Tax haven for Russian oligarchs, Cyprus seeks to change its economic model

7:10, June 9, 2022

At the end of May, mercury is already flirting with 30 degrees in the country “sour lemons” sung by writer Lawrence Durell in the 1950s. Cyprus, then a British colony that served as its backdrop, has since become a tax haven for oligarchs and other Russian fortunes. After the collapse of the Soviet Union, more than 40,000 people left their suitcases and several yachts in the seaside city of Limassol. Capital is fueling the local economy from the cold and has dragged the island into offshore finance capable of laundering billions of rubles. A disaster, according to deputy ecologist Alexandra Attalides. “We want to end the kleptocrats who drive for themselves, dirty money is crowding out clean money and real well-being”she says from her office in Nicosia.

Finish or at least try. Friday in Limassol, second summit for business and investment», combining the beautiful flower of finance and government, worked on it. On the menu: continue to attract foreign direct investment and make the city the preferred location for global corporate headquarters over other regional centers such as Dubai or Tel Aviv. In an encouraging sign, after Dublin, Japan’s Mitsubishi Financial Group (MUFG) decided to open its second European center in Limassol at the end of March.

Matryoshka montages

But for now, the elephant in the room still comes from Russia, the source of 25% of FDI on the island. Because Cyprus was able to attract clients with a double tax treaty, a real push to crime for Russians in search of a tax and financial haven, golden passports issued since 2007 to anyone who invests in real estate 2.5 million euros, and very popular assemblies in the form Matryoshka dolls that allow you to put together screen companies and redirect money disguised in this way to other countries, including Russia.

In 2020, Moscow is terminating the double tax treaty with Nicosia, and this is a serious blow to Russian business.

In 2013, this beautiful mechanism suffered its first shock. Cypriot banks, stuffed with Russian capital, are profiting from the debt crisis in Greece and are forced to close thousands of deposits until they go bankrupt. The authorities are lifting the rules on shell companies. And non-European deposits of Cypriot banks – 80% of Russian sources – are melting like snow in the sun, in ten years they have increased from 21.5 to 6.4 billion euros.

But the biggest shock will come from Vladimir Putin himself, who decided to return the capital that had taken refuge there. “In 2020, Moscow is terminating the double tax treaty with Nicosia, and this is a serious blow to Russian business”, emphasizes Pascal Saint-Amans, head of the tax division of the OECD. In the same year, Cyprus was forced to abandon convenient passports under pressure from Brussels. “With the entry into force of the minimum global tax of 15% on corporations by 2024, they will have to create real economic activity, find content”continues St. Amance, chief negotiator for the famous minimum tax.

Russian warnings

With the start of the war against Ukraine, Nicosia also applied economic sanctions imposed by the European Union against Moscow. “We want to hit Putin, not destroy our economy, but go after our Russians who have been living here for decades for some”, notes Alexandra Attalides. In early March, the Russian Ambassador to Cyprus reacted in Famagusta News. “Russian tourists will not come here anymore. They will spend their money in Turkey. You have closed the airspace. You shot yourself in the foot”he warned before announcing the opening of a representative office in the northern part of the island, divided in two after the Turkish invasion in 1974.

We encouraged the rentier economy and discouraged entrepreneurship

Sophronis Clerides, professor of economics at the University of Cyprus, installed in a cafe in Nicosia, regrets that Cypriot youth are aspiring to a career in accounting. “We promoted the rentier economy and discouraged entrepreneurship and productive investment”he notes. In his opinion, the Russian elephant mainly contributed to the enrichment of a narrow circle of lawyers, bankers, accountants and developers, and did not benefit the Cypriots as a whole. “We are changing, but we also have to deal with the bad practices of the past, which are still very ingrained, and pressures of all kinds.”whispers the accountant, who prefers anonymity.

And try to implement the Vision 2035 plan. “We have assets, maritime transport, tourism and young people with a good level of education. We still need to attract foreign companies and green and digitize our economy.”, — develops Alexandra Attalides. However, the imminent arrival in Limassol of the City of Dreams Mediterranean, a giant casino with 1,000 slot machines and 100 card game tables, is not really gaining momentum. Even if the project is strong enough to attract nearly 300,000 more tourists.