Revealed: UK oil refinery owner moved Russian loans to offshore subsidiary where sanctions did not apply | Essar Energy

Days after the first wave of Russian tanks crossed the Ukrainian border in March 2022, dockers at a port in northern England took a stand.

Appalled by Vladimir Putin’s brutality, workers at Ellesmere Port in Cheshire have vowed never to offload Russian oil destined for the nearby Stanlow refinery, a major hub for Britain’s fuel supplies.

When attention turned to Stanlow’s parent company, Indian-owned holding company Essar, the company acted quickly to halt all imports of Russian fuel.

But analysis of the Essar group’s corporate accounts by the Guardian and investigative journalism organization SourceMaterial raises questions about whether the flow of money was stopped as quickly as the flow of oil.

In the months after the invasion, Essar entered into complex offshore deals that enabled the group to continue doing business with a Russian bank under sanctions from the west.

Essar transferred billions of dollars in loans provided by the Kremlin-controlled lender VTB from Cyprus to a subsidiary in the sanctions-free tax haven of Mauritius.

Among the Cypriot and Mauritius entities participating in the acquisition were subsidiaries of Essar’s UK arm, Essar Energy.

Essar said UK sanctions law did not apply to the transaction and that it had complied with all applicable sanctions laws after seeking advice from a leading law firm. But the restructuring “raises red flags about potential problems.” [sanctions] get over it,” according to a leading expert.

Authorities in Cyprus, where the government approved the transfer, are examining whether Essar has done anything “that would violate EU sanctions regulations”.

Experts and MPs now say British authorities should follow suit.

a special relationship

Even though most of the world turned its back on Russia after the attack on Ukraine in 2022, India maintained cordial relations.

In July 2024, Putin presented India’s prime minister, Narendra Modi, with Russia’s highest honour, the Order of St. Andrew the Apostle.

The two countries’ friendship had been strengthened in part by blockbuster energy deals, including Essar, owned by the billionaire Ruia brothers.

In 2014, the year Putin’s forces seized Crimea from Ukraine, the Essar group borrowed $1bn (£740bn) from state-owned lender VTB.

Then, in 2017, Russian state oil company Rosneft invested $13 billion in the group’s refining business Essar Oil, a key player in India’s growing hunger for oil and gas.

Essar’s financial relations also extended westwards.

In 2010, seeking to gain greater access to global investors, the group listed Essar Energy on the London Stock Exchange. A year later, it bought Cheshire refinery Stanlow, which fuels one in six British vehicles and nine airports, for $1.3 billion.

But even before the coronavirus outbreak halted demand for Stanlow’s fuel, Essar Energy began reporting heavy losses.

As Essar sought stability, he again tapped Russia’s credit lines. By 2020 its debt to VTB had risen to €2.35bn (£2bn).

According to Companies House records, the loans were given to two Cypriot companies, with UK-based Essar Energy as guarantors.

But soon the loans turned from a lifesaver into a logistical and reputational headache as geopolitical tensions brought Essar’s ties to Russia and Britain into conflict.

Temporary solution offshore

Putin’s attack on Ukraine in February 2022 changed everything. Russia became a pariah state, and VTB and its chief Andrey Kostin became the target of international sanctions.

Essar’s UK arm was just one of many British companies with Russian business interests to become ensnared in the conflict.

Typically, UK businesses with financial obligations to sanctioned companies seek permission from the UK Financial Sanctions Enforcement Office (OFSI) to settle their debts until the relationship is resolved.

Shortly after the sanctions came into force, Essar stated in its accounts in April 2022 that “payments on VTB loans can only be made after obtaining a special license from the UK government.”

When contacted by the Guardian, Essar said the note reflected broader enforcement recommendations on what would be required to make certain payments, not any expectation that it would require OFSI approval. He added that UK sanctions law did not apply to the relevant transaction.

After all, Essar never sought OFSI approval. Instead, he sought and received approval from the Cypriot government to transport the loans more than 4,000 miles to Mauritius in the Indian Ocean, where Russian sanctions do not apply.

The resulting loan termination agreement was signed by Essar Energy Limited, two subsidiaries of Essar’s UK arm, authorized as “debtors’ representatives” to act on behalf of the company.

Leading sanctions experts said the transfer should be investigated by UK authorities.

Michael Ruck, a sanctions expert and partner at law firm K&L Gates, said the regulation was “unusual.” He said the restructuring “raises red flags about potential sanctions circumvention.”

