You cannot take away what is inside a container.
Selling Pumpyansky’s yacht Axioma to pay off debts will make it easier for foreign authorities to deal with the properties of Russian billionaires under sanctions.
More and more wealthy Russians' properties are being seized due to sanctions, but it is expensive for countries to maintain their yachts and villas. Dmitry Pumpyansky’s yacht being sold for debts could be a solution, according to Vladimir Khantimirov, managing partner of Asterisk law firm.
After tough sanctions were imposed on Russia and the start of the 'special operation' in Ukraine in February 2022, news about the arrest of large assets of Russian oligarchs abroad became frequent. The unknown aspect was the disposal of these seized properties by the countries.
In late June, the Supreme Court of Gibraltar decided to auction off the yacht Axioma owned by Russian billionaire Dmitry Pumpyansky. The yacht was under arrest in March and just two months later it was up for auction.
Yacht Axioma
Forbes.ru reported on 06/27/2022 that the Gibraltar Supreme Court ordered the sale of billionaire Pumpyansky’s yacht, making it the first superyacht owned by a Russian billionaire to be auctioned. Without a court decision, authorities usually cannot sell seized yachts, and maintaining them costs 10-15% of their value, according to Business Insider.
JPMorgan, the largest US bank, was responsible for the arrest of Pumpyansky’s yacht under sanctions, as reported by Bloomberg in late March.
It appears that the yacht was initially bought using loan funds from JPMorgan and was pledged to the bank. Vladislav Zhuravlev, a legal adviser at the Sovet legal group, explained to Forbes that the bank is trying to seize the yacht because of a loan default, leading to its seizure. However, the statement by British Foreign Secretary Liz Truss claiming that the yacht is 'exclusively owned by Pumpyansky' raises some questions. Nonetheless, foreclosing on the yacht due to debt will exempt it from the sanctions, according to the lawyer.
Pumpyansky was sanctioned by the EU on March 10, and a few days later the UK also imposed sanctions on him. At the end of March, British Foreign Secretary Liz Truss announced that the Axioma yacht ultimately belongs to Pumpyansky. After being sanctioned, Pumpyansky ceased to be the beneficiary of the Pipe Metallurgical Company, which he owned 90.6% of, and left its board of directors. — Inset K.ru
From freezing to confiscation
The European Council Regulation No 269/2014, which governs the seizure of property of sanctioned individuals, only allows for freezing of assets, not confiscation. Property can only be confiscated for public needs, with appropriate compensation. Western countries are seeking a solution for the seized property, such as a bill in the US Congress allowing confiscation of sanctioned individuals' property.
So far, the biggest ships owned by Russian billionaires have been seized: the luxury yacht “A” of EuroChem's founder Andrey Melnichenko, Lady M of Severstal's co-owner Alexei Mordashov, and the yacht Lena of Novatek and Sibur's co-owner Gennady Timchenko. Before, the owners didn't have to worry about their property's safety and just had to wait for the sanctions to ease. However, the Axioma case revealed that all seized assets are under threat.
One explanation for the quick sale of the vessel was the high expenses for maintaining the yacht, which can be 10-15% of its value. Because the yacht is under arrest, the country that seized it has to cover all expenses, including the boat's maintenance.
In dealing with the costs, the Gibraltar Court was more drastic than the Fiji Court, which chose not to sell but to transfer billionaire Suleiman Kerimov's Amadea yacht to the wealthier United States, capable of affording the storage and upkeep of oligarchs' toys. However, Italy states that it won't feel sorry for the seized property. This year, the country will spend nearly €13.7 million to maintain the Russians' assets. The government has already prepared changes, allowing it to sell the seized property to cover the costs.
Debt bypassing sanctions
The given examples support the emerging trend. Western countries are legalizing the sale of expensive property to cover the expenses. But in the Axioma case, another significant direction can be seen – the sale of seized property for debts.
In reality, Axioma doesn't belong to Pumpyansky, but to Pyrene Investments, whose shareholder is the Cypriot company Ferdberg Holding company, which is ultimately owned by the oligarch. According to public sources, JP Morgan gave Pyrene Investments a €20.5 million loan in December 2021 secured by the Axioma yacht. When JP Morgan demanded the debt to be repaid, it led to the yacht's arrest.
In both the USA and Russia, credit line agreements often include conditions that allow the bank to demand early repayment if violated. In countries with case law, parties tend to include all potential risks in contracts. A typical violation of contract terms is including the borrower in the sanctions lists and not informing the bank of the change in the beneficiary. It seems these conditions were violated.
Once the yacht is sold, the funds will be under the disposal of the Supreme Court of Gibraltar, which will decide their future. Experts estimate the ship's market value to be around €60 million, which even considering all expenses, exceeds the debt amount significantly. It's unclear whether the yacht owner will receive this difference. It may either remain with the court or be transferred to one of the owner's international accounts, which is inaccessible due to sanctions.
Do not forget about the existence of secondary sanctions, which played an important role in this matter. Even if we assume that Pumpyansky (which is unlikely given the freezing of accounts) could pay JP Morgan, the bank is not entitled to accept money from him directly. For this reason, large companies try to adhere to the “over compliance” principle and refrain from direct or indirect interaction with prohibited persons. Otherwise, the bank itself faces serious consequences, up to criminal cases. The US already has a mechanism for using secondary sanctions against violators of the sanctions regimes against Iran and Venezuela. Surely, in the near future we are still waiting for a lot of “domestic” cases – business is business, and foreign companies will try to circumvent sanctions in a variety of ways.
By his example, JP Morgan showed how all Western creditors can get their money back and not fall under secondary sanctions. Surely other Russian billionaires also have obligations to foreign banks and companies with which they cannot pay due to the blocking of accounts. In order to get their money back from large borrowers with ties to Russia, creditors can start going to court to demand repayment of the debt, and the enforcement of the judgment will be ensured through the sale of seized assets. Appeal of such a verdict will be an almost impossible task for the Russians who fell under the sanctions. If the Axioma story becomes a precedent, then the authorities of the countries where the arrested yachts and villas are located will be able to get rid of them, and along with the costs associated with their maintenance.
The opinion of the editors may not coincide with the point of view of the author
