Cyprus is losing its Russians – and facing existential questions about its economy – POLITICO

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Over the decades, Cyprus has built an economy that pleases Russians – Russian tourists, Russian investors, Russian oligarchs.

Now, with Europe severing ties with a warm Russia in just a few days, Cyprus is facing an existential question: What if these Russians suddenly disappeared. ?

In Cyprus, Russian connections are everywhere.

They show up in economic figures. Hundreds of thousands of Russian tourists come here every year – a huge number in a country of only 1.2 million people. More than 100 billion Euros of investment came from Russia in 2020 alone – about a quarter of all foreign investment in Cyprus.

Other connections are more cultural – and questionable. The Mediterranean island has long served as a banking hub for Russian investors, from arms dealers to gambling companies and porn sites. In the early 1990s, post-Soviet figures like Slobodan Milošević arrived on the island with suitcases full of cash.

Over the past decade, Cyprus has come a long way to untie these knots. But the EU is now forcing them to untie them even more, almost immediately.

Cyprus, an EU member, has supported the bloc’s escalating sanctions against Russia following its invasion of Ukraine. However, officials admit that the support comes with a price: Sanctions will eat away at parts of the Cypriot economy, even as it has already begun to turn away from Russian money. .

Banking is one of the sectors 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 different – dozens of luxury apartments may not sell. Tourism will be affected the most.

“The Cypriot economy is disproportionately affected compared to other countries due to the structure of the Cypriot economy and dependence on Russian tourists,” Cyprus Finance Minister Constantinos Petrides told POLITICO.

“Based on our estimates, we expect one million tourists from Ukraine and Russia this year, about 20-25% of the Cypriot tourist market,” said Petrides. “The key is the timing of this crisis. If this ends in a month, we will leave normally. If it drags on any longer, no economy will manage to come out clean.”


In the days after Moscow sent troops into Ukraine, the EU, UK, and US all moved at historic speeds to cripple the Russian economy, block Russian banks from international markets and bar Russian planes from flying out of the country. their sky. They also outlined a plan to flood Ukraine with humanitarian assistance and eventually some weapons.

Cyprus generally favors these plans. But there are signs of hesitation along the way.

Cypriot authorities initially resisted banning major Russian banks from participating in the SWIFT international payments network, a key driver of global business, before adopting it. And while Cyprus agreed to close its airspace to Russian planes, it also added that it could reconsider if Turkey refused to follow suit. And until Tuesday’s announcement, Cyprus was the only EU country did not contribute any emergency assistance to Ukraine.

Meanwhile, at least some Russian executives are looking to use Cyprus to circumvent existing sanctions. Russia’s state-owned bank VTB has quietly transferred its entire stake in Cyprus’ RCB bank to its Cypriot shareholders, making it a 100% Cypriot-owned bank. The new ownership structure is currently waiting for the European competent authorities to sign and promulgate. VTB is one of the banks that the EU has excluded from SWIFT.

Seeing it through an economic lens, the actions can be easily explained.

In Cyprus, the service sector, including tourism, accounts for more than 80% of the economy. And the Russians have long kept the service industry afloat.

Cypriot authorities are now trying to cover the expected loss, reaching out to other markets. But they acknowledge that will be difficult, especially after the pandemic has taken a toll on the tourism industry.

“We had a very good booking from Russia until the announcement of the closure of the airspace. Then everything froze,” said Charis Loizides, president of the Cyprus Hotel Association.

“We are in contact with tour operators from Russia and they are very disappointed,” he added. “We’ve managed to survive the last two years in very difficult circumstances and we hope 2022 will bring us back to normal.”

Predictably, Russian Ambassador to Cyprus Stanislav Osadchiy brought a more threatening tone to the situation.

“Where will Cyprus attract Russian tourists from? They won’t come,” he said told a Cypriot television station. “Where are they going – to Turkey, is that what you want? Let them go spend their money there? Summer is coming, you’ve 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 broader restrictions and uncertainty are sure to keep many Russians away.

It’s a reality that will hit hard in coastal cities like Limassol and Famagusta, where Russian tourists once flocked to history. Russian tourists are known locally to be the biggest spenders, unlike British tourists, who locally say “only buy beer, burgers and condoms”.

As a result, Cypriot support for Russia sanctions has not gone well for everyone.

“It is as if we want to punish Russia and we are punishing ourselves,” said Panicos Demetriades, a former head of the island’s central bank.

Demetriades, also a professor emeritus at the University of Leicester, said: “We are also punishing the Russians who need to separate from the dictator of their country. “There are thousands of Russians who can’t stand Putin’s Russia and want to leave and we isolate them.”

Deep relationship

Since the fall of the Soviet Union, Cyprus has been closely associated with Russia.

“There was a conscious decision 20 – 30 years ago when the Soviet Union collapsed to force the Republic of Cyprus into Russian hands with all the risks involved in this, which one can easily realize only when read news about the political and social situation in Russia,” said Stelios Orphanides, a Cypriot investigative journalist working for the Organized Crime and Corruption Reporting Project.

In a way, those ties became stronger after 2003, when Russian President Vladimir Putin began to limit the independence of Russia’s oligarchs. Many prominent Russian executives have decided to move their finances out of the country. One of their favorite places to deposit funds? Cyprus.

In 2013, years of providing too-favorite loans stifled Cyprus’ banks, triggering a financial crisis. Many Russians with large domestic deposits were given ownership shares in Cypriot banks in exchange for their losses. Ironically, this plan meant that the Russians became the main stakeholders in Cypriot banks after the crisis subsided.

However, banks also began to enforce stricter anti-money laundering rules after the crisis. And in 2018, US regulators began aggressively cracking down on illegal Russian money circulating on the international market. As part of the initiative, the Central Bank of Cyprus has shut down thousands of shell companies, projecting a broader change in the island’s business model.

In 2020, Cyprus suspended the controversial “Golden Visa” program, which grants passports to foreigners in return for a large investment in the country. The scheme, established in 2013, has raised about 7 billion euros for Cyprus – and scored passports for many Russian oligarchs.

Now, with the new sanctions, a group of accountants, lawyers and agents still working with the Russians are likely to be at a loss. But authorities insist this will not spill over into the broader economy.

In particular, Petrides, the Cyprus Finance Minister, thinks that the country’s banks are safe.

“There is an atmosphere due to the past, but the Cypriot economy is no longer so dependent on Russia. There are other countries with bigger problems,” he said.

“The EU banking system-related sanctions do not affect Cyprus to a large extent, as the Cypriot banking system has nothing to do with Russia,” Petrides added. “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 Central Bank of Russia abroad. “

Officials also note that about a dozen businesses from Russia and Ukraine are looking to move their operations out of the conflict zone and could benefit from the rapid bureaucratic process in Cyprus. In addition, about 1,000 people have recently requested a business visa in Cyprus, they said.

Bank officials also argue that Cyprus has learned to deal with financial penalties against the Russians. They point out that many Russians own large shares of Cypriot banks that were sanctioned by the US and UK in 2018.

However, Russia’s deposits in Cyprus are estimated at 1 billion euros. And Demetriades, a former central banker, points out that a bank’s liquidity depends on investors’ confidence in the system, which can change rapidly.

“Cyprus is a small country and is known for its past relationship with Russia and oligarchs, so it is very difficult to support itself and could fall victim to sanctions,” Mr. Demetriades said. . “Because of old sins, Cyprus is on the gray list and everyone else is always suspicious.”

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