As billions of pounds flow illegally into London from Moscow and Russia's wealthy decamp en masse, John Underwood looks at why they are fleeing — and it's worse than you think
At his annual question and answer session earlier this year, Vladimir Putin was asked by a veteran of the Battle of Stalingrad to name Russia's allies and enemies in the world. 'We don't view any countries as enemies,' responded the president, 'and I don't recommend anyone to treat us… as enemies.' Behind the veteran, thousands of gun-toting troops marched and wheeled in close formation. Putin's mouth may have preached peace but — as we might expect from a judo expert — the truth lies in his strength of arms.
Some 24 years after the collapse of the USSR, Russia occupies a peculiar space in the worlds of business and diplomacy. Although it is no longer a communist country, many former state industries remain under effective government control. Despite the introduction of a nominally democratic system, ordinary Russians appear to prefer Putin's strong, unilateral leadership. And while a handful of canny operators made their fortunes in the confused post-Soviet era, today's Russian HNWs feel increasingly threatened by the country that, we are assured, is nobody's enemy. Nobody's, that is, except perhaps its own citizens.
After a year of unprecedented volatility, financial as well as political, a significant number of wealthy Russians are losing their faith in the motherland and turning instead towards the UK. According to Deutsche Bank, almost ’1 billion in undeclared Russian funds is now arriving in London each month — 40 per cent of all the money that enters the UK through irregular channels.
Although accurate reporting is of course difficult, it's believed that much of this money finds its way into the London housing market, currently enjoying a post-election boom as fears of Labour's mansion tax have receded. A rich seam of Russian cash runs under the parks and pavements of London — and although we may spot the occasional outcrop in Chelsea or Knightsbridge, the majority remains hidden from view.
One of the quickest options for wealthy foreign nationals considering a permanent move to the UK is applying for a Tier 1 Investor visa. This (temporary) visa is contingent upon the applicant investing ’2’million in government bonds or one of various approved industries, and can be converted into indefinite leave to remain after five years. Those in a hurry to make the UK their permanent home can expedite the process, applying for leave to settle after two years if they've invested ’10 million.
According to figures released last December, the number of successful Tier 1 Investor applicants from Russia soared by 69 per cent in 2014, reaching a level unmatched by anyone bar the Chinese. According to Mark Pihlens, managing partner at global immigration consultancy firm Henley & Partners, Russians 'have dominated the UK Investor visa category for most of the 2000s'. (Now, he adds, 'they have been caught up by China, and between them make up over 60 per cent of Investor visas in 2014.')
These statistics seem to coincide with the conclusions of the 2015 Knight Frank Wealth Report, a survey of private bankers and wealth managers who reported that 33 per cent of their clients in Russia were planning to leave the region — comfortably over twice as many as intended to flee any other area.
However, an odd distinction has emerged in London, where the overwhelming majority of HNW Russians moving to the UK settle. Over the same period that saw such a surge in the number of visas granted, the number of Russians registered through Christie's International Real Estate (CIRE) to buy their pricey properties dropped by 70 per cent. Russian money is certainly arriving in the UK — but if it isn't being tied up in Kensington mansions, where is it going?
Kamal Rahman, a partner at Mishcon de Reya and head of the firm's immigration group, sees a simple answer: while the Russians heading to London are by no means poor, they may simply not be in the mansion bracket. 'All the very senior people — the oligarchs — have all got plan B sorted out,' she says. 'We're now seeing the next tier and the one below that making a move, because of the increased uncertainty and realising that Russia may not be a long-term prospect for their children and their family.'
There is another factor which explains CIRE's figures. Early last year, the Migration Advisory Committee published a series of recommendations on the future of the Tier 1 Investor visa. One recommendation, which has since been adopted, was that applicants should no longer be allowed to tie up a proportion of their investment in residential property — the full amount pledged must be invested in bonds or businesses. Another implemented suggestion was to double the minimum investment to its current level of ’2 million.
Although the changes to the investor visa will not have had profound effects in 2014, they will certainly be affecting the behaviour of many Russians this year — Russians whose UK residency now requires a minimum of ’2 million plus the cost of a house, rather than ’1 million minus the ’250,000 that could formerly be sunk into real estate.
Rahman identifies one key factor that she believes is driving HNW Russians from their homes — Federal Law No 376-FZ, the so-called 'deoffshorisation law'. Active as of New Year's Day 2015, 376-FZ requires Russian nationals to expose their overseas commercial interests. Breaking the new law carries relatively light penalties, but compliance poses a much more serious threat, namely letting Putin see an itemised list of assets. Nervous Russians might prefer to obtain and make use of a second passport rather than reveal what they've got hidden away… except the same piece of legislation demands they report those very passports.
Among those who see their future outside the Federation, two options have become popular. Some, as can be imagined, are accelerating their escape plans in the face of what they see as increasingly authoritarian behaviour by the state. Others, operating within a Kafkaesque philosophical framework, are deliberately freezing their preparations just before the point at which they would be required to declare them. 'Our clients want to remain compliant all the time,' says Rahman. 'Therefore, they don't want to get second citizenship because they don't want to disclose it to the Russian authorities.'
