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Guest Blogger Eoin McGee on The Irish Economy

3/31/2014

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As change from the subject of Russia, let us look towards Ireland, a country where they make great drinks that unlike the Russians, actually taste of something. 

Eoin McGee runs Prosperous Financial Services in Ireland, he is a member of the IBA financial services committee, a director in two start up businesses and a regular contributor on Newstalk Radio. That's the work stuff. Outside of work he has a wife and three kids and is the manager of the local youths Gaelic Athletic Association team. As if that isn't enough to fill a fellow's calendar he runs 6 days a week and will one day break 3.5 hours for the marathon (a prestigious club I wholeheartedly look forward to welcoming him to).

All of the above is a very long way of saying he is a rather successful and busy chap. So I'm sure you can appreciate that I was very pleased and honoured that he found the time to give his expert opinion on a subject that is of great interest to all of us who follow the global markets: The Irish economy.


Take it away Eoin.

Ireland. Boom, Bust.... Boom?

“I will have a Ray and a little chip please” was the order coming from the customer side of the counter in every Italian run fish and ship shop in Ireland. Had we suddenly discovered that we love to eat this flat fish, not at all. 

It was 1990 and Ray Houghton had just chipped the ball into the back of the Italian net in the Italia ’90 world cup. 


That was a pivotal point in the Irish economy. For the first time, maybe ever, we believed we could achieve on a global scale. Within 20 years we would be considered by Forbes magazine as the best place in the world to do business. 
We had just come out of an awful decade where the majority of our youth emigrated and unemployment was rife. People were poor and had little, including any exposure to the real world. This was a country that didn’t legalise homosexuality until 1993 and that almost came to a standstill when Virgin mega store opened in Dublin and were planning on selling condoms. 
Lots changed in the 90’s. The spark that was Italia 90 is thought by many to have been the catalyst for growth and the rise in employment. We joined the euro at the end of the decade and passed over control of our interest rates to a distant central bank who was more interested in central Europe then our booming economy.

The Irish have an obsession with owning property (for reasons I won’t go into here) so once the cheap credit became available people bought houses, more houses than they could ever live in.

As a financial planner mortgages have never really been my bag, but I did facilitate a few. But it was the stories that shocked me. It was the different cases I heard were getting approved. Stories like first time buyers borrowing 7 times their €30,000 a year salary. 

People switching lenders every 6-9 months to clear credit cards and release enough for a family holiday.

Then there were those who thought they were property gurus.  Their modus operandi was to raise €60,000 on their own home, divide the money in four pots of €15,000 and simultaneously lodge 4 investment property mortgage applications. They would draw down all four loans within six weeks of each other so as not to get rumbled. These people would go from having a modest loan on their own home to owning 5 different properties and owing over a million euro in a matter of weeks.

If the banks knew about it at the time of the application of course they wouldn’t have let the loans go through but incredibly six months later it was doors wide open. Certain banks designed products for the “professional investor” market.

The bank didn’t look for proof of the applicants’ earned income; 6 months rental income bank statements, a valuation on each property, a driver’s licence and a utility bill got you a €1 million mortgage refinanced often with enough of a top up to go buy another house.

It wasn’t surprising when it all inevitably came crashing down. We did well out of the 18 year boom. We became an international player and as one of our TD’s (MP’s) commented “we all had a party” (he regrets that comment!)

The sitting government, Fianna Fail, who had reigned over the majority of the boom, blamed the global financial crisis. The opposition, Fine Gael,  who have been running the country since 2011 keep blaming the last lads.

There were mistakes made. When our banks were about to collapse late one September evening, the minister for finance came up with a plan. He would guarantee all deposits in all Irish banks, indefinitely.

This stopped the flee of money from the banks. It wouldn’t have been a bad idea had he not left the door open “indefinitely”.  International money flooded in and the government was now on the hook for not only depositors but bondholders too. Any default by a bank would be seen as a sovereign default.

So the government had to clean up the banks to the extent that they could remove the guarantee. Genius plan number two kicked in. 

Iceland was in similar crap as us albeit on a different scale. Their banks were also full of toxic loans. So they set up a good bank and moved all the good loans into it and then left the old banks to sort themselves out.

