The Russian oligarchs who are now embarrassing Cyprus – Elisa Perrigueur

The horizon line is only interrupted by construction sites. The empty skyscrapers shade the palm trees on the coast. Along the wide boulevards, where convertibles whiz in the left lane of the carriageway, billboards in English and Cyrillic promote investments in luxury villas.

In Limassol, the financial center of Cyprus, one fifth of the population is of Russian origin. The city has earned the nickname “Limassolgrad”, because it is the showcase of the oligarchs: Alexandr Ponomarenko, Roman Abramovič, Ališer Usmanov, Leonid Lebedev and other figures of equal rank are linked to this place. Lured by the low tax rates of the former British colony, they have built an empire based on offshore companies and flashy residences. Some have moored their yachts and opened bank accounts, others have even taken Cypriot citizenship.

But these very rich Russians are no longer guests of honor. After the invasion of Ukraine on February 24th, their presence became a source of embarrassment for the island’s government. A European Union country since 2004, Cyprus “rigorously applies” economic sanctions to its former partners, assures its finance ministry. “We have frozen sixty million euros of 15 investment companies that had commercial relations with entities sanctioned by the Union. The Central Bank of Cyprus had already frozen several Russian accounts worth around ten million euros ”, hastens to specify Avgi Lapathiotis, director general of financial stability at the ministry.

Added to these measures is the stop to commercial flights from Russia, a serious blow to tourism, which is the second source of income in the island’s budget, immediately after the financial sector, admits Lapathiotis. Russians account for 20 percent of visitors and are regular customers, linked to the business world. “You shot yourself in the foot, our citizens will go to Turkey,” the Russian ambassador told the island’s authorities, deliberately mentioning their eternal enemy. In fact, since 1974, Ankara has militarily occupied more than a third of the island.

The finance ministry belittles the importance of this presence for the country’s economy. “Russian deposits in banks have decreased in recent years. They are only 3.8 per cent out of a total of 51.5 billion euros ”, says Avgi Lapathiotis. However, the total reserve of direct investments (FDI) of Russian citizens in Cyprus remains colossal: the Bank of Russia has estimated a value of 176 billion euros in 2020. For its part, the Central Bank of Cyprus says that the Russian FDI on the island would be “only” 97 billion However, a considerable figure for a country that has a GDP of 23 billion euros, notes the independent consultancy Sapienta Economics based in the capital Nicosia.

This difference is explained by the fact that the Central Bank of Cyprus does not take into account all direct flows, “but focuses on the real origin of the investments”, says the Cypriot finance ministry. The Bank of Russia, on the other hand, includes in the calculation all the flows that pass through the island, even those that do not remain: they just need to transit before reaching other financial centers. Cyprus, a reference for offshore institutions, is actually a fundamental hub of the financial architectures of the oligarchs.

A historical link
To understand the roots of this financial circuit we have to go back to 1982, when Cyprus and the Soviet Union signed an agreement to avoid double taxation of Russians and Cypriots who move and produce income in the two countries, which encouraged openness. on the island of companies of the Soviet republics. In 1991, therefore at the time of the collapse of the Communist bloc, the former British colony was ready to become the natural refuge of very wealthy Russians and former leaders fleeing the collapsing USSR.

“We share the Orthodox religion with the Russians, who feel safe thanks to our legislative culture, of Anglo-Saxon style, inherited from the colonial period,” explains Avgi Lapathiotis. This famous legislative culture he refers to makes Cyprus a gateway to other tax havens on the Channel or the Caribbean. Also, in those years the island attracted investors for its low tax rates: in 1991 it was 4.25 percent for offshore companies, compared to 12.5 percent today.

Eager to protect their treasures from the instability of their countries of origin, the entrepreneurs of the former Soviet bloc and the Balkan countries have chosen Cyprus en masse. Over the years the island has become an important hub of their financial architectures. And also for this reason the country has been accused of not being particularly careful in verifying the origin of this money.

