Paradise Papers -
The Shadowy World of Big Money

A Bridge to the West

International sanctions can be ruinous for business. That is, unless your name is Arkady Rotenberg, you’re a close friend of Vladimir Putin and you have a resourceful law firm like Appleby working for you.

By Mauritius Much, Frederik Obermaier and Nicolas Richter - 07. November 2017

When Russia annexed Crimea back in March 2014, fireworks illuminated the skies over Moscow as exuberant Russians celebrated what they believed was a step on their country’s path back to greatness. Russian President Vladimir Putin had illegally wrested the peninsula from its neighbor Ukraine, deploying soldiers and military vehicles. But when it came to getting civilians onto the newly acquired territory, there was one complication: Crimea was only accessible from the Russian mainland by plane or ship. So what did Putin do? He pushed forward plans to build a 19-kilometer (11.8-mile) bridge for cars and trains across the sea.

He tasked his friend and confidant Arkady Rotenberg with completing the prestige project. The friendship between Rotenberg and Putin goes back to the days when St. Petersburg was still called Leningrad. They met in a youth group back in the 1960s and later trained together at judo. Today, many of Putin’s critics see Rotenberg as a straw man who helps the president accumulate wealth. He’s one of the few people Putin trusts.

Of course, the planned bridge over the Kerch Strait, which connects the Black Sea and the Sea of Azov, is much more than an infrastructure project – it’s a provocation, too. From the perspective of Western governments, at least, it represents a permanent break with international law. The West has reacted accordingly; it wants to force Moscow to give Crimea back. To that end, it has been punishing those closest to Putin.

On March 20, 2014, immediately following the annexation of Crimea, the United States imposed sanctions against Putin’s confidant Rotenberg. Four months later, the European Union followed suit. Now, Rotenberg’s bank accounts and assets in the U.S. and the EU are frozen and he is also forbidden from traveling to the EU. People and companies from America and Europe are prohibited from transferring money or assets to him.

Sanctions are designed to force a country to change its behavior. They do so by taking out the bridges that link them to the rest of the world. Citizens from the ostracized country are no longer allowed to travel, export goods or transfer money. For Putin’s entourage, members of which are frequent guests in some of the world’s most expensive destinations, access to the West has been blocked. That means Rotenberg’s private jet may no longer land in Vienna, Paris or London, and no American or European enterprise may do business with him.

But as old as sanctions are, so are attempts to circumvent them. Offshore companies and trusts often serve to undermine one government’s attempts to punish another. In Rotenberg’s case, the law firm Appleby was one of the organizations helping him skirt the sanctions that had been imposed against the oligarch until at least April 2016. While the U.S. and the EU were trying to take out Rotenberg’s bridges to the world, the firm that is now at the center of the Paradise Papers was doing its part to build new ones.

For people like Arkady Rotenberg, being a friend of Putin’s can be both a blessing and a curse. For one, his proximity to the president has turned him, like other oligarchs, into a billionaire. When he was younger, Rotenberg wasn’t even interested in business. After receiving a Ph.D. in sport pedagogy, he went to work as a judo trainer in Leningrad (now St. Petersburg) and later founded the judo cooperative Yawara-Neva that would later make Putin its honorary president.

It wasn't until after the collapse of the Soviet Union that Arkady and his younger brother Boris discovered their knack for business. At first, they only owned a chain of gas stations and a security firm, but a vodka factory, a bank and an energy company were soon to follow. They built pipelines and some of the infrastructure for the 2014 Olympics in Sochi, Russia. Putin’s winter spectacle alone brought them contracts worth over $7 billion, according to reporting by the news agency Bloomberg. Rotenberg’s economic rise mirrored that of Putin’s political advances. Forbes even dubbed Rotenberg “the king of state orders.”

After the annexation of Crimea, Putin asked his old friend Arkady to build the bridge across the Kerch Strait, even though his company Stroygazmontazh (SGM) had never built one before. Rotenberg, the martial artist who described himself in his doctoral thesis as a “representative of the aggressive part of society,” agreed. “It’s an important project for the country,” Rotenberg told the Russian newspaper Kommersant. The project was expected to cost around $3 billion.

Serguei Fomine/Russian Look/Imago

Construction of the Kerch Strait bridge is fully underway.