For Russians with misgivings about the present government, of course, there may be more pressing reasons to move abroad than the potential effects of a new tax law. In February, former deputy prime minister turned anti-Putin activist Boris Nemtsov sent a tweet imploring opposition supporters to attend a march protesting the war in Ukraine. Hours later, he was shot to death near the Kremlin. Nemtsov's assassination showed parallels with the 2003 murder of Sergei Yushenkov, another politician whose support for democracy and the rule of law made him a thorn in Putin's side. A number of other wealthy Russians who posed a threat to the establishment have fled abroad, including to the UK, one step ahead of (possibly) trumped-up embezzlement charges.
Some didn't manage to get that far. Mikhail Khodorkovsky, a one-time oligarch who was once among the world's richest men, spent nine years in prison for fraud immediately after he publicly accused the Putin administration of running on bribes. And although it may feel comforting to put 1,500 miles of land and water between oneself and Moscow, it won't necessarily do any good. In 2006, former FSB officer Alexander Litvinenko was fatally poisoned with radioactive polonium-210 after seeking political asylum in London. On his deathbed, he accused Putin of his murder. A few years later, two Russian businessmen — both of whom had fled Russia in fear for their lives — died in the Home Counties within months of each other.
Alexander Perepilichnyy was a whistleblower who exposed an alleged $220 million fraud perpetuated by senior Russian treasury officials and the Mafiya. Boris Berezovsky, whom Litvinenko claimed he had been ordered to kill in 1997, was an oligarch and anti-Putin stalwart. No foul play was initially proved in either of these cases, although a new toxicology test has suggested that Perepilichnyy may have been poisoned with the rare gelsenium elegans, or 'heartbreak grass' — reportedly a favourite tool of Russian and Chinese assassins. Whatever the result of the latest Perepilichnyy inquest, a nervous Russian might be inclined to wonder whether anywhere is really safe.
A handful of prominent Russians, of course, face an even better reason to stay at home — EU sanctions. Cameron Doley, senior partner at Carter-Ruck, stresses the life-altering consequences of being 'listed' while abroad. 'What it really means is your bank accounts will be frozen immediately, you'll have a travel ban within Europe… The major banks will refuse to conduct transactions for you. It's a very draconian system.'
Doley wonders if the penalties for leaving town are actually reinforcing Putin's old guard. 'If you're an opponent of Putin, now may be the time to get out. But… were you a close associate of the inner circle, [the sanctions] may be a dissuasive factor.'
As unlikely as it may seem, with intimate corrupt oligarchs close by Putin's side and his adversaries in impotent exile in London, Russia's current ’migr’s may be its future salvation. Irina Shumovitch, an education consultant who specialises in helping Russian children into the best British schools, certainly thinks so.
’In Russian education, humiliation is still a form of encouragement,' she says. 'So when they come to study here, they're treated with respect and they learn… completely different values. I think when they go back to Russia they will bring all these ideas back with them. They won't want to go back to this system of unification and indifference for an individual and disrespect.'
Shumovitch has supported more than a hundred families in the last six years through her company School Placement Service, and she sees an augury for the future of London's Russian community in the continuing popularity of British schools. 'Russians have a herd mentality. Often, I ask my clients, “Do you know what is so good about British education?” And most of them say, “No, we heard from our friends that it's fantastic.” It seems cool, it emphasises the fact that they're successful.'
Shumovitch also sees the growing Russian community in London as a self-perpetuating cycle — the more Russians come to the UK, the more are willing to come: 'They can nowadays live in London without speaking any English, because there are so many social layers of Russians.' In fact, some unreformed characters appear to be importing a class system scarcely changed since the days of the tsars.'Why wouldn't they employ a perfectly trained British butler? But they prefer a big Russian peasant woman to be their house staff, because they feel more comfortable.'
Peasants or no peasants, Shumovitch's clients have become marginally more down-to-earth than the ones she had seven years ago. 'When I started, all of my clients were the super-rich. Now the majority of my clients are upper middle class. Before, it was hundreds of millions — now it's tens of millions.'
'Tens of millions' might not get you a penthouse at One Hyde Park, but it's hardly a barrier to entry in London's property market. Gary Hersham, managing director of Beauchamp Estates, not only insists that Russians are ready and willing to buy — as far as he's concerned, they never went away. The currency crash saw Russians changing their roubles into sterling — 'at whatever rate': 'They were more keen to transfer funds into sterling than they were not to do a transaction.'
This is the desperate taste in the mouth of the fleeing Russians. With London's Russian population enough to fill a new city the size of Southampton, and Putin's chest-thumping now audible across Europe, no price is too great for a life that is (relatively) free from the interference of the state.
The affluent Russian middle class, some in fear for their lives as well as their fortunes, can remember when neither the prospect of a fortune nor the concept of a middle class existed behind the Iron Curtain, and so they leave — and still, year after year, they come to London.