VIII. The Russian Connection (i)

In 2011 the Russian government loaned €2.5bn to the Cyprus government on generous terms (4.5% per annum over 4.5 years) which has 'worried some foreign diplomats about deepening ties with Moscow' (Financial Times 05.06.12.) and the exposure of Cypriot banks to the Greek debt crisis.In Jan 2013 Cyprus was hoping to extend the repayment of this loan by sis years (FT 31.1.2013).


Apparently Russians hold a 'large proportion' of the €22bn in Cyprus bank accounts belonging to those outside the eurozone (FT online edition 05.06.12.) Cyprus has close trade links with Russia, due in part to a favourable tax arrangement that encouraged companies doing business with Russia to work through Cyprus.


Cyprus is in effect a conduit for much of Russia's offshore banking: it is estimated that Russian deposits in Cypriot banks and investments in real estate amount to more than €10bn (see Financial Times 14.09.2011.)


Limassol(grad) is home to 30-40,000 Russians - many being 'Pontian' Russians of Greek descent from the Black Sea region. There are allegations that 'Russia is involved in running a huge weapons trade via Cyprus to the countries of the Middle East, particularly to Syria, Lebanon, Iran and Iran – and even to China and India.' Guardian 26 January 2012


In July 2012 the Cyprus government was hoping to secure a further €5bn Russian loan as an alternative to or part of a mixed EU/Russian bailout. The FT commented tartly that the president was doing this because 'Moscow, unlike Brussels, does not attach strict conditions to its aid. On that point the Kremlin undoubtedly has its own opinion.' (FT Leader comment, 09/07/2012).  For sure, there is no thing as a free lunch when it comes to dining with President Putin, commander-in-chief of Russia's ruthlessly pragmatic drive to secure Russian national interests.


For more on this see next section The Russian Connection

I have been wanting to write something more on the Cyprus/Russia connection and an excellent article in the FT (see below) has prompted me to do this (see also Issues I: Economic Crisis above)


Some background: during the run-up to the Turkish armed forces intervention/invasion in Cyprus in 1974 Western powers – particularly the US and UK – had expressed concern that Cyprus might ‘go communist’, or at least leave the ‘Western fold’ and become a non-aligned country. How realistic these fears were is another matter. Archbishop Makarios certainly played the non-aligned card and the Cyprus communist party, AKEL, has been historically strong. Indeed, the Republic’s current (as at 8th Feb 2013) president, Christofias, is an AKEL man and was educated in Moscow.


At the time then there were considerable fears that a Cyprus that was not aligned to the Western powers, and that booted the British armed forces out of the country, would leave a gaping hole in NATO’s southern flank.


Cyprus must have looked like, and still will look like, an excellent prospect for a Russia that wants to project its power into the Mediterranean and provide some cover for the vital access to its Black Sea through the Dardanelles and Bosforus. Russia’s unwillingness to stop the flow of arms in support of the Assad regime in Syria is in part explained by its fear of losing its one base in the Mediterranean at Tartus in Syria.


A recent article notes the attraction of Cyprus to migrants from countries of the Orthodox Christian faith,

Cyprus has proved especially attractive to migrants from countries of the Orthodox Christian faith – Russians, Georgians, Bulgarians, Romanians and Serbs. Amongst the Russians especially, there is a wealthy business community which is quite large and well organized, with its own churches, private schools, newspapers and cultural centres. They are particularly concentrated in and around the coastal town of Limassol, with its extensive endowment of tourist hotels and entertainment facilities. The other East European communities also have their respective associational lives, but not on the scale of the Russian presence.

See Teerling, J. and King, R. ‘Of Hubs and Hinterlands: Cyprus as an Insular Space of Overlapping Diasporas’ Island Studies Journal, Vol.7, No. 1, 2012: 32)


There is also an historically important Greek trading community, the Pontic Greeks, based around the Black Sea, that has provided considerable immigration into Cyprus in recent years. Teerling and King, 2012:31 estimate there were 12,000 Pontic Greeks settled in Cyprus in 2004, mainly in the Paphos area.


There is a large gap in my knowledge that I will attempt to correct at some point regarding the development of Cyprus’ international alliances and networks between 1974 and the present.


More recently Cyprus has managed to avoid approaching the EU – of which it became a member of in 2004 – for a bailout by borrowing €2.5bn from the Russian state. The Christofias regime indulged in some interesting brinkmanship in the recent run-up to the delayed EU bailout by attempting to extend these Russian loans and even sending senior politicians to talk to the Chinese. The Russians however would not come up with more money.


