Cyprus Crisis Burns Russian Investors

James Brooke
March 28,2013

MOSCOW — For years, construction companies in Cyprus lured Russians to invest in the Mediterranean island. Over the last decade, 40,000 Russians moved to Cyprus. They now make up five percent of the population.

But the lure was more than just trading Moscow's cold winters for fun in the sun. Cyprus offered low taxes, low regulation, and the security of the euro zone.

While the glass office towers of Moscow City, Moscow's new financial district, languish half-empty, Russians now have $32 billion deposited in banks in Cyprus.

Tiny Cyprus is now the largest foreign investor in Russia, a nation with an economy 75 times larger.

Minimizing taxes

Mark Galeotti, an international affairs professor at New York University, tracks Russian money movements. He explains why some Russians have chosen to place their money in Cyprus banks. "It's been the den for all kinds of dirty money, criminal money, but also money just avoiding tax in Russia. Secondly, it has been a turntable for a lot of Russian oligarchs. Rich Russians move money out of Russia and then reinvest it to take advantage of a lower corporate tax rate,” he said.

For Russia's ultra rich, Cyprus was a key to minimizing taxes. Galeotti said Cyprus also emerged, though, as a safe banking haven for Russia's new middle class.

“It is a place where you can go, and enjoy a nice holiday and perhaps also stash a little bit of your money, so you feel you have something safely outside of Russia, just in case,” he said. “There was a sense that Cyprus gave you security, as well as a suntan.

All that ended this week with the Cyprus banking crisis, and the decision to slap 40 percent taxes on all deposits over $130,000.

Protesting taxation on deposits

In Cyprus, protesters chant in Greek. But the street protests also have been sprinkled with Russian flags - and protest signs in Russian.

Maxim Mokeyev, executive director of Evans Property Services, a Moscow real estate company, said Russians see the tax as a hostile act.

"People take it very personally,” Mokeyev said in Moscow. “It is a trust issue that is completely gone. Because they have confiscated 40 percent of the deposits.

He said Russians believe that currency controls could last for years, and that the oligarchs are fighting to get their money out now.

"The almost hourly flights to Cyprus were almost full of Russian businessmen trying to do it the Russian way, to use their connections, do whatever they can, to try to be different, to get their money out,” he said.

Mokeyev predicts that values for Cyprus vacation homes could drop by 50 percent as Russian buyers stay away.

"Cyprus has completely lost any trust from any investor or anyone who wants to park their money anywhere," he said.

And so, while Cyprus may remain a safe haven for Russian tourists, it is no longer to be a safe haven for Russian investors.