Originally published in Corporate INTL, October 2011
Fiona Le Poidevin, Deputy Chief Executive of Guernsey Finance – the promotional agency for the Island's finance industry, explores how Guernsey is ideally suited to providing financial products and services for a rapidly developing Russia.
Russia straddles Europe and Asia, is the largest country in the world by area and has a population of more than 140 million. By contrast, Guernsey is an island between the United Kingdom and France, 65 square kilometres in size and with just 62,000 inhabitants.
So, what is the connection?
Russia is quickly developing, particularly economically and therefore is accumulating increasing amounts of private and corporate wealth; Guernsey has, during the last 50 years, established itself as a leading international finance centre – the Island has a wide range of providers offering a diverse suite of financial products and services to clients from around the globe, including Russia and Eastern Europe.
There are already a number of high net worth individuals from the region utilising Guernsey's experience and expertise in providing private client services to maintain and indeed, enhance their wealth through trust and company structures. In the last few years, there have been a significant number of investment companies and funds established in Guernsey (with many listed on major stock exchanges) as vehicles for investing into Russia.
Now Guernsey is looking to specifically increase the amount of business touching Russia that flows through its finance industry. I was part of a delegation from the Island that visited Moscow in May of this year so that we could be on the ground to see for ourselves the potential for closer business links between Russia and Guernsey.
A developing Russian economy
The most recent edition of 'Doing Business in Russia, 2011' by Baker & McKenzie highlights how during the last decade "prudent macroeconomic policies and renewed government efforts to advance structural reforms, have raised business and investor confidence" in the country.
It admits that "Russia was severely hit by the international financial crisis" and in 2009, GDP contracted nearly 8%. However, "the government has increased its efforts to safeguard the economy" and it did appear to stabilise during 2010. In fact, GDP recovered by 4% in 2010 and grew 3.95% year on year in the first half of 2011.
It is evident that Russia's economic growth and development means the country offers a lot of potential but there are also hurdles to overcome in terms of the perception of doing business in Russia.
There is evidence to suggest that this is, to an extent, misplaced and reforms are slowly but surely coming through which will increase transparency and corporate governance standards. This sort of thinking is a growing trend in Russia and as this evolves then doing business with Guernsey becomes an even better fit.
The Guernsey-Russia connection
Guernsey's unique environment (see box 1) has helped attract several hundred financial services firms during the last 50 years so that today a distinguishing feature of the Island's finance industry is its breadth and depth. There is a balanced range of providers, broadly comprising:
- 38 licensed banks holding £114 billion (US$ 184 billion) of deposits
- An investment funds industry with total business valued at more than £274 billion (US$ 442 billion)
- An asset management and stockbroking sector with more than £81 billion (US$ 131 billion) of assets
- A wealth management sector of 150 fiduciary licensees who together hold more than £350 billion (US$ 565 billion) of wealth and assets in trust and company structures
- The largest captive insurance industry in Europe and number four globally
- A network of professional support services such as multi-jurisdictional law firms and the 'big four' accountancy firms
as well as:
- The Channel Islands Stock Exchange (CISX), which has more than 4,000 securities listed
- A Guernsey Registry for company incorporations and Intellectual Property (IP)
- A bespoke professional development facility, the GTA University Centre
There is a team spirit amongst these providers who work within the regime of an independent regulator, the Guernsey Financial Services Commission (GFSC).
Then there is Guernsey Finance, which is the joint government and industry agency responsible for promoting the Island's finance industry internationally. We work closely with the sector associations as well as specifically-orientated organisations such as the Guernsey Russian and Eastern European Financial Forum (GREEFF).
GREEFF representatives were part of the delegation to Moscow earlier this year to speak face-to-face with existing contacts and develop new leads. We were able to reinforce our thoughts about how the region's development means there is considerable potential for Guernsey to service the needs of private and corporate clients from Russia; and in addition, there was significant interest from those in Moscow about what Guernsey can offer in terms of financial services.
Our visit indicated that there are three principal areas where Guernsey can offer services to clients with Russian-related business: overseas investment into Russia via 'offshore' fund vehicles; Russian institutions seeking an overseas structure for investment back into Russia; and the allocation of Russian wealth outside of Russia.
The allocation of Russian wealth outside of Russia
A significant number of high net worth individuals in Russia use 'offshore' trusts, foundations or other structures as asset protection. A growing number already use Guernsey where there is a wealth management sector with more than five decades' experience of supplying trust and company services for the preservation and indeed, enhancement of both private and corporate wealth and assets. Today, the Island hosts fiduciary licensees ranging from large multinational organisations to independent, boutique operators who have substantial expertise in using the modern structures available on the Island for asset protection, investment purposes, tax planning and estate planning.
