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For decades, Cyprus built an economy that courted Russians – Russian tourists, Russian investors, Russian oligarchs.
Now, as Europe sever ties with a warmongering Russia in just days, Cyprus faces an existential question: what if these Russians suddenly disappear?
In Cyprus, Russian connections are everywhere.
They appear in the economic figures. Hundreds of thousands of Russian tourists pass through here each year, which is no small number in a country of only 1.2 million people. More than 100 billion euros of investments came from Russia in 2020 alone, around a quarter of all foreign investments entering Cyprus.
Other links are more cultural – and questionable. The Mediterranean island has long served as a banking headquarters for the gray fortunes of Russian investors, from arms dealers to gambling companies and porn sites. In the early 1990s, post-Soviet figures like Slobodan Milošević traveled to the island with suitcases full of cash.
Over the past decade, Cyprus has come a long way towards unraveling these knots. But the EU is now forcing it to untie many more, almost instantly.
EU member Cyprus has backed the bloc’s growing sanctions against Russia following its invasion of Ukraine. Still, officials acknowledge that the support comes at a price: the sanctions will corrode swaths of Cyprus’ economy, even though it has already begun to turn away from Russian money.
The banking sector is an area likely to be affected. At least five people on the EU sanctions list have assets in Cypriot banks, according to banking officials. Luxury real estate is another – dozens of high-end apartments will likely remain unsold. Tourism will be the most affected.
“The Cypriot economy is disproportionately affected compared to other countries due to the structure of the Cypriot economy and its dependence on Russian tourists,” the Cypriot finance minister told POLITICO. Constantinos Petrides.
“Based on our estimates, we expected to have one million Ukrainian and Russian tourists this year, which is about 20-25% of the tourist market in Cyprus,” Petrides said. “The key is the duration of this crisis. If it ends in a month, we will come out unscathed. If it lasts longer, no economy will be able to emerge clean.
walk the line
In the days after Moscow sent troops to Ukraine, the EU, UK and US all moved with historic speed to cripple the Russian economy, block Russian banks in the markets international markets and ban Russian planes from flying. They also made plans to flood Ukraine with humanitarian aid and possibly even some weapons.
Cyprus generally supported these plans. But there were signs of hesitation along the way.
Cypriot authorities were initially against banning major Russian banks from the international payments network SWIFT, a key driver of global trade, before later backtracking. And although Cyprus has agreed to close its airspace to Russian planes, it added the caveat that it may reconsider if Turkey refuses to follow suit. And until an announcement on Tuesday, Cyprus was the only EU country that did not contribute any emergency aid to Ukraine.
Meanwhile, at least some Russian leaders were looking to use Cyprus to sidestep impending sanctions. Russian state-owned bank VTB has quietly transferred all of its shares in Cypriot bank RCB to Cypriot shareholders, making it a 100% Cypriot-owned bank. The new ownership structure is now awaiting approval from European authorities. VTB is one of the banks the EU kicked out of SWIFT.
Seen from the economic angle, actions can be easily explained.
In Cyprus, the service industry, including tourism, accounts for over 80% of the economy. And the Russians have long kept the service industry humming.
The Cypriot authorities are now trying to offset the expected losses by tapping into other markets. But they acknowledge it will be difficult, especially after the pandemic has already damaged the tourism industry.
“We had a very good flow of reservations from Russia until the announcement of the closure of the airspace. Then everything froze,” said Charis Loizides, president of the Hotel Association of Russia. Cyprus.
“We are in contact with Russian tour operators and they are disappointed,” he added. “We have managed to survive the past two years in very difficult circumstances, and we hoped that 2022 would bring us back to normal.”
Predictably, the Russian ambassador to Cyprus, Stanislav Osadchiy, brought a more threatening tone to the situation.
“Where will Cyprus get its Russian tourists from? They won’t come,” he said. Recount a Cypriot television channel. “Where will they go – to Turkey, is that what you want? For them to spend their money there? Summer is coming, you closed your airspace, you shot yourself in the foot .
