Russian interests have found Luxembourg’s expertise useful as a European business hub for several decades. Here we look at the state of this relationship before the invasion of Ukraine, and how these arrangements might be affected by the subsequent sanctions and the decisions of business leaders and politicians in Luxembourg.
“The Grand Duchy remains one of the most important investors in the Russian economy,” said the then Russian Federation prime minister Dmitri Medvedev in an interview with the Luxemburger Wort in 2019. He cited foreign direct investment via Luxembourg companies of around 20 billion dollars.
One physical bank
East-West United Bank is the most prominent financial business in Luxembourg with Russian links. The bank, which still has its headquarters in Luxembourg, was originally created in 1974 as the institute that took care of the foreign economic interests of the former Soviet Union.
EWUB, as the bank is also known, employed 110 people at the start of last year, according to the national statistics office. A provider of corporate banking and wealth management services, it now is a wholly owned subsidiary of the Moscow-based conglomerate Sistema, which has interests in communications, IT, construction, media, and pharmaceuticals and more, as well as banking.
Sistema is majority owned (59.2 percent) by the Moscow-based oligarch Vladimir Yevtushenkov. This 73-year-old is 1,427th on the Forbes Billionaires List, with a net worth estimated at 2.2 billion dollars. His recent history suggests a degree of distance from the Putin regime. In September 2014 he was put under house arrest in Moscow on charges of money laundering, being released subsequently. Some have compared his fate to that of fellow oligarch Mikhail Khodorkovsky who also fell foul of the Russian state, ending up being jailed on allegations of fraud, and having his Yukos oil company appropriated.
Board representatives
In July 2020, the ex-deputy Luxembourg prime minister and economy minister Étienne Schneider joined the board of Russian conglomerate Sistema as an independent director. This followed the appointment of his predecessor at the Economy Ministry Jeannot Krecké, who was also a member of the Sistema board and that of East-West United Bank in the role of chairman.
Both men announced their resignation from these roles on February 27, after resisting this move for a number of days after the invasion of Ukraine. By being generally relaxed about these connections in recent years, Luxembourg’s society and media was in line with the general policy of constructive engagement favoured by neighbouring Germany.
Soviet links
Asked about East-West’s clients, CEO Sergey Pchelintsev told the Luxemburger Wort newspaper in 2019 “it can be Russian businesspeople who have cross-border import-export activities, it can be investors who want to create a basis for business in the EU in Luxembourg or want to invest globally from here, even those whose business activities do not touch Russia at all.”
As for the origins of the bank in 1974, he said “the founding corresponds to the beginning of gas exploration in Siberia. The Soviet Union developed a huge gas pipeline project to Europe and needed advanced technology to carry it out. Luxembourg being, at the time, at the heart of the metallurgical industry, I suppose that this position played a role in the installation of a Soviet bank here.”
East-West was previously majority owned by VTB Bank, on of Russia’s largest, and which has just been targeted for sanctions by the West.
Mostly trade holding companies
Otherwise, most operations with Russian connections in Luxembourg operate as holding companies to facilitate trade and investment into and from the EU. Most of this is related to oil and gas. The business register lists 237 companies backed directly with Russian capital, as well as numerous others owned partly or completely by Russia-connected company structures. Mostly these are small operations with a handful of directors and employees. The country’s energy giants (including Gazprom and Rosneft) have dozens of these holding companies in the Grand Duchy. There is also VEB-Leasing, and offshoot of VEB, the Russian state development corporation, which is chaired by a certain Vladimir Vladimirovich Putin.
Potential impact?
As well as the international trade sanctions, these companies will have to manage the potential exodus of Russian and non-Russian directors and employees unwilling to work for Russian businesses after the invasion of Ukraine. The extent and effect of this remains to be seen.
Investment Officer spoke off the record to a locally based, non-Russian who last week resigned his role as a non-executive director in a Russia-connected financial holding company. While saying that long term this would affect the corporate governance profile of the company, which would potentially have regulatory consequences, short term his resignation and that of a colleague would not prevent the company from being able to operate. The Russian chair of the company will still be able to sign documents on the firm’s behalf.
Pension fund stakes
There are also investments in Russia by Luxembourg’s state pension fund, the Fonds de Compensation, but these stakes are relatively small. The exposure of the fund to Russian equities and bonds is 0.23 percent. Most of this is held in the form of sovereign debt totalling at least €52.3 million, in the exchange rate of the time. As regards shares, the value totalled around €20 million, including €4.2 million in the sanctioned bank Sberbank, €3.6 million euro in Gazprom, and 3.1 million euro in Lukoil, Russia’s second-largest oil company.