Cyprus - Russia Relations
"Cyprus relations with Russia are basd on cultural affinity and familiarity
(especially sharing the Greek Orthodox religion), and the sense in Russia that Cyprus is a long-standing friend. Cyprus is a popular destination for Russian tourists and capital and many wealthy Russian business people bank or own property there.
Cyprus continues to enjoy close economic ties with Russia and to depend on that country for more than 25 percent of bank deposits and about one-third of foreign direct investment. However, much of that investment is simply doing a round-trip back to Russia to take advantage of Cyprus tax laws. Cypriot bank executives and anti-money laundering officials were highly confident that these flows are not being used to launder criminal or terrorist funds, although they are utilized to avoid Russian taxes.
Many Cypriots believe that they are somewhat insulated economically because Russia is taking the place of the UK as the country's main economic driver. Finance Minister Stavrakis said many times that "Russia is Cyprus' most important financial partner." Part of this view is perception rather than reality. As a trade partner, Russia is barely on Cyprus' radar, with 2007 exports to Russia amounting to US$26.7 million (1.8% of total), and imports of US$56.2 million (0.6 percent of total). Total services trade with Russia accounts for only 5.4 percent of Cyprus' global total trade in services of about Euro10 billion. And while tourist arrivals from Russia are increasing at a better than 17 percent annual rate, and Russian tourists are the highest-spending of any nationality, they still comprise only 6 percent of Cyprus 2 million annual visitors.
Russians were increasingly important for the city of Limassol, which has about 30,000 Russians as permanent residents and who supported the luxury end of the Limassol property market for several years. In Limassol, Russian supermarkets, bars and restaurants are commonplace and high end businesses depend on the free-spending Russians for their profitability; one marine shop owner said Russians make up about 15 percent of his total customers but more than 50 percent of his profits. Cities like Paphos are making an effort to lure Russians away from their current enclave, but outside of Limassol, expatriate the Russian presence on society and the general economy is negligible.
The biggest source of business with Russia comes from the many Cypriot-registered companies that are created to channel investment to and from that country. Under the Cyprus-Russia tax treaty (signed in the 1980s) Russia withholds only 5 percent on dividends paid to shareholders in Cyprus and nothing on royalties and interest. Cyprus itself, meanwhile, has a flat 10 percent corporate tax rate and a range of double tax treaties with third countries in addition to being an EU member. The result, major accounting firms tell us, is that 70 percent of all their business is foreign-related and, of that, 50 percent is related to Russia. Much of that business comes from Western companies using Cypriot vehicles to invest into Russia, with a minority of transactions coming from Russians reinvesting into Russia via Cyprus.
Because of Russian concerns that its citizens are avoiding tax through Cypriot companies (although Cypriots tell us Russian government concern is actually to keep a close eye on who has money) Russia put Cyprus on a "black list," requiring Russian companies in Cyprus that repatriate dividends to Russia to pay additional tax on those funds (although this is contrary to the provisions of the tax treaty with Cyprus). In Jun 2008, the Cyprus Parliament removed some levels of bank secrecy which prevented quick response to Russian requests for information on accounts. As a result, Cyprus expected to be off the Russian "black list" soon, probably during President Christofias' visit to Moscow in November 2008. While the practical effect of the Russian action was limited - few companies are sending dividends back to Russia - the action demonstrated what Russia could do if Cyprus refused to cooperate.
The Finance Minister estimated in 2008 that 25 percent of deposits in Cypriot banks were related to transactions with Russia. This would include actual operating companies that Russians have created here to manage their EU operations, as well as funds parked here pending investments and simply paying company expenses from Cyprus as "proof" the holding company is a bona fide Cypriot entity and therefore able to claim the benefits of the dual tax treaty. As the head of the Cyprus-Russian Chamber of Commerce explained, each bill paid, each board meeting attended by a local lawyer as a member of a board of directors, and each transaction undertaken by a local bank earns fees which go right into Cypriot pockets. While Austria and the Netherlands have similar (though not quite as advantageous) tax treaties with Russia, Cypriot officials and business leaders believe that so long as relations between Cyprus and Russia remain good and Cyprus maintains its low-tax domestic regime, this sort of income will continue even if the pace of transactions varies according to economic conditions in Russia. In the wake of the Georgia crisis, bankers tell us that deposits from Russia to Cyprus increased slightly.
Russians were believed to account for most of the 19 billion euros of non-EU, non-bank money held in Cypriot banks in January 2018, according to the island's central bank. Of 38 billion euros in deposits from banks, 13 billion euros came from outside the EU. Major account holders, many of them Russian, will lose up to 60 percent of their deposits over 100,000 euros ($130,000) at Cyprus's largest bank under a European Union bailout to save the Mediterranean island from bankrutpcy.
The Russian government will not aid businesses that have lost money in Cyprus, First Deputy Prime Minister Igor Shuvalov said 01 APril 2013, underscoring Moscow's resolve to clamp down on the flight of capital to offshore financial centers.If Russians lose money "it's a terrible shame, but the Russian government will not take any action in such a situation," Shuvalov was quoted by the Interfax news agency as saying in a television interview on Sunday night.
Russia on 29 March 2018 warned authorities in Cyprus not to allow the U.S. military to deploy on their territory, saying such a move would draw a Russian reaction and result in "dangerous and destabilizing consequences" for the Mediterranean island. Maria Zakharova, a spokesman for Russia's Ministry of Foreign Affairs, said Moscow had become aware of what she called "anti-Russian plans" involving Cyprus and the U.S. military which she said was eyeing setting up forward operating bases for its troops there. "We're getting information from various sources that the United States is actively studying options to build up its military presence on Cyprus," Zakharova told a news briefing in Moscow. "The aim is not being hidden - to counter growing Russian influence in the region in the light of the successful operation by the Russian military in Syria.”
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