Another sanctions lawyer, who requested anonymity, said having subsidiaries of Essar Energy Limited sign the agreement on its behalf could expose it to liability.

Liam Byrne, who chairs the business select committee examining the effectiveness of sanctions, called on UK authorities to review the action.

He said: “VTB is no ordinary bank. It is an arm of the Russian state that helps finance its war of aggression against Ukraine. That is why it is sanctioned. And that is why any business in the UK should not go anywhere near it, directly or indirectly.”

“So the government’s next steps are very simple. Investigate. Now.”

Essar referred questions to his lawyers, who said he had “taken responsible and proactive steps, based on expert legal advice, to ensure full compliance with UK, EU and other applicable sanctions”.

Lawyers said the arrangements for loan transfers were “explicitly approved by the Cypriot authorities” on the advice of a leading law firm and that any suggestions of “red flags” or circumvention of fraud were “unfounded”.

credit improvement

Island hopping to Mauritius appears to have done little to distract Essar from VTB, nicknamed “Putin’s piggy bank”. Company records suggest Essar may have deepened its reliance on Russian loans following the Mauritius move.

Following the move, Essar appears to have “increased” VTB borrowing by $1.2 billion, according to the accounts of its main UK subsidiary.

The group’s lawyers said the “increase” reflected accrued interest rather than new borrowing, adding that any claims that Essar had deepened its ties with VTB were “false” and that the company had repaid the loans “in a sanctions-compliant manner.”

However, two forensic accountants from leading British firms who examined Essar’s latest accounts identified a new ruble risk equivalent to at least $1 billion, which they believed could not be explained by accrued interest.

Independent forensic accountant Rachel Sexton said: “Essar’s filed accounts mean nothing unless there is new borrowing from Russia.”

The year after the move, Essar’s Cypriot subsidiary paid $39 million to the Mauritius company. After this partial payment, the Cypriot company still owed its Mauritian counterpart half a billion dollars as of March 2024.

Essar’s lawyers said a payment of $39 million was made pursuant to an “intercompany obligation” and that none of the funds were used by the Mauritius subsidiary directly or indirectly for payments to VTB. “There is no violation of the permission given by the Cypriot authorities,” they said.

A spokesperson for the Cypriot government said: “The approval did not allow for any loan repayments to be made directly or indirectly to VTB, including to third country jurisdictions such as Mauritius. On the contrary, the approval was expressly conditional on no funding being made available directly or indirectly to VTB.”

Meanwhile, Essar has established a presence on the ground in Russia. In 2023, he founded a new company in Moscow, with offices in the Moscow Federation Tower, a boat-shaped skyscraper that also houses the headquarters of VTB Capital.

Essar’s lawyers said the sole purpose of the Hong Kong-owned Moscow subsidiary was to manage VTB loans while the group liquidated it.

A Moscow employee doesn’t seem to understand this. One of his duties was to “identify investment opportunities,” he said in an online interview published in March 2024.

Cyprus review

Essar’s ongoing relationship with VTB is now a concern for the government of Cyprus, long a haven for Russian money but which has joined the rest of the EU in imposing sanctions on the Kremlin and its allies.

Authorities in Cyprus, whose government approved a $3 billion loan transfer to Mauritius, are examining whether Essar’s transactions with VTB “breach EU sanctions regulations” following the move, a spokesman for the country’s finance ministry said.

Essar said they were not aware of any investigation and that the group’s Cypriot lawyers had confirmed that no Cypriot or EU sanctions regulations had been breached.

The group’s maneuvers also appear to have created unrest in Mauritius.

After offloading its Russian loans to the tax haven, Essar asked authorities there in September 2022 to approve a restructuring to “disconnect” its Mauritius business from the UK.

It took three years for Mauritius to approve the changes.

Essar’s lawyers said the “delinking” was part of a broader company restructuring unrelated to any enforcement issues. When asked about the delay, they blamed the Mauritian authorities, citing administrative reasons.

However, a spokesman for the Mauritius government said that the blockade was due to Essar’s failure to provide evidence regarding the nature of its ties with Russia.

Essar had not handed over important documents, including evidence related to the “creation of security”. [loan by Russian bank]” and that they provided a partnership structure that “does not match the names of the shareholders in the mandate letter.”

Lloyd Hatton, an MP and member of an inter-parliamentary group examining corruption, said the UK government should now apply the same critical approach as authorities in Cyprus and Mauritius.

He said the relationship was “extremely concerning. Authorities must now investigate Essar and its possible dealings with this Russian bank.”