Ireland with its bank guarantee couldn’t do this so set up a bad bank (NAMA) and asked the banks to hand over all their crap. The problem was 6 months later, the economy worsens and you have to go to round two and round three etc constantly getting more and more crap into our tax payer owned bad bank.

Nama now owns the world’s largest real estate portfolio and it may well in time turn a good profit.

The Irish have left the  IMF/EU/ECB bailout. The international markets think we are great little boys and we managed to hold on to our 12.5% corporation tax rate. We have yet to get the big debt write down we believe we are due because we saved the euro but our government still promise it is coming.

Commercial property is estimated by some to grow by 15% per annum for the next three years. Residential property, in Dublin at least is in a supply led boom. Employment is at 88% and my clients are starting to feel a hell of lot more confident.

We are not going to the World Cup, but we did win the 6 Nations. 

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Russia and Oil. Follow Up

3/27/2014

2 Comments

 
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Photo Credit: Flickr/Playing Futures: Applied Nomadology
Due to the ton of emails, tweets and comments regarding the previous Russian related article I  wanted to do a quick follow up.

There seems to be in some circles this strange belief that Russia is somehow all-powerful because they have gas and oil and thus the Western world can only cower in fear of the almighty Russian bear turning off the oil and gas taps. 

Conveniently scary story that, I’m sure the same people who buy that malarky are the ones who bought the FoxNews Al-Qaeda suitcase nuke stories as well. 

A quick wake up call to these people: If Russia would stop selling oil and gas to Europe, you know what? Russia would not get any money.

But they’ll sell to the Chinese! They cry. Ah, how wrong they are and I’ll come to that later in this post. First, let’s have a brief look at Russia’s economic situation if they were to start using oil as a weapon.

Russia is a kleptocracy plagued by serious economic disparity and endemic corruption. In other words it’s a traditional emerging market with all the problems such a market entails, but to some people for some strange reason it seems like a superpower. 

Bah-humbug says I.
 
Russia's economy is based on oil (and gas). End of. We’ve seen oil rich countries try to hold the world to ransom before and the success has not exactly been overwhelming. Iraq in the early 90s and the OAPEC countries in the 70s for example.

But don’t take my word for it, take someone’s who is much smarter than I, The Streetwise Professor. He penned a short, clear, fact based article on this subject, the jist of which is that for Russia “Using the Energy Weapon is Economic Suicide”. You really should read his post, now! 

If you then find yourself starting to geek out a bit (like I did) you might want to follow up by reading a thorough analysis “Crimeanomics favours the West”. It’s written by UBS analysts, so as articles go it’s what you’d expect, a bit boring. But the underlying numbers and data are interesting.

Russians Selling Oil to The Chinese

Right then, let’s get back to the US dollar and the Chinese, who are going to buy all this Russian oil as we in Europe go back to living in igloos and trading squirrel furs with each other to survive because the Russians didn’t pump gas to Germany. 

I have one word for these people who think that changing from the US dollar as an oil currency is a simple matter. That word is hedge.

How are the buyers and sellers of Russia’s “traded in any currency other than US Dollars” oil going to hedge their oil exposure? If you are wondering what the heck I’m on about, allow me to elaborate.

Many things happen and a lot of time transpires from the time that oil is extracted to the time you pump it into your car in the form of petrol this causes the price of oil to go up and down. We pros prefer to use the word volatility because it makes us sound like we know what we are talking about (and you don’t). 

Because of the uncertainty in the price of oil a there emerged a futures market. The futures market is used as insurance by all participants in the petroleum sector to protect (hedge) against price swings. (It’s pretty basic stuff, here you’ll find a good example of how hedging works). 

The global oil futures market is valued at tens of billions of US dollars. Why US dollars? Because that’s what the contracts are denominated in. So here we are, back to the US dollar again. 

So for all of those who think "Eeeek Russia, ooh how strong" please explain to me how Mr. Oilagotski from Russia and Mr. Wan-Sum-Lube from China are going to do business without a proper working futures market in an appropriate currency?

If the Russians and Chinese want to end US dollar hegemony in the oil markets they need to come up with a working market that participants can use to hedge their inventories and purchases. Without that it’s just two-way bartering, slower and more cumbersome than the current system.

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How Russia Would Throw In The Towel

3/24/2014

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Let’s stop kidding about it. If the West (in this case, the USA) really cared about Crimea and the Ukraine and wanted Russia to pack up its Kalashnikovs and head home, it would be a simple task to take care of. No gunfire or “Shock and Awe” air attacks are necessary.

