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Abu Dhabi, UAESaturday 23 March 2019

Cyprus sheds its safe haven image to Russian businesses

Russian investors were previously attracted to the country by its status as a low-tax regime within the EU

The Cypriot Ministry of Finance building, in Nicosia, Cyprus. The value of bank accounts at Cypriot lenders held by foreign nationals from outside the euro-area - mostly Russian - fell to Dh30.14bn at the end of November, according to the Central Bank of Cyprus. Bloomberg
The Cypriot Ministry of Finance building, in Nicosia, Cyprus. The value of bank accounts at Cypriot lenders held by foreign nationals from outside the euro-area - mostly Russian - fell to Dh30.14bn at the end of November, according to the Central Bank of Cyprus. Bloomberg

For Russian businesses, Cyprus just isn’t what it used to be.

New Cypriot anti-money laundering rules are compounding the effects of US sanctions against Russia and its high-profile citizens, driving money away from the one-time haven.

“Russians are downsizing in Cyprus,” says Kyriakos Iordanou, general manager of the Institute of Certified Public Accountants of Cyprus, whose members have clients from the country.

The value of bank accounts at Cypriot lenders held by foreign nationals from outside the euro-area - mostly Russian - fell to 7.1 billion euros (Dh30.14bn) at the end of November, according to the Central Bank of Cyprus. That’s down from a peak of 21.5 billion euros at the end of 2012.

En+ Group said in November it plans to move to Russia from Jersey rather than to Cyprus as previously planned. En+ is the main shareholder of aluminum giant United Rusal, a company of billionaire Oleg Deripaska, who is on the US’s sanctions list.

Relatively muted sanctions imposed in the US during the Obama era over the conflict in Ukraine have only widened in scope and severity since Donald Trump took office last year.

 En+ Group plans to move to Russia from Jersey rather than to Cyprus as previously planned. En+ is the main shareholder of aluminum giant United Rusal, a company of billionaire Oleg Deripaska, who is on the US’s sanctions list. Photo: Reuters
 En+ Group plans to move to Russia from Jersey rather than to Cyprus as previously planned. En+ is the main shareholder of aluminum giant United Rusal, a company of billionaire Oleg Deripaska, who is on the US’s sanctions list. Photo: Reuters

Accounts belonging to Viktor Vekselberg, who’s also on the US list and whose Renova Group is the largest shareholder in Bank of Cyprus, have been frozen, according to the bank.

The outflow of Russian funds from the country marks the reversal of a trend that began after the fall of the Soviet Union and accelerated as Cyprus joined the European Union in 2004 and adopted the euro in 2008. Russian investors were attracted to Cyprus by its status as a low-tax regime within the EU and was seen as safe and stable.

“Cyprus’s economic model has already changed and has shifted to one that relies a lot less on shell companies and foreign deposits,” finance minister Harris Georgiades said in September. The island “has been focusing on bringing new business with substance, physical presence and real activity and employment,” he said.

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Russian-related business in Cyprus generated gross income of around 2.2 billion euros in 2017, about 11 per cent of economic output, down from an estimated peak of about 14 per cent in 2012, according to Fiona Mullen, director of Nicosia-based Sapienta Economic.

“Tourism is now bigger than banking, so what you see is a slightly different mix of Russians,” she says. “There is still the old money, but you also see a lot of regular middle-class Russians just coming for a holiday.”

New banking business from Russia is “limited,” Mr Iordanou says. His public accountants’ organisation’s members are looking for opportunities from elsewhere, like China, India, the Middle East and Africa.

While some of the drop in numbers over the years stems from Russians - like Deripaska - acquiring Cypriot nationality, affecting the way such funds are classified, tightened local rules are also beginning to bite.

In November, a directive from the Central Bank of Cyprus kicked in, giving lenders less leeway to work with shell companies. That’s making many Russian companies “non-bankable,” says Mr Iordanou.

Two Russian businessmen with accounts in Cyprus for over a decade said they were contacted by their banks over the past few months asking for documents from many years ago on the source of the money in their accounts. Unable to provide them, they were forced to close the accounts, they said, declining to be named.

“Cyprus banks require a lot of papers now,” says Alexander Ryazanov, Gazprom’s former deputy chief executive, who has a real-estate business in Cyprus and has worked for many years with Cypriot banks. “It is very difficult to open a new account now.”

The central bank directive on money laundering involves avoiding dealings with entities deemed to be shell companies, which hits at the heart of Russian investments.

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Take the Bank of Cyprus, the country’s largest lender. Russian clients now account for only 1.5 per cent of the total and 5.7 per cent of total deposits compared with 2.4 per cent and 9.9 per cent in 2014, according to the lender.

Although the measures didn’t specifically target Russians, “one can argue that this group is affected to a larger degree than others,” says Demetris Taxitaris, general manager of Cyprus-based Map S Platis, a consultancy firm for financial services companies.

That said, a number of Russian businesses continue to keep a foothold in Cyprus, among them Victor Rashnikov, owner of Magnitogorsk Iron & Steel Works; Vladimir Lisin, who controls his stake in Novolipetsk Steel through a Cyprus-based holding company; and Vladimir Potanin, president of MMC Norilsk Nickel, a producer of refined nickel.

For their part, Cypriot entities are cutting their Russian exposure. RCB Bank, whose second-largest shareholder is Russia’s state-owned VTB Bank with a 46.3 per cent stake, plans to strengthen and further develop domestic business operations, a spokesperson for the Limassol-based lender says.

“Amid sanctions and tightening compliance, Cyprus banks prefer not to deal with Russian money and Russian clients, even those who’ve had accounts in Cyprus banks many years,” says Evgeny Kogan, former director of the Centre for Protection of Shareholders and Investor Rights of Cypriot Banks set up in 2014. “Russian clients are becoming toxic.”

Updated: January 10, 2019 04:29 PM

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