Cyprus Poses Fresh Crisis as EU Questions Russian Investment

Henry Ridgwell
March 21,2013

LONDON — Political leaders in Cyprus appear to have abandoned plans for a one-off levy on bank deposits in return for a financial bailout from the European Union. The Mediterranean island has long been an attractive place for foreign investors, in particular Russians - and that has sparked a heated discussion in Europe.

In Cyprus the banks may still be closed, but lines at cash machines are still growing. Alongside the Cypriots withdrawing their savings are many foreign nationals.

With a corporate tax rate of 10 percent, Cyprus has long attracted foreign investors. But this Mediterranean island has other attractions, says International Finance Professor Kate Phylaktis, of London's Cass Business School, a former consultant to the Cypriot government.

"It is not just because of tax," said Phylaktis. "We speak English, I mean the English language is very well spoken in Cyprus. Our legal system is based on the English legal system so our institutions are very good and well understood by everyone so that is very attractive to foreign investors.

The ratings agency Moody's estimates there is $31 billion of Russian money in Cypriot bank accounts. Phylaktis says close links between the two countries go back to the break-up of the Soviet Union.

"We have had very long links and close relationship with the Russians," she said. "There are about 20,000 Russian families living in Cyprus, so obviously these Russians have property, have deposits, have businesses, which bring a lot of money to Cyprus, there is no doubt.

In recent weeks German media have published leaked intelligence reports that allege Cyprus is used by corrupt Russians to launder money.

Kate Phylaktis says that suspicion is driving the European Union to insist on tough measures in return for a bailout.

"With the German elections coming up very soon, I mean they have not got a lot of leeway, they have to convince the taxpayers in Germany that they are not going to fund the Russian oligarchs," she said.

But the accusations leveled at Cyprus are exaggerated, says one-time Cypriot resident James Ker-Lindsay, who is an expert on southeast Europe at the London School of Economics.

"There is no doubt that there has been dirty Russian money that has gone through Cyprus," said Ker-Lindsay. "But we know that dirty Russian money has gone through a lot of places.

Ker-Lindsay says many foreign nationals have seen Cyprus as a safe haven.

"Throughout the Middle East for example, North Africa, Eastern Europe, plus also there is a very large British population that lives in Cyprus," he said. "Cyprus was a safe haven at the height of the Lebanese civil war, so you had a lot of people who were coming over and setting up new lives in Cyprus. A number of them have stayed. From southeast Europe, from the Balkans during the wars in the 1990s.

Britain, which has military bases on Cyprus, has sent a plane carrying a million euros to the island in case servicemen and women have any problems with their banks. Analysts say it is a measure of how seriously Cyprus's European partners view the crisis.