In this post, I’ll tell you how it can be technically and legally done. It involves money (surprise, surprise) or to be precise, the flow of money.

Do you remember George W. Bush’s talk of Saddam having weapons of mass destruction? Do you remember when the US lost its mind collectively as they in all seriousness (and much to the amusement of the rest of the world) started calling French Bread Freedom Bread and French Fries Freedom Fries? If you answered yes, then you will definitely also remember the words Patriot Act.

Unlike the WMDs that turned out to be a “Waffle of Mass Distraction,” the Patriot Act still remains with us. And therein, my dear readers, is the power of the USA against Russia.

I’ll come back to that in a moment.

But first a bit of background on the US Dollar. You'll like this, so pay attention:

All USD transactions done by a bank outside the US must be done through a US-based correspondent bank.

Read that again and ponder on it a bit … okay? Ready to continue? Of course you are.


What that means in reality is that if you have a USD denominated account containing some US dollars with your bank in London (or wherever outside the USA), those dollars are in effect held in a nostro account in your bank’s name in a US-based correspondent bank.

The above is an important concept to understand, because now we come to the second part: commodities.

Everyone is harking on about how wealthy Russia is and how much oil and gas it has. All of this is true. But do you know what currency nearly all oil and gas transactions are settled in?

If you answered US dollars, then give yourself a cookie.

It’s because of the position of the US dollar as the standard commodity settlement currency that China and Russia continue to work to end its hegemony. They’ve had some success, but they are still far, far from making that happen.

Because of the US dollar's position as the settlement currency of choice for oil, it remains a popular reserve currency. The favourite currency of wealthy Russians, although they have euros, Swiss francs, and sterling in their private banking accounts, remains the US dollar.

Because so many wealthy and middle-class Russians like the US dollar, Russian banks have to deal with Mucho Gringo Greenbacks. Just go and have a quick look at the main Russian retail bank’s web pages, and you’ll find quotes for interest rates for USD denominated accounts.

Okay. So now we are coming to the punch line of how Obama could make Putin his biaatch. But before that let’s recap:

  • Russians love the US dollar.
  • Russian banks offer USD accounts to Russians who love the US dollar.
  • Russian oil firms are forced to deal with the dollar.
  • All US dollars held in foreign banks are in fact sitting in an account in a correspondent bank in the US.

And now, drum roll please, we come to the Patriot Act.

Specifically to Section 319 of the Patriot Act: Forfeiture of funds in United States Interbank accounts.

This is a great piece of legislation for the US, as it is the equivalent of a nuclear bomb, or as GWB used to say New-Q-Lear!

It allows the US to seize or arrest funds held in US correspondent accounts of foreign banks, which of course is bad enough, but there is more to it. If the US thinks you’re a bad guy and your bank has a correspondent account with a US bank (and all proper banks do, because a bank cannot work without access to US dollars), then the assets held in the correspondent account are liable for the amount the government wants from you.

Don’t believe me? Here’s the text from U.S. Code § 981 (k):

“… if funds are deposited into an account at a foreign financial institution and that foreign financial institution has an interbank account in the United States with a covered financial institution, the funds shall be deemed to have been deposited into the interbank account in the United States, and any restraining order, seizure warrant, or arrest warrant in rem regarding the funds may be served on the covered financial institution, and funds in the interbank account, up to the value of the funds deposited into the account at the foreign financial institution may be restrained, seized, or arrested.”

Wait, it gets better, even if you never held a single US dollar in your account; the fact that your bank has a correspondent account in the USA makes that money fair game for seizure by the US government. 

And that’s not all. There is no legal requirement by the US government to prove that the assets in the correspondent are traceable to you. This means that other people’s money could be frozen while Uncle Sam chases your cheating a$$.

So, if you’re still with me (I know it’s a longer post than normal, but stay with me here), then this brings me to my point.

This whole Ukraine crisis is purely about the US having the stomach for the fight, and, quite frankly, they don’t. Crimea and the Ukraine just aren’t that important to the West. Because if they wanted to, they could simply use the Russian energy companies and the Russian banks and seize their correspondent accounts. You would immediately see a run on Russian banks when the middle class and wealthy would try to access their accounts. Since the Russian banks hold such a large amount of their reserve funds in US dollars, which would be frozen, the banks wouldn’t be able to open their doors. It would cause some serious rioting on the streets of Moscow as wealthy Muscovites would try to drive their Audi Q7s and Range Rovers in through the banks doors.