Meanwhile, the West would still like to punish Putin for stealing Crimea without affecting the entire Russian population. It has refrained from imposing a complete embargo for this very reason and has instead opted for targeted sanctions against Russian companies, banks and oligarchs who have profited the most from Putin’s system – people like Arkady Rotenberg. The EU justified the sanctions it imposed against him on July 30, 2014, by saying Rotenberg had “been favored by Russian decision-makers in the award of important contracts by the Russian state or by state-owned enterprises.” The EU also cited Rotenberg’s role in the Kerch Strait bridge project, arguing that its construction would consolidate Crimea’s “integration into the Russian Federation which in turn further undermines the territorial integrity of Ukraine.” On the day the U.S. imposed sanctions against Arkady, it also applied them to his brother Boris, another close friend of Putin. According to Forbes, Boris was only spared the same treatment in the EU because he also has a Finnish passport.


Boris Rotenberg was likely spared EU sanctions because he has a Finnish passport.

The West is taking its punitive measures very seriously. Americans caught doing business with the Rotenbergs are subject to hefty fines and prison sentences of up to 20 years. The EU, for its part, has stated that, “No funds or economic resources shall be made available, directly or indirectly, to or for the benefit of natural persons” under sanction, including Arkady Rotenberg. German citizens who provide Rotenberg with either of these can expect to face up to five years in jail or fines as high as 500,000 euros.

This is an inconvenience for Rotenberg who, like most oligarchs, spends some of his fortune in the West. As of spring 2016, he owned real estate in Italy and private jets registered on the Isle of Man.

Despite the sanctions, Appleby helped him at least until April 2016, trying to maintain the connections the West was eager to cut.

In addition to its relationship with Rotenberg, Appleby provided services directly or indirectly to close to a dozen banks and companies from Russia, Iran and Libya, even though these entities had long been the subject of EU and U.S. sanctions. These include the financial institutions Sberbank, VTB Bank, Gazprombank, the VEB development bank, the Russian Agricultural Bank, the Bank of Moscow, which merged with VTB in 2016, and the oil company Rosneft. The law firm also had connections to Libya's sovereign wealth fund, the Libyan Investment Authority (LIA), and Bank Melli Iran. When contacted for comment by the Süddeutsche Zeitung, Sberbank denied becoming an Appleby client after sanctions had been imposed against it. However, according to the Paradise Papers, the law firm assisted with deals involving Sberbank during that time. The bank declined to comment on this. Requests for comment sent to the remaining companies and banks went unanswered.

Sanctions do not appear to faze Appleby. The law firm continued doing business with Arkady and Boris Rotenberg even after the U.S. – and in Arkady’s case, also the EU – had imposed sanctions against them. Appleby’s office on the Isle of Man in the Irish Sea temporarily administered the three offshore companies Eagle Aviation Limited, Sentonan Investments Limited and Damstone Limited, through which the Rotenberg brothers imported multiple business jets into the EU. There was also Hilanser Limited, a company located in the British Virgin Islands that, at least temporarily, belonged to Arkady Rotenberg, according to the Paradise Papers. Arkady and Boris Rotenberg did not respond to any of the Süddeutsche Zeitung’s requests for comment.

The business relationship became particularly delicate in the summer of 2014 when, on July 30, Arkady Rotenberg was put on the EU’s sanctions list. On Aug. 8, 2014, the same sanctions came into effect against him on the Isle of Man. The island may not be an EU member, but it does belong to the bloc’s customs union and implements some EU laws – including the sanctions against Russia. From then on, the situation grew dangerous for Appleby. Continuing to do business with Arkady Rotenberg could be seen in court as a violation of sanctions, though it would depend on how strictly the often murkily formulated provisions were interpreted.

The compliance manager at Appleby (Isle of Man) LLC was, in any case, promptly alerted. After all, many firms belonging to the Rotenbergs were registered on the island. In an email to colleagues, he wrote, “Please note that as a result of Mr Rotenburg now appearing on the list we must immediately take action to freeze this relationship.”

The law firm’s partners apparently saw things differently. Perhaps they were more worried about losing a wealthy customer than violating sanctions. Rather than taking immediate action, as they were advised, Appleby waited a year before handing over administration of Arkady Rotenberg's company Sentonan Investments Limited to another legal services provider. Appleby even continued to manage Eagle Aviation Limited, through which Rotenberg’s jet was registered for a time, until at least April 2016. Arkady Rotenberg did not respond to inquiries about which business transactions were carried out during this time through Eagle Aviation Limited, but the Paradise Papers reveal that ownership of at least one of the company’s airplanes was transferred to a bank. Arkady Rotenberg remained an Appleby customer and the economic beneficiary of this company until at least April 2016 – more than a year and a half after he was put on the EU’s sanctions list.

