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The Kremlin’s back-office

How Cyprus became Russia’s offshore hub – and its backdoor to the EU

Stoking historical divisions. Bribing politicians and protestors. Orchestrating cyber-attacks. Spreading incendiary disinformation.

All tried-and-tested techniques straight from the Kremlin’s Playbook. But these are just some of the more newsworthy tactics used by the Russian state and its proxies to further their interests and sow the seeds of instability in the West.

While high-profile conflicts and attacks have burned themselves into the consciousness of diplomats and analysts, a much more insidious form of influence has gradually taken hold in the Mediterranean island of Cyprus.

Since the collapse of the Soviet Union, the Russian economic footprint within the island has grown into an effective takeover of key industries. Within financial and corporate services as well as real estate (and, to a lesser but growing extent, tourism) Russian money is so dominant that the country now enjoys substantial control over these sectors.

This situation creates enormous leverage for Russia and poses several risks for Cyprus, not least to the integrity of its governance. Indeed, Russian influence is so ingrained that conflicts of interest extend right to the top: to President Anastasiades himself.

The de facto capture of Cyprus by Russian capital also poses unsettling questions for the whole of Europe.

An examination of financial flows within the EU reveals Cyprus isn’t just an important hub for transactions between the EU and Russia. It is also a key enabler of the penetration of Russian capital in strategic European sectors.

Russian companies use Cypriot-registered subsidiaries to avoid taxation, obfuscate the firm’s real corporate ownership and sometimes launder money by severing the link between illicit activities in Russia and the acquisitions of European assets and companies.

Cyprus therefore represents far more than a compromised enclave of Russian money at the far edge of the EU. It’s a key link in a web of opaque financial dealings that threaten the probity of the whole system.

An emerging dependency

Following the end of the Soviet Union in 1991, Cyprus emerged as an attractive and accessible place for Russia’s newly rich oligarchs to store their assets.

Relative proximity, Orthodox cultural ties and historical links between the country’s Communist parties counted in its favour, as did the fact that Cyprus was one of the few countries where Russians did not need a visa to travel.

Cypriot banks and associated services – accountants, tax planners, lawyers and investment managers – were willing to help, and a niche corporate service sector emerged catering to wealthy Russian clients. Some of these firms became one-stop shops, covering everything from book-keeping to immigration applications.

Cash for passports

Although phased out in November 2020, the Cypriot golden visa scheme provided another lure to Russian investors.

By investing $2million in property or $2.5 million in companies or bonds, foreigners could be fast-tracked to obtaining citizenship and thereby free movement of people, goods and capital within the EU.

The Cyprus scheme, which started in 2002, had one of the fastest turnaround times of any citizenship programme in the world, and by mid-2017 Russians accounted for over a third of the 3,322 successful applicants. Because the scheme incentivised property ownership, it also led to an increased Russian involvement in the Cypriot real estate market.

The exposure of rich Russians to the fragile Cypriot financial system prompted Russia to disburse a $3.5 billion emergency loan to Cyprus in 2011, thereby preventing a debt default that would have put billions of dollars in Russian oligarchs’ deposits at risk.

Following a banking crisis in 2013, many of these oligarchs inadvertently became major shareholders in the banks, when they were forced to convert deposits into equity to prevent the Cypriot financial system from collapsing. Although at the time this ‘bail-in’ strained relations between the countries, it further consolidated Russian influence in the financial sector.

Calculated influence

Today Russia is by far the biggest foreign economic player in Cyprus. The numbers are stark:

  • By the end of 2018, Russian companies had invested a total of €45.1 billion in the country – 12.4% of total foreign direct investment in Cyprus and 230% of its GDP for that year.
  • Russian companies accounted for 20% of Cyprus’s annual turnover in 2017.
  • Russian-controlled companies account for 90% of the island’s real estate revenues.

This significant economic influence goes hand-in-hand with changes within Cypriot society that have consolidated Russian soft power:

  • Over 5% of the permanent population of Cyprus is Russian.
  • A fifth of the island’s workforce in 2017 were employed by Russian companies.
  • In 2017, émigré Russian businessman Alexei Voloboev formed a pro-Russian political party, ‘I The Citizen’ (EOP).
  • In 2018, over a fifth of all tourist arrivals were from Russia (second only to the number of arrivals from the UK). The Russian tourist sector is worth an estimated €800 million a year.

Taken as a whole, the direct and indirect economic footprint of Russia accounts for a third of the Cypriot economy, making it the European country most vulnerable to Russian economic influence.

Healthy trade?

On a benign reading, this Russian importance to Cyprus merely showcases the island’s success. By establishing itself as a banking and professional services entrepôt, Cyprus acts as a useful conduit allowing Russian and EU businesses to trade successfully.