On top of this, the US could slap a few indictments on Rosneft and Gazprom. Because the US dollar is (pardon the pun) the oil that greases the oil and gas industry, the whole market in Russian oil and gas would come to a screeching halt. Those firms also hold large US deposits, which they wouldn’t be able to access, meaning they wouldn’t be able to meet their daily obligations.

Utter mayhem would ensue in Russia.

How long would this take? Well, let me tell you that the time to answer a request for information alone under the Patriot Act Section 319 is 120 hours, yes, HOURS.

“120-HOUR RULE—Not later than 120 hours after receiving a request by an appropriate Federal banking agency for information related to anti-money laundering compliance by a covered financial institution or a customer of such institution, a covered financial institution shall provide to the appropriate Federal banking agency, or make available at a location specified by the representative of the appropriate Federal banking agency, information and account documentation for any account opened, maintained, administered or managed in the United States by the covered financial institution."

Like any form of sanctions, it would have far-reaching repercussions, and we would see all kinds of nasty things in the world of finance, who knows Goldman Sachs’s chairman Lloyd Blankenfein’s beard might even fall off.

But do you honestly think that the Russian kleptocratic economy, which defaulted as recently as 1998, is more resilient than the economy of the US (even with its myriad of problems)?

So, as you can see, from a purely technical perspective, bringing Russia and Putin to his knees is really not that difficult a task. The legislative framework is there, and it is brutally effective. The question is does the USA have the political will and the stomach to face the inevitable repercussions of such actions, or is it just easier to say a few words of support in favour of the Ukraine, and then let things carry on as before?



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The Compliance Tsunami

3/13/2014

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The Compliance Tsunami from ComPeer Limited
For those of you who don't work in the finance industry the subject of compliance might sound a bit boring, but for those who do, it is way up there in the interesting thingimies list. Compliance is to a finance pro what a big wave is to a surfer. Like gnarly Dude! 

Compliance (and the legislative changes involved) are the biggest single driver in how the finance sector is currently evolving. 

Above is a slide show provided courtesy of ComPeer Limited, a research and benchmarking firm for the UK Wealth Management sector. It is from their "Compliance Tsunami" event held in London earlier this month. The presentation relates to the UK, but in my experience these are exactly the same problems/challenges facing the sector globally. Nik Lysiuk, a senior analyst at ComPeer Limited, has been kind enough to pen a guest blog post on their findings.


The Compliance Tsunami From ComPeer Limited

The 150 firms in our wealth management universe manage and administer £600 billion of investment assets. They have broken new records for profit and revenues in 2011, 2012 and all signs suggest that 2013 will be another record year. Costs, however, are also increasing and recent ComPeer research showed that firms were spending 10% of revenues and close to 50% of profits on compliance matters alone. Total investment assets for the firms we interviewed amounted to over £60 billion pounds, with total staff of 3200, each of which constitute roughly 10% of the industry.
91% of interviewees said that the pace and volume of regulatory changes across 2012 and 2013 was high or very high. The biggest problem when dealing with the workload was not the inherent difficulty in understanding Policy Statements, nor the shortfall in resources - it was the prolonged time and effort needed to get a grasp on a given interpretation of the policy. The overwhelming suggestion was that collaboration was needed between the firms and the FCA, and the trade bodies were all praised for their work in this area. 
Have firms experienced any material changes since the FSA split into the FCA and PRA? The 80% that answered ‘yes’ show that the FCA is doing as promised. Looking at this optimistically, the remaining 20% may simply be those firms that have historically had a positive experience, suggesting that the transfer of power has been smooth. There may be a way to go before we see whether this increased engagement leads to increased collaboration.

Regulation hitting the UK that ought only to act as a framework within which firms operate, has actually become a reason that firms have changed their service provision. Almost a third of interviewees mentioned that FATCA had resulted in them curtailing the provision of services to U.S clients. With Suitability, we saw that firms were turning to ‘ready-to-go’ investments and now have more scalable business models. Recent ComPeer research shows that only 2% of firms were able to achieve scalability between 2009 and 2012, so this can only be a good thing.