Mikhail Metzel/ITAR-TASS/Imago

The oligarch Arkady Rotenberg – an excellent client for Appleby

Just how frustrating it was for some people at Appleby to ultimately have to give up such lucrative clients like the Rotenbergs became clear in July 2017. “It’s a shame really, I know that what they did was wrong politically but the clients we had were excellent, they were paying for a top service and they got it,” Brian Johnson, technical director for Appleby's aviation division until 2015, said in an interview with the Guardian, one of the Süddeutsche Zeitung’s partners in the Paradise Papers investigation.

It’s astonishing that Appleby does not immediately sever ties with clients who are the subject of sanctions. After all, the law firm, where partners and employees are fond of presenting themselves as the good guys of the offshore industry, takes pride in its fairness and good reputation.

However, Appleby’s approach has often prompted discussions, at least internally. In early May 2014, a month and a half after the Americans imposed their sanctions against Arkady and Boris, the director of compliance at Appleby’s office in the Cayman Islands, wrote in an email that “the risks involved in dealing at all with sanctioned persons ... are great.”

Despite this admonition, Appleby opted to keep a customer rather than burn a bridge with a dubious business partner. In a similar case that began in April 2015, the firm even opted to welcome a new customer – the Russian Agricultural Bank, even though it was obvious that the financial institution had been on the U.S. and EU sanctions lists since 2014. An internal email conversation revealed just how delicate the new business relationship was. The senior compliance officer for the firm’s Cayman Islands branch asked apprehensively, “Can please you (sic) confirm that you have thoroughly considered the engagement and that this does not breach any sanctions?”

An employee from the firm’s British Virgin Islands office replied, using an acronym for the Russian Agricultural Bank, “RAB is subject to the capital raising sanctions only. So long as the instruction will not facilitate capital raising on the markets subject to the US and EU/UK sanctions, the engagement should be fine.”

The response demonstrated how Appleby wanted to test just how flexible the terms of the sanctions were. The law firm analyzed in meticulous detail whether the planned business would come into contact with EU or U.S. territory and exactly which sanctions had been imposed against the person or company in question. If the firm deemed the business to be legally sound, even just barely, it got approved. In a general response to a list of detailed questions sent by ICIJ and the Süddeutsche Zeitung, Appleby wrote that it only provided services to individual clients or companies under sanction if permitted to do so by law. The law firm also said it relied on outside, independent counsel to determine whether certain operations might infringe upon punitive measures imposed by governments. Appleby did not provide a statement on the Rotenberg brothers, nor did it comment on Iranian and Libyan companies and banks. As far as Russian banks go, Appleby said it was allowed to provide certain services to them despite sanctions.

The fact that sanctions are not always unambiguous and watertight plays to the advantage of law firms like Appleby. Sometimes the international community only partly removes the bridges to sanctioned people or companies. The Office of Foreign Assets Control, the U.S. agency responsible for imposing sanctions, for instance, differentiates between comprehensive and selective sanctions against specific activities. Certain transactions are permitted if only the latter are in place. EU sanctions, too, occasionally have loopholes. For example, conducting business with subsidiaries of sanctioned companies is not always forbidden. Decisions are often made on a case-by-case basis, based on individual risk analyses.

The Rotenbergs, too, are experienced at shrouding their business dealings. At least until recently, they owned multiple offshore companies in the British Virgin Islands. Normally, such entities and their true owners are completely hidden from the public and difficult even for international investigators to scrutinize. However, thanks to the Panama Papers from the law firm Mossack Fonseca – the data trove provided to the Süddeutsche Zeitung that made headlines in 2016 – Arkady Rotenberg is known, at least until 2010, to have been the owner of multiple firms. According to the Panama Papers, one of those firms, Causeway Consulting Limited, is purported to have temporarily, and in a circuitous manner, owned shares in the company that owns the Nord Stream pipeline that transports natural gas from Russia to Germany.

Although the Rotenbergs are adept at secrecy, they can’t skirt Western sanctions entirely. In autumn 2014, for instance, Italian authorities seized a number of the Rotenbergs’ villas in Cagliari, Tarquinia and Arzachena as well as the Berg Luxury Hotel in Rome. The Russian parliament, the Duma, subsequently debated possible compensation legislation. Under the proposed law, Russian entrepreneurs who faced EU or U.S. sanctions would have been compensated with public funds. However, there was widespread resistance to the “Rotenberg Law,” which was seen as a handout to Putin’s rich friends.

Meanwhile, Arkady Rotenberg has presumptively moved to protect his business interests in a different way. The Panama Papers revealed that he has transferred ownership of numerous offshore companies to one of his sons, who does not face sanctions – an efficient, if not entirely new trick.

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