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Does Russian money harm the reputation of Cyprus?

Cyprus wants to get rid of the label of a place of dubious investment and money laundering - often associated with Russia.

But Russian capital is flowing and flowing into this island country, one of the largest banks that has recently closed thousands of Russian accounts.

Russia is noticeably present in Cyprus everyday life. According to the lowest estimates, approximately 40 thousand Russians live on this small islet in the Mediterranean Sea, and signboards with Cyrillic letters predominate along the southern coast of Cyprus.

The reason is really simple: the countries have close historical, cultural and religious ties, and Cyprus has for many years been the natural goal of the rapid flow of Russian investment and capital.

"The history of Russian investment in Cyprus is long, Russian investors are well aware of this country and are happy to place their money there," says Svetlana Ledyayeva, associate professor at the University of Aalto in Helsinki, who studied the topic of Russian foreign investment.

It is supported by Alexander Kliment, Head of Global Analysis at Eurasia Group.

"As a rule, the Russian elite, which is often associated with the Russian government, prefers to keep most of its assets outside Russia, and Cyprus has long been a convenient haven for Russian capital."

The basis for Russia's interest in Cyprus was mainly a double tax treaty, according to which Russians can not be re-taxed for income or capital in Cyprus, where the tax on entrepreneurial activity is only 12,5%.

But the lack of will to act and the lack of opportunities to allow the Cypriot authorities to monitor and control cash flows allow Russian investors to transfer large sums of money to Cyprus without special supervision and control.

"In the 1990-ies, it was incredibly easy for Russians to transfer black money to Cyprus, then they simply did not rule," says Svetlana Ledyaeva.

After the collapse, related to the Cyprus banking crisis of 2012-2013, cash flows and investments from Russian senders increased again. Only in the last 12 months, Russian investments increased by 50%, according to Bloomberg.

"Russian investments in Cyprus were declining due to the banking crisis, but now they have returned to a high level," says Svetlana Ledyayeva.

It also points out that many Russian investors are trying to go abroad, and with particular pleasure - to Cyprus, in connection with international sanctions imposed after the Russian annexation of the Crimea in 2014.

The banking crisis of the year 2012 caused a certain type of investment from Russia to change its form. The transparency requirements of the banking system - including those from the EU, the European Central Bank and the International Monetary Fund - have led to a significant decrease in the share of black money sent to Cyprus.

At the same time, the Cypriot government has undertaken something new to attract foreign investors: foreign citizens who invested two million euros in real estate or local enterprises automatically became citizens of the country.

Since the introduction of this program, popularly known as "passport money," Cyprus has issued more than 2 thousand citizenships and thus granted these individuals access to 147 countries without visas. According to the audit firm PWC, which helped many with this process, half of the passports went to Russian citizens.

Many international players, not least within the EU, questioned the moral aspects of the Cyprus program "money for a passport."

But few doubt the purely economic effects: only for 2016 year, foreign direct investment as a result brought almost 40 billion crowns (about 4 billion 172 million euros).

More stringent requirements for transparency and supervision within the banking system led to the fact that investments from Russia in Cyprus bank accounts fell from a maximum of 220 billion CZK (almost 23 billion euros), fixed in April 2012, to 100 billion CZK 10 and a half billion euros) in April this year.

This spring, the Bank of Cyprus - the largest bank in the country - also said that it closed bank accounts of 3,5 thousand customers who did not follow the bank's rules. Half of these clients were Russian citizens.

Such measures have a common goal - to improve the reputation of Cyprus as a country for investment. In this context, it is Russian investors, it seems, not in the priority.

The official side also quickly followed assurances that investment in Cyprus is now coming from an increasing number of countries.

The Russians primarily invest in real estate and the financial sector of Cyprus.

"Russian investors are still important for Cyprus, but in 2015, they accounted for less than 10% of all direct foreign direct investment," says Natasa Pilides, head of Invest Cyprus, a state-owned organization that is responsible for attracting foreign investors to Cyprus.

The image of Cyprus as a safe haven for dubious Russian money has changed to a certain extent, Cyprus is increasingly perceived as a relatively attractive country for foreign investors with low tax rates.

At the same time, the Russian presence remains palpable. Investments from Russia have recently grown and due to incredibly low tax rates and citizenship related to investments, this trend will continue.

A source: ИноСМИ

Author: Gunnar Vrang (Dagens Industri, Sweden)

Tags: Cyprus, Economy, Investments, Russia, Analytics, Real Estate, Citizenship, EU