After waking up to anti-aircraft sirens, the inhabitants of kyiv ran on February 24 to take shelter from Russian bombs. Hours later, EU leaders met in Brussels to agree on a response to Moscow’s attack. Meanwhile, in the offices of Nicosia and Limassol, a plan was designed to try to save RCB, the third largest bank in Cyprus. This entity became at the end of the day, for the first time since its foundation in 1995 —then under the name of Russian Comercial Bank— an entirely Cypriot bank, after the majority shareholder, the Russian state bank VTB, got rid of its shares by selling it to its Cypriot partners. RCB thus intended to get rid of the sanctions that would be announced at dawn the next day. Since then, a message in Greek welcomes visitors to the bank’s website: “No to war”.
Cyprus is the largest island in the Mediterranean and the third smallest country in the EU. With just over a million inhabitants and a GDP of 23,000 million euros (50 times less than Spain), it is, however, the country in the world with the most investments in Russia. With a difference compared to the rest: in June 2021 it had invested 155,000 million euros, according to data from the Russian central bank. Three times more than the next, the United Kingdom. Cyprus is also by far the largest recipient of direct investment from Russia: almost 180 billion euros, six times more than the next largest, the Netherlands.
But these numbers are tricky. “Actually, it is not foreign investment. It is basically a more or less complex method of stealing money,” explains Andrew Kenningham of the London-based consultancy Capital Economics. That is, this investment it does not end up in factories or productive companies, but ends up in Cyprus as a preliminary step to being lost in a network of front companies, accounts offshore and tax havens to later return to Russia with reduced taxation, since it appears as foreign investment, although behind them there are Russian businessmen and tycoons, in many cases well connected with the Kremlin. “Obviously, this is done to avoid paying taxes and to hide who the real owner of that wealth is,” Kenningham concludes.
Since the beginning of the Russian invasion of Ukraine, with access to certain funds frozen and several Russian banks excluded from the SWIFT payment system, this model has faltered. “We are in a shitty situation, we have many problems,” complains a Russian who has lived in Cyprus for more than a decade and prefers not to give her name.
Part of those money flows that do end up in Cyprus, be it in the form of bonds, company shares, bank deposits or real estate. They seek the security of a State that offers “greater protection of property rights”, as explained a study by three researchers at the University of Nicosiabecause they fear losing their possessions, as has happened to some disgraced oligarchs in Vladimir Putin’s Russia. Thus, the Russian community has grown in Cyprus and it is estimated that they number between 20,000 and 40,000 residents throughout the island. According to data from the Cypriot consulting company Sapienta, 10% of the island’s real estate market depends on Russia, as well as 20% of hotels and restaurants and 35% of professional services, such as law and consultancy.
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This is especially palpable in the coastal city of Limassol, where the RCB is based and which many refer to as “Limassolgrad”. There has proliferated an economy of luxury, extravagant parties, high-end cars. “Most of the skyscrapers are Russian investment. They work as promoters or invest in luxury properties”, says an architect who in the past worked with Russians in Cyprus. “Here they move with a lot of arrogance; You have to keep in mind that they are wealthy people, but not exactly doctors or artists, ”he adds.
The Cypriot model
For decades, Cyprus was a financial center in the area: a safe port in the middle of a turbulent region where those who fled or feared for their fortunes – amassed more or less legally – could safely secure their future. It happened during the civil war in Lebanon and, even more so, when after the fall of the USSR, mafia capitalism flourished in Russia and other states of the former socialist bloc.
The system was blown up in 2013 due to Cyprus’s heavy exposure to Greek debt. A corralito was decreed, three banks were liquidated (one of them, the FBME, after serious accusations of helping criminal and terrorist groups launder money) and the Cypriot financial system had to be restructured: if before it was equivalent to eight times its GDP, now it is only three times higher, in line with other EU countries. In addition, the deposits of non-EU citizens, which a decade ago totaled almost 30,000 million euros, now do not reach 7,000 million, and just over half belong to Russian citizens. Controls against money laundering were also reinforced: thousands of front companies were closed in 2018 and the Council of Europe Moneyval committee assures that “progress has been made” on this issue, although the country is still subject to periodic reviews.