However, this optimistic interpretation ignores two crucial reasons Cyprus is so attractive to Russian investors: the opacity of its financial services system and its weak standards of governance.

As an offshore financial services hub, Cyprus isn’t especially competitive in terms of its low tax status, although because of its low corporate tax rate and preferential treatment of dividends and interest revenue it does remain attractive compared to other European hubs such as Switzerland, Luxembourg and the Netherlands.

A place to hide

In terms of financial secrecy, Cyprus offers significant opportunities for anyone looking to keep a low profile. Corporate ownership can be obscured through the use of nominees and bearer shares that conceal the real shareholders of the business and accounting records are not transparent. This system provides ample opportunity for money laundering operations and other financial fraud.

The American lobbyist and political consultant Paul Manafort, convicted in the US of tax fraud and money laundering, used fifteen offshore entities to avoid paying tax on tens of millions of dollars of income from his political activities in the Ukraine. Twelve of these entities were registered in Cyprus.

A 2013 report by the European Stability Mechanism revealed significant loopholes in the way six of the country’s largest banking institutions implemented anti-money laundering rules. The report also found that 10% of customers surveyed were ‘politically exposed persons’ and over half were assessed as high risk.

Highly conflicted

The lax approach to implementing rules is exacerbated by endemic conflicts of interests within the financial and corporate services sector – as well as in the country’s key regulatory institutions.

As previously mentioned, many of Cyprus’ banks now have significant Russian ownership, following the ‘bail in’ of 2013 that forced major depositors to convert their deposits into equity. One, the Bank of Cyprus, acquired six Russian members on its board of directors – amid political pressure to speed up the approval process. Vladimir Strzhalkovsky, for example, who became vice-president, is an ally of Putin and a former KGB officer.

Meanwhile the board of the Central Bank of Cyprus, the organisation that supervises antimoney laundering in the banking sector, consists of conflicted individuals with long careers in commercial banking or financial services.

Powerful friends

Conflicts of interest in Cyprus extend to the highest level of the state. The President since 2013, Nicos Anastasiades, is a former lawyer whose eponymous family law firm has deepseated connections to Russian business interests.

His pro-Russian credentials are well-established. When all other EU leaders boycotted Russia in the aftermath of its invasion of the Ukraine, Anastasiades notoriously called for the relaxation of Russian sanctions.

Over the years, the Anastasiades law firm has represented a number of wealthy oligarchs, and was among only a few organisations approved as agents for the golden visa scheme.
Two of his daughters are partners in the firm, as well as being nominee directors in a company that owns a major Russian chemical plant.

The Anastasiades law firm was also linked to the infamous ‘Troika Laundromat’ scandal in which $4.6 billion of Russian funds was moved around a network of dubious shell companies between 2006-13.

Although Anastasiades has publicly denied having anything to do with the firm, his family’s financial interests mean that Russian leverage extends to the very heart of Cypriot politics.

A conduit into the EU

While the network of Russian capital and influence within Cyprus is concerning in itself, the implications extend way beyond the shores of the Eastern Mediterranean.

The high levels of secrecy, the weak standards for financial system governance and a pliant corporate services sector make Cyprus a useful hub for different tax avoidance schemes including round-tripping – the practice of returning funds to their original owner in one country after having been transferred to a shell subsidiary company in another jurisdiction.

Round-tripping is often used as a way to avoid and optimize taxation, obscure the real ownership of capital, to facilitate mergers and foreign acquisitions, protect assets from state-appropriation, and sometimes even for money laundering aiming to conceal the proceeds of criminal activity

Cyprus is central to this process of round-tripping, both as an initial conduit for Russian funds moving into the Eurozone and as a common final destination for the profits generated in other jurisdictions with preferential tax treatment such as the Netherlands, Luxembourg and other financial service hubs. Indeed, a third of investment from Russia into the EU comes via Cyprus, and a similar proportion of capital flowing from the EU into Russia leaves
via the island.


Conclusion: An unvirtuous circle

As well as acting as a secretive back-office for Russian businesses, tiny Cyprus functions as an important gateway to the EU itself. Through its weak governance standards and financial dependence on Russian capital, it enables the deep penetration of oligarchy in EU finance and trade.

As Russia becomes ever more vital to Cyprus’s prosperity, so it is able to increase its role in the island’s affairs and press home its economic dominance even further. This ‘unvirtuous circle’ is enabled by Cyprus’ fusion of corporate and political elites and powered by Russia’s outsized influence on its economy.

If this cycle is to stop, there needs to be far more robust screening of foreign investment. Although the EU has issued a number of anti-money laundering directives, establishing an EU-wide agency to ensure compliance would give them much greater bite.

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