British Virgin Islands

The BVI Stepping Stone to Russia

By Simon Pascoe, Partner, Bedell Cristin, Jersey, and Kristian Wilson, Senior Associate, Bedell Cristin, Singapore (01/12/2014)

International finance centres (IFCs) are frequently used to structure Russian inward and outward investment and it has been observed that in 2012, 11 of the 40 main recipients of Russian FDI were IFCs[1].  The BVI is at the forefront of offshore investment into Russia, and the share of outward FDI stocks structured through the BVI increased from almost zero in 1990 to US$123.5 billion in 2006[2].


There are many reasons why the BVI has played such a significant role in structuring investment into and out of Russia.  Most observers point to the tax neutrality and commercial confidentiality offered by the BVI, but one little explored and yet fundamental reason for using the BVI is the legal certainty offered by this jurisdiction.



The BVI specialises in the establishment of offshore companies and is well regarded for its modern commercial law.  It offers a light regulatory environment, designed to enable maximum commercial flexibility.  BVI law is based on English common law and the ultimate court of appeal is the Privy Council in London.  The BVI has a dedicated commercial court, which is well regarded and has a particular expertise in shareholder disputes, with The Economist recently noting that the "courts in the British Virgin Islands hear a good share of all disputes involving international joint ventures."[3]


The mature legal environment and legal certainty offered by the BVI stands in contrast to the Russian system, which, historically, has been characterised by the weak protection of property rights, the limited scope of corporate law and the arbitrary enforcement of such laws.  As such, the BVI was frequently chosen as a jurisdiction in which to structure deals, which enabled Russian investors to overcome deficiencies in the Russian legal system and difficulties in accessing international finance.



In order to understand the circumstances which gave rise to this demand for BVI companies, it is essential to look at the legal context to Russian property rights.


The Russian Legal Context


Following the collapse of the Soviet Union in the early 1990s, Russia witnessed a number of changes associated with the move to a market oriented society.  These changes included periods of political and economic instability and the development of a new code of law, while also impacting upon the investment climate, as investors had to consider legal and political risk, how to protect assets and how to enforce property rights in a new legal environment.



The swift enactment of new company laws resulted in an uncertain body of law, which was ambiguous, untested, limited in scope and proved unpredictable for investors and legal counsel.  In addition, there was uncertainty as to the implementation and enforcement of such laws, given that Russia had an inexperienced judiciary who were unfamiliar with the new laws and how to apply them. 


Investing in Russia was not without risk, given the uncertainty raised by the new laws and the problems of enforcing them.  Investors therefore sought legal certainty and the solutions could be found in the BVI, which offered more supportive institutions and a clear code of commercial law.  By incorporating in the BVI, Russian investors could rely on common law rights and remedies and modern commercial laws, thereby gaining access to Western principles of corporate governance and the ability to structure joint ventures and co-investment in ways that would not be possible under Russian law.  In addition, by incorporating in the BVI as opposed to another onshore jurisdiction, Russian investors could benefit from cost and operational efficiencies due to the lower costs of setting up a BVI company and the lighter level of regulation.



In order to gain greater insight into the ways in which the BVI improved the investment environment for Russian investors, it will be instructive to look at the ways in which the BVI was used to find legal and practical solutions.  This can best be seen by observing how the BVI has been used for asset protection, accessing international finance, and protecting shareholder rights.



Asset Protection


The BVI has often been used to protect assets against the risk of expropriation by the government or misappropriation by unscrupulous business partners.  The BVI has also been used to protect family assets from dissipation, through the use of trust and private wealth structures.



Following the collapse of the Soviet Union, there was uncertainty among investors as to whether property rights under the new free market system would continue as well as concern about the potential of the government to expropriate assets.  As a result of such uncertainties, Russian investors often structured their asset holdings through offshore vehicles, which would protect them against political and legal risk by locating ownership offshore and ensuring that any challenges to ownership would have to occur in the BVI, under the protection of a neutral and mature legal jurisdiction.