To enhance the attractiveness of the island as an investment center after that financial crisis, the government of the conservative Nikos Anastasiadis offered Cypriot nationality – and with it a European passport – to those who invested more than two million euros in Cyprus. Citizenship was granted to 3,125, half to Russian citizens. Among them, an investigation Al-Jazeera identified at least nine Russian oligarchs, a score of defendants for financial crimes and at least 40 people strongly linked to the Kremlin.
The scandal that followed the revelation and the opening of a file by the European Commission forced this scheme to be stopped in 2020. A parliamentary investigation concluded that half of these golden passports were illegally granted. In addition, in recent weeks, the Nicosia Executive has been forced to cancel the passports of four Russian millionaires and their relatives as they have been included in the new list of EU sanctions.
In his speech before the Cypriot Parliament on the 7th, the Ukrainian president, Volodímir Zelenksi, asked to go further and cancel all the passports granted, “except those of those that have been shown to not harm Ukraine”. There is also pressure to stop the residency-for-investment grant program.
For years, a blind eye has been turned to these flows of money and to the suspicious activities of Russian personalities on the island. For example, in 2018 Cypriot nationality was granted to three directors of the Russian bank VTB despite the fact that the entity was already on the radar of international organizations that were contemplating imposing sanctions since the Russian annexation of Crimea in 2014. In addition, successive leaks such as the pandora papers revealed that the Cypriot bank RCB, in the hands of the Russian VTB until February, extended credits of dubious legality to Konstantin Ernst, one of Putin’s main propagandists, and to Sergei Roldugin, a close friend of the Russian president and whom some investigations place as the figurehead of part of his personal fortune.
The reality is that the cream of the political and economic elite of Cyprus has sat on the board of directors of RCB. “What is expected if even the president was involved in these issues? Unfortunately, my compatriots have not paid enough care and attention [respecto al dinero ruso]”, denounces Stelios Platis, director of the European Institute of Management and Finance in Nicosia.
They are not the only Russian – or Belarusian – interests in Cypriot banking. The largest shareholder of the island’s main bank, the Bank of Cyprus, is Lamesa, a Panamanian subsidiary of the Renova group, owned by the oligarch Viktor Vekselberg, one of the 250 richest men in the world, considered close to the Kremlin. Vekselberg has been sanctioned since 2018 by the United States and his yacht was seized on April 4 in Mallorca.
The second shareholder of the second largest Cypriot financial institution, Hellenic Bank, is the video game company Wargaming.net, owned by Belarusian businessman Victor Kislyi, who settled in Nicosia in 2011 for tax benefits. The company was forced to fire one of its managers in February after he defended the Russian invasion of Ukraine. “This time it is different. Now it’s war,” says Platis, who adds: “Cyprus belongs to the West and to the EU. So this government has no choice but to apply the sanctions to the letter.”
A controlled crisis
In the offices of Cyprus, the lawyers have not stopped for weeks. “New sanctions are announced almost daily and that means that, every day, lawyers, accountants, consultants, have to assess the situation and see whether or not their clients are affected by the sanctions. Interpreting the sanctions is not easy and we are in contact with the Cypriot and European authorities to follow their recommendations”, explains Nicolas Tsardellis, director of the Cypriot Bar Association: “Of course, this will affect many companies and profit accounts, but we have to be patient.”
The dependence of the Cypriot economy on the Russian economy is very important. Various agencies estimate that Cyprus could lose 3% of GDP due to the absence of Russian and Ukrainian tourism this year, and another 7% due to the interruption of financial services and all the businesses around it. “There is a risk that Cyprus enters a recession, but we do not foresee financial instability, because this time there is plenty of liquidity and the position of the European authorities is different from the previous crisis,” says Kenningham.
The plan to save the RCB bank has failed and the entity is heading for its dissolution, but it is being carried out discreetly and in cooperation with the European Central Bank. On March 22, it announced the transfer of its credit business to Hellenic Bank, and two days later it reported that it was closing its banking operations to become “an asset management company” for its clients.
Analyst Fiona Mullen, with several decades of experience on the island, is more optimistic and believes that the impact of the sanctions “will be offset” by the influx of Russian, Ukrainian and Belarusian companies and citizens who are relocating to Cyprus to flee sanctions and war. What is clear is that Cyprus will once again have to reinvent its model. “Cypriots have proven time and time again that they are very shock resistant,” says Mullen: “Little by little, the model is changing. Now we must take advantage of the European recovery funds to build a more sustainable economy that does not depend on businesses that can blow you up in the face”.
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