In 2001, the discovery of secret accounts belonging to the former Serbian dictator Slobodan Milošević caused a scandal. Some former KGB officers also transferred their money to the island’s banks. One of them, Vladimir Strzalkovsky, became in 2013 vice-chairman of the board of the Bank of Cyprus, the largest financial institution on the island.

These links work both ways. Cyprus is in fact one of the first foreign investors in Russia. Russian investors on the island put their money in high-paying accounts and then transfer it back to the country of origin. These financial transactions fuel suspicions of Russian money laundering, although the government denies it.

Panicos Demetriades, former governor of the Central Bank of Cyprus (from 2012 to 2014), does not hesitate, however, to denounce the matter. At the poolside of the luxurious Poseidon Beach hotel, this man in a straw hat and Bermuda shorts is less laid back than his attire suggests. “States like Cyprus and Malta are not fighting money laundering. The EU is aware of this weakness but has never put in place effective strategies to counter the phenomenon. Even the establishment of the Banking Union, created in 2014 precisely to secure the eurozone banking sector, has had no effect ”.

In his view, the penetration of Russian capital into Europe has strengthened the “political influence” of Russian President Vladimir Putin. “We all knew that the Russian oligarchs worked for him. The Kremlin has slowly penetrated into European affairs, getting closer to politicians, ”he says.

In Cyprus these oligarchs became citizens of the island, obtaining “golden passports”. “The authorities have perfected this tool, which was a kind of alternative to money laundering, because it had become increasingly difficult for foreigners to open an account here,” continues Demetriades. The finance ministry considers it a way of “getting money back after the crisis”. Because the explosion of the so-called Cyprus Investment Program (CIP) has its roots in the economic disaster of 2013.

The banking sector, which is worth seven times the GDP of the island, was in crisis. In exchange for a loan, the Eurogroup had imposed a deposit tax in excess of one hundred thousand euros, which was used to restructure the banking system. An “unfair, unprofessional and dangerous decision” said Vladimir Putin. Indeed, Russians and oligarchs owned a third of Cyprus’ bank deposits. In retaliation, Moscow refused to grant a new loan to Nicosia. The relationship had become tense, but the “golden passports” had ended up seducing the oligarchs. Initially created in 2007, the Cip program offered Cypriot citizenship in exchange for a € 26 million investment on the island. In 2013, President Níkos Anastasiádes, a former business lawyer with the conservative Disy (right-wing liberal) party, decided to lower the investment amount to 2.5 million.

Questionable mechanism
In total, more than 6,700 passports have been handed over to wealthy Chinese, Indian and Ukrainian entrepreneurs in 13 years. Among them are also nearly a thousand Russians according to the local media. Many of their identities have remained confidential and thanks to their wealth an entire galaxy of local figures has been enriched: business lawyers, real estate developers, consulting firms and so on.

“Government representatives were personally tied to the system,” says Alexandros Zachariades, a specialist in international relations at the London school of economics. The reference is to President Anastasiádes, whose family law firm dealt with the granting of passports. The granting of gold passports has yielded seven billion euros according to official sources. The construction sector in Cyprus continued to thrive, but property prices increased. “Today, many young Cypriots can no longer afford housing and are returning to live with their parents,” says Zachariades.

The program was abandoned in 2020, a year after the Al Jazeera revelations. According to the investigation by the Qatari newspaper, the system had taken advantage of criminals and corrupt people. In 2021, the commission of inquiry set up to investigate the scandal revealed that 50 percent of the gold passports granted had been illegally issued.

The war in Ukraine has made the questionability of this mechanism of granting nationality even more explicit. The European institutions are calling for the cancellation of those passports that present “serious risks to the security of the Union”. Ukrainian President Volodymyr Zelenskii also launched an appeal on April 7, asking Cyprus to revoke passports and prevent the oligarchs’ private yachts from docking. According to the executive, so far four Russian citizens with Cypriot passports have already been affected by the sanctions, but the government does not mention names.

(Translation by Federico Ferrone)