A Brief Introduction To Russian Family Offices - by Stepan Chplakhyan, Single Family Office
Before diving into details on Russia’s family office environment, it is important to understand that the concept of running a FO is relatively new here. While the number of family offices worldwide is constantly increasing, single family offices or independent multi-family offices are still the exception. Family offices in Russia are usually directly linked to private banks, law firms or consultancies like the Big 4. But we see a trend towards the rise of single family offices in Russia, too.
The immense wealth of most of Russia’s multi-millionaires and billionaires was accumulated right before the end of 20th century. These wealth owners are growing older (most of them are in their 50s or 60s) and issues like estate and succession planning are becoming more pressing. While the big family offices associated with banks or law firms serve the asset and wealth management service needs of their clients, when it comes to transferring wealth to the next generation, Russian wealth owners come to appreciate the advantages of an independent single family office.
As indicated, a key concern for Russia’s super wealthy is how to pass on wealth to the next generation – estate and succession planning are pressing issues that most families have little to no experience with. While other families around the world have long established systems of how to pass on wealth from generation to generation, wealth transfer mostly takes place for the first time, as virtually every business is still in the hands of the 1st generation.
Russian clients (especially the older generation) are highly sensitive concerning questions of confidentiality and their personal security. From here we can make a leap to the second most important matter – asset protection and wealth preservation. All of these issues and concerns can inter-linked and are directly connected to the unstable economic and political situation we face in Russia.
It is important to understand that Russian FO consultants are highly focused on tax optimization and tax consulting in general. Most of the corporate structures are built in an old-fashioned way, including numerous companies in offshore jurisdictions with complex relationships amongst each other and difficult loan structure between single entities. The establishing of Russian CFCs (Controlled Foreign Corporation) and the subsequent emergence of the Common Reporting Standard all those complex networks of companies required restructuring.
There is a lot of distrust in government officials, banks and generally rules and laws that are being passed. A simple example occurred several months ago, when a person declared his foreign assets under the capital amnesty, which basically assured that no accusation of tax offences can be made, or data provided cannot be used as evidence during criminal proceedings. An envelope with declarations submitted to tax authorities by this person was, however, opened by the FSB (Federal Security Bureau) and the information was further used against the defendant in order to convict him (although now the law is on the side of that person).
Thus, utmost trust between client and FO is crucial. Personal meetings prevail over virtual ones. Handshakes and eye contact are still highly regarded and will not be out of fashion anytime soon.
Over the years, institutional family offices in Russia dealt a lot with relocation services, whether it’s the overseas education of their children or the acquiring of a new citizenship or permanent residency in mostly European countries. Especially dual citizenship makes it a lot easier from the Russian tax law perspective to control assets.
Long after the matters mentioned above were dealt with, Russian family offices look into issues such as family constitution or charity, which in certain cases is only used as tool to polish the family’s reputation as opposed to a genuine philanthropic motivation.
Regarding non-financial services, many single family offices are no one-stop shops. Luxury lifestyle management, travel arrangements, citizenship or education are often managed by third party service providers outside the actual family office space.
The Russian FO cosmos is still in its infancy in terms of services rendered to its clients. Many UHNW Individuals or principles are not aware of the scope of services or solutions available to them. Whether it is with regards to their personal lifestyle or the ways and options when it comes to passing down their wealth under a trust or private foundation, all the while this has been happening in Western countries for decades.
But the new generation’s attitude to business is dramatically different to the one of their parents, especially in terms of legality of their business doings and matters of confidentiality. The question is - will it be possible for them to continue doing business in Russia under the current political regime or will money continue to be transferred across Russian borders to safe havens.
Stepan Chplakhyan is a lawyer and project manager in Russian Single Family Office.