On a Dublin side street, behind a Georgian house where the Irish Red Cross is raising funds to support Ukraine, a once-thriving Russian financial center is falling apart.
Here, a little-known company quietly helped keep Russia’s global monetary engine running in recent years. Cafico International set up shell companies for some of the largest companies in the country, providing directors and accounts, helping them sell bonds and raise billions of dollars.
If Cafico’s services were discreet, its clients were the opposite: corporations intertwined with President Vladimir Putin’s regime, including VTB Bank and Russian Railways JSC, industrial powerhouses linked to oligarchs such as Oleg Deripaska and Roman Abramovich, and systemic lenders to the country’s economy as Sovcombank PJSC. and the Moscow Credit Bank.
Along with other corporate service providers such as Amsterdam-based TMF Group and Hong Kong-based Vistra Group, Cafico is part of a network of invisible intermediaries that helped Russian companies borrow at least $145 billion (€137 billion) over the past decade. even after Russian forces invaded Crimea in 2014. There is about $65 billion outstanding, a third of which is tied to Cafico, according to a Bloomberg review of financial and regulatory documents.
The numbers suggest that while Russia’s tycoons were known for spending money on luxury real estate in London and parties in Monaco, some of the lifeblood of their empires was happening in a nondescript office building in Dublin.
But the full-scale invasion of Ukraine has now turned the industry upside down. Cafico’s clients have fallen under international sanctions, the bonds they and others arranged have plummeted to pennies on the dollar, and banks are delaying, even blocking, payments as they try to stay on the right side of the restrictions.
For their part, corporate service providers are trying to free themselves and get rid of the Russian clients they once courted, something that is easier said than done. Companies have expressed horror at the war – Cafico says it goes against their values - but industry critics have little sympathy.
“Where were these securities after the invasion of Crimea?” said Sinn Féin TD Mairead Farrell, who said Cafico had served a “disproportionate number” of Russian clients. “It’s too little, too late.”
Russian companies have been using empty shells for just over two decades to raise funds, according to data compiled by Bloomberg, and business barely picked up after the 2014 invasion of Crimea. By locating in Ireland, for example, they take advantage of regimes regulations with which international investors are most familiar, while benefiting from special tax exemptions.
The stand-alone entities, known as special purpose vehicles, or SPVs, can be used to issue securities called loan participation notes that can be listed on local exchanges and sold to international investors, with the proceeds funneled back to their backers.
And for companies that establish such services, the business is a source of income. They will often have tens, if not hundreds, of SPVs on their books. Each entity will pay up to €20,000 in fees each year, estimates James Stewart, a finance professor at Trinity College Dublin who has studied the sector.
Russian companies have been heavy users of SPVs and the LPN structure, data analyzed by Bloomberg shows. They raised more than twice as much in foreign currency through that process than other types of bonds over the last decade.
According to Angela Gallo, a finance professor at the City University of London, the figures suggest they have become “the predominant type of foreign exchange access for Russian companies.”
“SPVs are the infrastructure that allows capital to flow in and out of Russia,” he said. “Russian companies need access to global capital markets to raise funds and global investors need risks to enhance their returns. Think of corporate service providers as bridges that allow parallel capital flows.”
Rodney O’Rourke, an Irish lawyer who controls Cafico, did not respond to phone calls and emails seeking comment. Yolanda Kelly, chief financial officer, declined to comment beyond a company statement in March.
Meanwhile, the companies that were hired to validate the accounts of the shell companies began to jump ship, with at least seven Ireland-based SPVs receiving letters of resignation since the invasion. KPMG, EisnerAmper, Mazars and Grant Thornton have all left, with Grant Thornton citing concerns about non-compliance with sanctions.
European regulators were unaware for years of the size of the SPV industry and who was behind the transactions. When officials from the Central Bank of Ireland investigated the sector in 2015, they uncovered hundreds of shadowy entities that had combined assets greater than the country’s gross domestic product. Ireland-based SPVs still hold around €37 billion in Russian-issued assets.
Even before the war, critics questioned whether they were obscuring risks and wrongdoing.
Credit Bank of Moscow used a Cafico vehicle to borrow billions of dollars despite being a close business associate of sanctioned state oil giant Rosneft. Vneshprombank Ltd. borrowed $225 million through Cafico SPV only to collapse in 2016 amid allegations that executives had stolen its assets and falsified accounts. Tatfondbank PJSC, one of the country’s largest regional banks, used an SPV organized by TMF to sell $60 million in bonds just weeks before it imploded under a cloud of accusations.
Founded by O’Rourke in 2012, Cafico is barely known in Dublin business circles, while its Twitter account has fewer than 100 followers. However, it has actively courted Russian businesses for years, even having a Russian-language page at one point.
The industry has attracted some wealthy investors. British private equity firm CVC Capital Partners bought TMF for €1.8bn in 2017. Warburg Pincus considered a possible offer for Vistra late last year that would have valued it at up to $5bn.
Cafico is smaller but still lucrative. The firm had 4.5 million euros in equity at the end of 2020.
But this steady stream of income has now turned into a nightmare.
“Cafico has terminated and continues to terminate the provision of services to all customers linked to Russia,” he said in early March.
At TMF, CEO Mark Weil says the company did business with Russia over the past decade because it was “perfectly legal.” He now wants to get rid of most of those clients and is gearing up for a multimillion-dollar hit mainly due to “walking away from revenue.”
Last month, a Dublin-based SPV called PhosAgro Bond Funding DAC declared that it had paid no interest to bondholders. The entity borrowed $1.5 billion through bond sales in recent years and sent the funds to PhosAgro PJSC, the Russian fertilizer giant controlled by sanctioned oligarch Andrey Guryev, whom the UK describes as an “associate close” to Putin.
In Luxembourg, the story is the same. This is the home of Steel Capital SA, an SPV linked to Severstal PJSC, the steel conglomerate controlled by sanctioned oligarch Alexey Mordashov. The entity, which is in technical default, is directed by Vistra.
Sylvia Evans, a spokeswoman for Vistra, said the firm had “very limited business dealings with clients in Russia even before the Ukraine crisis.”
Similar notices have been landing fast and in droves since March.
Russian Railways owes billions through Dublin-based SPV but says it can’t pay; an SPV linked to potash miner Uralkali PJSC, controlled by tycoon Dmitry Mazepin, says the same; Sovcombank, which borrowed $300 million in November but is now under sanctions, has also had trouble making payments.
And at the bottom of each notification: an email address owned by Cafico. –Bloomberg