Similarly, the BVI was used to protect assets in private wealth structures.  As the generation that found wealth following the collapse of the former Soviet Union grew older, the concern now turned to how to maintain and protect that wealth.  Solutions could be found in the use of BVI trusts, which were a useful tool to preserve family wealth for future generations, guard against the fragmentation of family business, guard against the possibility of divorce, or address concerns in relation to political instability and personal safety.



Access to Capital


In addition to asset protection, the BVI has also been used as a platform to access international finance.  Russian investors have preferred to use the BVI as a platform for capital raising, given structural problems in Russia, which made raising finance difficult, including such matters as "an unsettled political environment, macroeconomic instability, a confiscatory tax system, an insolvent banking system, and weak protection of property rights."[4]


In contrast, the BVI offered a stable and mature legal and financial system, where deals could be structured without imposing excessive costs.  BVI corporate law allowed corporate and financial transactions to be structured with ease.  Similarly, lenders preferred BVI companies as security could be taken over their assets or shares and comfort could be taken that enforcement in the courts was predictable and straightforward.



Shareholder Rights


The BVI has also been used by Russian investors to take advantage of the property rights available under the Business Companies Act 2004 and the common law, in order to overcome specific deficiencies in Russian law.  One area in which this can be seen is with joint ventures and shareholder agreements.


Joint ventures are frequently located in offshore jurisdictions as a means of protecting the joint venture from legal risk.  One way of achieving this is to incorporate a BVI company, which is bankruptcy remote from either joint venture party.  A second way of ensuring this is that, by choosing the BVI, each party can rely on the law and legal institutions of a jurisdiction other than their home jurisdiction and thereby avoid potential bias.


In establishing joint ventures and other forms of co-investment, shareholder agreements are frequently used as a tool to provide for negotiated rights, such as preferred rights to voting, dividends and upon a liquidation, to provide for pre-emption rights, rights of first refusal and dispute resolution mechanisms.  These provisions can often be tracked through into the constitutional documents of a BVI company.



However, such provisions, and shareholder agreements, have historically not been legally recognised in Russia.  As a result, Russian law did not recognise contractual provisions relating to share transfers, restrictions on the sale of shares and corporate governance provisions relating to board appointments and voting.  As a result it was common practice to incorporate a BVI company, as shareholder agreements would be recognised under BVI law and such provisions could be incorporated into the company's constitutional documents.



In 2009, steps were taken to ameliorate the situation with an amendment to the Law on Joint Stock Companies, which formally recognised shareholder agreements.  However, problems still remained in that the amendment failed to clarify whether foreign law shareholder agreements were valid, and issues remained with the apparent inflexibility of Russian corporate law.



Further amendments were made, including the 2013 amendments, which provided for the recognition of foreign law shareholder agreements.  However, the popular view is that BVI companies still provide the best solutions to matters concerning shareholder rights and joint ventures, with one paper noting that despite the 2013 amendments, the authors "do not see an immediate change to the tendency to structure Russian joint investments offshore."[5]



What this outline review of the relationship between Russia and the BVI indicates is that an understanding of the Russian legal and economic context is key to understanding the reasons for the popularity of BVI companies in Russia.


It is clear from the Russian perspective that BVI companies have been used as a means of managing legal risk.  The BVI has allowed Russian investors to manage risk by providing the tools to enable such investors to protect their assets, to obtain finance in an uncertain economic environment, and to rely upon well defined property rights and legal protections when co-investing with other investors.

[1] See Koroliuk & Rudenko, Russian Multinationals FDI Outflows Geography: the Emerging Dominance of Greater Europe, 67(1) European Researcher (2014).

[2] See Settles, International Investment Activities of Russian Corporations, <>.

[3] See The Economist, Unbundling the Nation State, 8 February 2014.

[4] See Karhunen & Ledayeva, Foreign Investments Between Offshore Financial Cenres and Russia: Institutional Arbitrage or Institutional Escape, Centre for Markets in Transition Paper 1 (2011).

[5] See Cranfield & Kondruseva, Changes to regulation of shareholders agreements in the context of the Russian Civil Code reform - will they make a difference? Lexology (12 December 2013) <>.