What’s quite interesting is firstly that firms did not really think of compliance as a strategic tool and secondly, if it was strategic, there were no clear ideas on how it could be harnessed. There’s a bit of a conflict here between the vast amount of regulation that firms have to deal with, and the fact that there is no strategy to deal with it. RDR and Suitability were the two projects mentioned most often as those that took up large amounts of time - firms estimated that on average, around 80% of the work on each project would be done in any case, without the FCA forcing them to do it, which is a significant confirmation of the FCA’s intent.

Regulation was thought to be the major driver of compliance department costs. When asked how they would rate the level of costs, 17% rated them as ‘too low’ indicating that more resources are needed to meet the regulatory workload. The majority rated their costs as acceptable and the majority also rated the difficulty in dealing with compliance as high or very high, the implication being that resources match the task and the current high level of regulation can be sustained in future.

To what extent did interviewees feel that the front office has been impacted by the regulatory environment? The overwhelming response was that it had been hugely affected. Some firms said that they had tried to shield the front office from compliance, where possible, but that inevitably they had a responsibility because they were so close to the client and were better able to gather the required data.  

90% of respondents said that it was challenging for their IT department to keep pace with regulations, but that they saw the requirements as an opportunity for general updates to their systems. 60% said that they did not use specialist software for the management of compliance and in fact, no two people mentioned the same software package. This could be because a catch-all package simply isn’t suitable for managing compliance, or perhaps there is a gap in the market for service providers. With regard to the role of social media, firms were still broadly unsure about how to harness the power it could bestow. The regulator is due to issue official guidelines this month, so this could be an opportunity to really grasp the idea of social media.

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Banker Pay. Are They Really Worth It?

3/11/2014

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Photo Credit: Flickr/hypo.physe
Banks deal in money, biii-iiiiig chunks of money. For rather obvious reasons I have no problem with bankers being paid more than the national average. After all, it fed my family, kept me in well-tailored suits and my tushie in a rather nice big powerful German car vroom-vroom-beep-beep. Perhaps I really shouldn’t bite the hand with the Rolex that fed me.

But are senior bank bosses really worth the millions we read about?

First of all there is one thing you need to understand about banks in general. They are not growth companies, they are not start ups. As much as they like to splash around the word “entrepreneurial” they are anything but.

The primary business objective of a bank is not growth. A business that is trying to grow has to innovate and take risks. Banks don’t like risks, banks avoid risks. 
I don’t care what any one says contrary to this, they are wrong. The number one goal of a bank is to survive as a business and it does this by doing what it has always done, keeping the status quo. 

Banks are also protected by legislation. You can start a florists with relative ease, but try starting a bank, it’s not an easy thing (just ask Dave).  

Because of their risk averse nature you simply can’t have people running banks who are innovative risk takers. So what type of person rises to the top in a risk averse, status quo seeking, protected behemoth? Bureaucrats do, that’s who.

Nothing wrong with bureaucrats, every organization needs them, but as a job it is not the most mentally challenging or creative thing to do. A bureaucrat creates nothing. They are given a ready built package and their job is to administer it and make sure things keep chugging along Choo-Choo exactly as before. 

This is where there is an all too common misconception. Senior bank bosses (and in general senior managers in any industry) often see themselves as leaders, when in fact they are administrators. There’s even a whole industry of management consultants and book publishers who make a business from supporting this myth.

After all, who wants to see themselves as a bureaucrat? Much nicer to be a James Cook of the finance world, heroically leading explorations in the global world of commerce. 

When viewed from this perspective it does beg the question: Should administrators be paid so grandly? 


What bureaucrat is really worth millions?
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Private Banker International. The Difficulty of Digital Media.

3/10/2014

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How many times have you won the lottery? How many times have you reached for your wallet after landing on a site with a pay wall?

The odds are in favour of the former being a higher number are they not?

Financial journalism is in dire straits. Funny that. Not funny ha-ha, but funny strange. There’s so much competition for attention these days that the demand for quality content continues to grow. If you're in the financial information business you need to be producing great content, problem is no one wants to pay for it. So how are financial news and information providers going to survive, when there's so much great content already out there that costs you zero dinero?

I got to thinking about this as I saw this tweet from Private Banker International (part of Timetric Financial Services)

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I clicked on it and what do I get? No article. Just the option to "request a free trial"

I then tweeted Private Banker International (@BankerNews) and received this answer.