Draft foundations legislation has been published for consultation and we are hopeful that our practitioners will be able to offer Guernsey foundations to their clients from early in 2012. The introduction of foundations will provide another tool for practitioners to meet the needs of clients. In particular, we expect the foundation structure will be attractive to clients based in civil law jurisdictions in Europe and also further afield in the 'emerging' markets such as Russia where the trust concept is less familiar than in common law countries such as the US, Canada and the UK.
Having said that, as things stand, much Russian wealth remains within the country. This is partly due to the 'spend now' mentality but also due to the structure of the pension and insurance markets. Reforms appear to be in the pipeline but, even if they are introduced, it will be some time before they have an impact and they will also need to be accompanied by a change in mindset if they are to lead to increased investment in non-Russian products, such as Guernsey-domiciled funds.
Russian institutions seeking overseas structures for investment back into Russia
Many successful Russian businesses are now looking to source further investment from overseas. Many domestic institutions in Russia, such as a number of banks, have links with the state or are part owned by the state. As such, there has been a growing appetite for stock market flotation, of a business as a whole or just a minority stake. Guernsey can offer a stable environment for structuring tax efficient vehicles which can be listed on a variety of exchanges providing for inward investment into these Russian institutions from the European capital markets.
Indeed, one of the Island's great strengths is the ability for Guernsey vehicles to list on the CISX, Euronext Amsterdam or the London Stock Exchange (LSE). Data direct from the LSE to the end of December 2010, shows that there are more Guernsey-incorporated companies and securities listed on its markets than there are entities from any other competitor jurisdiction. In addition, earlier this year, Guernsey companies were given the green light for listing on the Hong Kong Stock Exchange (HKEx).
Overseas investment into Russia via 'offshore' fund vehicles
'Offshore' fund vehicles can be established to provide overseas investment into Russia. These are often driven by the will of overseas investors but tend to be most successful where the manager has a presence in Russia and therefore a familiarity with the business environment. Guernsey is already home to several successful examples of such structures, including Aurora Russia Limited. It was established as a Guernsey authorised closed-ended investment scheme regulated by the GFSC. From March 2006 it has been listed on the Alternative Investment Market (AIM) of the LSE. It adopts a group structure typically employed by overseas owners of Russian investments; the investments of the company may be owned directly or through a special purpose company incorporated in a jurisdiction which enjoys a favourable double tax treaty with Russia, such as Cyprus.
Guernsey's investment sector has bounced back extremely well from the financial crisis to record eight consecutive quarters of growth. This has been buoyed by the framework agreement reached regarding the EU's Alternative Investment Fund Managers (AIFM) Directive, which not only provides some certainty but also places Guernsey in a good position going forward in terms of having access to European markets. There is still much work to do and government, industry and the regulator are continuing to ensure that Guernsey is represented in the most appropriate ways during the next stages of the process. We are confident that the outcome will be positive for the future of our funds industry and certainly this is reflected in the feedback we are receiving from EU and non-EU based managers.
Other examples of managers with Guernsey domiciled funds investing into Russia include Ashmore Investment Management and Prosperity Capital Management. Speaking to these sorts of players, we hear that they are attracted by Guernsey's political and economic stability, experience in the investment fund sector, specific expertise in private equity and in particular, the fact that we are considered a well regulated and transparent international finance centre.
This reputation was further enhanced in January this year when the IMF commended Guernsey's high standards of financial regulation, supervision and stability along with our robust criminal justice framework to the extent that the Island was judged to have a high level of compliance with all the criteria against which it is assessed and scoring the highest of any jurisdiction so far assessed.
Later that same month, the OECD built on its white listing of Guernsey at the earliest opportunity by endorsing the Island's ongoing commitment to tax transparency and exchange of information. Guernsey has now signed Tax Information Exchange Agreements (TIEAs) with 28 jurisdictions and we are in advanced discussions with a number of other jurisdictions, as well as pursuing the Island's removal from (mainly outdated but still operational) 'blacklists' and the potential for
We are not blind to the fact that there are many challenges ahead. For example, the 'Zero-10' corporate tax systems of the Crown Dependencies have come under European scrutiny. We are undertaking a review but our politicians have been clear from the outset that any future regime must be both compliant and also competitive, i.e. there will be continued tax neutrality for financial services products.
The right conclusion
Guernsey is committed to providing an environment that is well suited to providing financial products and services to private and corporate clients from Russia. There are already numerous successful examples but we are looking to attract much more of this business in the coming years as the Russian economy continues to develop. We are now preparing to speak to more intermediaries both in Moscow and other centres such as London to see how we can ensure that Russia and Guernsey continue to be the perfect fit in the future.
Guernsey as a finance centre: Quick facts
- OECD/G20 'white list'
- IMF endorsed
- Banking: £114 billion (US$ 184 billion)
- Investment funds: £274 billion (US$ 442 billion)
- Asset management and stockbroking: £81 billion (US$ 131 billion)
- Wealth management: £350 billion (US$ 565 billion)
- Captive insurance: No. 1 in Europe; fourth in the world
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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