In the meantime the EU bailout of in the region of €17bn is being delayed due to both the upcoming elections concerns, particularly in Germany, regarding the amount of Russian money deposited in and flowing through Cypriot banks.


On Jan 16th 2013 the Lex Column in the FT ran a pretty uncompromising piece on the Russian money in Cyprus banks saying that the EU was in danger of a entering a ‘Faustian bargain with a state in denial about the calamitous state of its own affairs’ that involves a recapitalisation of Cyprus banks to the tune of €10bn at a time when those banks are ‘stuffed with Russian money evading tax at home.’ The piece concluded by stating that notwithstanding the upcoming election the country faces a choice, ‘either its days as a tax haven, or its days in the eurozone, are numbered.’


On February 6th, 2013 the FT published a more detailed article on the links between Cyprus and Russia with regard to financial flows. These are quite staggering.


Firstly, as was already widely known, Cyprus turns out to be the PRIMARY source of foreign direct investment (FDI) into Russia. Data from the Central Banks of Russia and Cyprus show that over $10bn of FDI in Russia was made from, or through, Cyprus in 2011.   The second and third biggest FDI sources for Russia were the Netherlands and the British Virgin Islands at over $7bn each. The fourth was Luxembourg at $4bn followed by Germany, the UK, the Bahamas, Austria, Gibraltar and France.


Secondly, in terms of net FDI flows into Cyprus the Russian federation is the greatest source with between £250 and £300m in 2011. The second biggest source of net FDI into Cyprus is tiny Belize with a flow of £200m in 2011. This is closely followed by tiny Guernsey. At over £50m comes then Greece and the US followed at the under £50m mark by Sweden, the Seychelles, Lebanon, Malta and lastly the UK at around £20m.


The actual amount of Russian money in Cyprus banks is disputed and figures range from €8bn to €35bn - a figure gleaned from a German intelligence report quoted in the German magazine, Der Spiegel.


A Steven Dashevsky, founder of a Moscow investment firm is quoted as saying, ‘From an economic perspective, Russia and Cyprus are so intertwined, Cyprus could almost be another part of the Russian Federation.’

And a Russian leader of the opposition, Alexei Navalny jokes that if Cyprus were to nationalize its banks it would own the entire Russian Federation.

As others in the article argue, the flows of money into and out of Cyprus are not illegal but are rather benefitting from Cyprus’ 10% corporation tax – the lowest in the EU – and its solid legal system based on English law.

Nevertheless, the article suggests there are doubts about Cyprus’ compliance with EU money laundering regulations and according to detailed allegations by Hermitage Capital $30m of an alleged $230m tax fraud in Russia ended up in Cyprus’ banking system. The Russian Central Bank has also criticized Russia’s second biggest lender, VTB for transferring $5.1bn bad loans to its Cyprus subsidiary in 2009-10.

VTB vigorously defends itself in the article and others say that EU concerns about Russian financial flows in Cyprus are just sour grapes at not securing this lucrative and legitimate business. However, concerns persist and the web-based FT article details another transaction between Russian concerns and companies created in Cyprus.

Where all this is going is anyone’s guess.

Presumably the EU will from now on take a keener interest in Cyprus’ compliance with money laundering regulations. Germany remains concerned that an EU bailout of Cyprus banks will benefit Russian creditors and it has been mooted that the EU will push for an increase in Cyprus’ corporate tax rate of 10% as a condition of the bailout.

Meanwhile Russia has announced it will attempt to control the outflow of capital from the Federation (net $56bn in 2012) by using a blacklist of countries not to invest in. Strangely though, Cyprus was removed from this blacklist last month, according to an announcement by the Cyprus Ministry of Finance. (for all the above see web version the FT article, ‘Russian money streams through Cyprus’ published at 4.59pm on 6th February 2013.)

The upcoming elections and the likely defeat of AKEL will also have a bearing on what happens next. But clearly the financial linkages between Cyprus and Russia will remain critical for some time to come.

There is a spirited correspondence of comments under the FT article with a strong constituency suggesting the FT is being hypocritical by focusing on Cyprus’ connection with Russian money whilst not looking at Russian money in the UK. Others point out that the Double Tax Treaty signed between the then USSR and Cyprus, and the low corporation tax and the zero-rated dividend tax in Cyprus are by themselves enough to explain why Cyprus is so attractive to Russian funds.