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Fair enough, everyone has to make a living. But the question is are they? It’s a bit cheeky to dangle that stick in front of you only to ask you to jump through a hoop. 

Making a potential client feel like a circus seal is, in my limited sales experience, perhaps not the best form of closing a deal. Seems a bit like the classical over promise under deliver spiel, but perhaps they know what they are doing.

But do they?

The thing about digital and the web is that there are a multitude of ways to see if someone is successful. Let’s look at Private Banker International as an example.

  • +1000 followers after being on Twitter since 2009 (about 0.6 followers per day)
  • A global Alexa page rank of 6 900 000 (As a comparison me, my laptop and blog come in at around 911 000. Viva La Digital Revolucion!)
  • Klout score of 43 (Ranks with the “Follow me I’ll get you 1000 followers” crowd)
  • Out of their 10 previous tweets they’ve received 2 retweets (one was mine)

Not exactly impressive are they? That's the thing for companies on the web, it’s safe to assume that if your digital statistics are lacklustre then your sales will correlate.

Let’s be clear on this, Private Banker International is not the only one struggling to get noticed on digital media (and they have other income streams) it affects the whole financial sector. They are just one example of many.

For the normal person tweeting and (maybe) blogging for the fun of it, the above figures don’t and shouldn't matter one iota, but for a corporation that is on social media you need to be getting your message out and you need to be growing. If not, eventually you will die, especially if you’re in the information and content business.

2 Comments

The Entrepreneurs. A Short Film

3/6/2014

1 Comment

 
The Sundance London Short Film Competition is on and here's my favourite entry from Martin Bamford. 

When working as a private banker one of the best perks of the job is meeting so many entrepreneurs and hearing their stories. It beats a Jack Reacher novel any day of the week. 

I've also been involved in film finance, assisting up and coming film students in their projects. So for rather obvious reasons Martin's film really hit the right spot. (Please note I'm not involved in Martin's film in anyway… other than I think it's great).

Martin is currently working on a feature length documentary called Boom! about Financial Planning and the Baby Boomer generation. The above five minute film titled The Entrepreneurs is the pilot. It delivers a real life example of what it takes to make a go of it in this modern world.

If you enjoy the film, please support Martin by voting for his excellent film.

Vote Now
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Freezing Russian Assets. What Happens If?

3/3/2014

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Photo Credit: Flickr/Darek
Bored of the Ukraine coverage yet? You won’t be after reading this. Here’s something to make you sound smart without appearing arrogant to your friends when it comes time for after work drinks. 

In an article titled Putin’s Ukraine Strategy by Leon Aron, a director of Russian Studies at the American Enterprise Institute, there was one passage that got my private banker grey matter rushing around in its grey well-tailored suit.

“The president [Obama] is likely to have pointed out that the risks would involve Russia's membership in the G-8, the safety of financial and other assets of the Russian elite which are located outside of Russia, as well as the ability of the members of this elite and their families to visit, live or study in the U.S. and the EU.”
Notice the mention of the financial assets of Russia's elite. This would put some pressure on Putin, but enough pressure? 

I don’t know. I’m just a banker. But what is interesting is how these assets could technically be frozen. Not as easy as it first may seem.

There’s a problem here, Russian oligarchs and wealthy individuals have been serviced by various financial institutions for years, to help them… how do I put this diplomatically?... Let’s say protect their assets. 

One of the main conduits have been different kinds of corporate structures. 

These corporate structures are not Russian companies. There isn’t an account somewhere in a banking secrecy country with a few hundred million in it with a big fat Russian name as account holder. 


What about Russian assets in Cyprus for example? A well known and popular place for wealthy Russians to place their assets and according to Quartz, they are setting up more offshore companies now than before the crisis.

An important point to remember here is that just because a company is registered in Cyprus, doesn’t mean the assets are held in a Cypriot bank. A Cypriot “company” can set up an account in a convenient, safe, stable, banking secrecy country and place assets there.

But back to my original point. Let’s say that the EU and the USA decide to freeze the assets of Russians held within the EU and the USA, how do you freeze the assets if they are (from a legal perspective) “owned” by a European legal entity?

I’m just going to leave you with that thought. 

Enjoy the drinks.

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