Loizides said that even if Cyprus reopened its airspace to Russian planes, it would make no difference. The Russian ruble is in free fall, and wider restrictions and uncertainty are sure to keep many Russians away.
It’s a reality that will hit coastal cities like Limassol and Famagusta hard, where Russian tourists have historically flocked. Russian tourists are known locally as the biggest spenders, unlike British tourists who, as the local saying goes, “only buy beer, burgers and condoms”.
As a result, Cypriot support for Russian sanctions was not welcomed by everyone.
“It’s like we want to punish Russia and we are punishing ourselves,” said Panicos Demetriades, a former central banker on the island.
“We are also punishing Russians who must be separated from their country’s dictator,” added Demetriades, also an emeritus professor at the University of Leicester. “There are thousands of Russians who can’t stand Putin’s Russia and want to leave and we are isolating them.”
Since the fall of the Soviet Union, Cyprus has been inextricably linked to Russia.
“20 to 30 years ago, when the Soviet Union collapsed, there was a conscious decision to link the Republic of Cyprus to Russia with all the risks that entailed, which one does not could have easily recognized that by reading the news about the political and social situation in Russia,” said Stelios Orphanides, a Cypriot investigative journalist who works for the Organized Crime and Corruption Reporting Project.
In some ways, these ties deepened after 2003, when Russian President Vladimir Putin began to restrict the independence of Russian oligarchs. Many prominent Russian leaders have decided to transfer their finances out of the country. One of their favorite places to park funds? Cyprus.
In 2013, years of overly soft lending resurfaced on Cypriot banks, causing a financial crisis. Many Russians with large local deposits received ownership shares in Cypriot banks in return for their losses. Ironically, the plan meant that Russians became major players in Cypriot banks after the crisis subsided.
However, banks also started to enforce anti-money laundering rules more rigorously after the crisis. And in 2018, US regulators began aggressively cracking down on illicit Russian money circulating around the world. As part of the move, the Central Bank of Cyprus closed thousands of shell companies, presaging a broader shift in the island’s business model.
In 2020, Cyprus suspended the controversial “Golden Visa” program, which granted passports to foreigners in exchange for massive investments in the country. The scheme, established in 2013, has brought Cyprus some €7 billion – and secured passports for many Russian oligarchs.
Now, with the new sanctions, a group of accountants, lawyers and agents still working with Russians are at risk of losing clients. But authorities insist that this will not spill over to the wider economy.
Specifically, Petrides, the Cypriot finance minister, claimed that the country’s banks were safe.
“There is a surrounding atmosphere due to the past, but the Cypriot economy is not so dependent on Russia anymore. There are other countries that have bigger problems,” he said.
“The sanctions regarding the EU banking system do not affect Cyprus to a large extent, because the Cypriot banking system is not exposed to Russia,” added Petrides. “The banking system maintains one of the highest levels of capital adequacy and liquidity ratios. The Central Bank of Cyprus has no reserves held by the Russian Central Bank abroad.
Officials also noted that a dozen companies from Russia and Ukraine were seeking to relocate their operations out of the conflict zone and could benefit from the rapid bureaucratic process in Cyprus. In addition, around 1,000 people have recently applied for Cyprus business visas, they said.
Bank officials also argued that Cyprus had already learned how to circumvent the financial sanctions imposed on the Russians. They point out that many Russians who own large shares of Cypriot banks were sanctioned by the US and UK in 2018.
However, Russian deposits in Cyprus are estimated at 1 billion euros. And Demetriades, the former central banker, pointed out that bank liquidity depends on investor confidence in the system, which can change quickly.
“Cyprus is a small country and is known for its past relations with Russia and the oligarchs, so it is very difficult to support itself and could face sanctions,” Demetriades said. “Due to old sins, Cyprus is on the gray list and the others are still suspect.”
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