia is in the middle of a 30-40 year transition from a completely state-controlled economy to one that resembles an open, market economy. There are new market segments and growth opportunities which make it ideal for investment.

"We chose Guernsey because of its reputation for compliance and due to our high level of satisfaction with our service providers there."

For more information about Guernsey's finance industry please visit

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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