British Virgin Islands: The BVI: Stepping Stone To Russia

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 IFCs1.

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 20062.

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 coinvestment 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 preemption 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, < ofdi/35%20Settles%20Alex.pdf >.

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) library/detail/aspx?g=73af18a-ba46-47d0- af68-b492ace302cc .

Previously published in the IFC Economic Report, Winter 2014

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions