From Russia with love, to Cyprus with cash

Perhaps the Russian oligarchs’ days of hassle-free, tax-free, risk-free banking are finally over...

Brits may not have known that much about Cyprus before this past week, but if you thought its only exports were olive oil, halloumi and suntans you need to add one more – money.

Of the £10.8bn invested in Russia in the third quarter of last year, £3.2bn came from Cyprus. That is 30 per cent of the total, and it was not a one-off: the Mediterranean island provided more than 24 per cent of Russian investment in 2011, and 28 per cent in 2010.

When it comes to capital flows, the closest parallel to Cyprus is on the far side of the world, on another former British island that also dominates investment into a much larger neighbour. Cyprus is Russia’s Hong Kong. So, when Cyprus announced that it would freeze bank accounts and would tax deposits over €100,000 at 9.9 per cent, its government was trying to grab a chunk of the estimated £20bn that Russians had parked there.

The Russian account-holders have failed to win the sympathy offered to ordinary Cypriots who, before parliament rejected an international bailout deal, faced losing their savings, but the eventual consequences of freezing the Russian money may prove catastrophic. The tax on deposits was intended to protect the banking system from collapse, but if the Russian money takes fright the banks may be past saving anyway.

After communism collapsed, Russians could make money in their homeland but had no confidence that their homeland would let them keep it. Cyprus saw an opportunity and, because of the time zone, lax visa regulations and a favourable tax treaty – at first, there was no withholding tax on profits leaving Russia for Cyprus, and even now it is only 5 per cent – it became the cash conduit of choice.

Since 1994, according to research from Global Financial Integrity, £518bn has left Russia illegally. That may be overstated but still, as one lawyer recently told me, it has been “the largest outflow of money since money was invented”.

Unlike Russia, Cyprus has a reliable court system and most money is safe once it’s there. Or, at least, it was until the proposed tax on deposits. Jamison Firestone, an American lawyer who has specialised in Russian taxes for two decades, struggled for an analogy to describe the shock he felt. Eventually he settled for a scene from the apocalyptic film The Day After Tomorrow where American refugees are struggling to enter Mexico. “I’m sending letters out saying, ‘Please don’t pay us into our Cypriot bank account, pay us into our Russian bank accounts, where the money is safe,’” he said.

“Everybody has put in orders to transfer all their money out. As soon as they lift the freeze on bank transfers there won’t be enough money in the banks to make those transfers. So the system will collapse anyway, even after this surprise levy.”

Much of Russia’s capital outflow, once it had bought villas in the west, went straight back into Russia: now as legal, protected, dividend-paying investment. Cyprus was the staging post on the way in and out, and it is now home to thousands of Russians, who are servicing the money, its owners and each other. My friend Tanya, who moved there with her family five years ago, describes her neighbourhood like a sunnier version of Moscow: “There are Russians everywhere, Russian shops, doctors, hairdressers. There are a couple of Russian schools, too, and lots of after-school activities for the children.”

The financial services companies that employ these children’s parents swelled to seven times Cyprus’s economy but the money was only ever passing through.

“Cyprus was low-security, low-cost, high ease of use,” Firestone said. “So it was great if you were non-political, just an ordinary Russian businessman who wanted a safe, low-cost place to hold profits. Once profits were paid out of Russia there were no more taxes.

“They have just put a tax on a lot of people who did not have to be there and who could effectively do this out of the UK or other jurisdictions.”

Among the other countries rivalling Cyprus as conduits for foreign investment are the wealthy European tax havens of Luxembourg and the Netherlands. But Richard Murphy of the Tax Justice Network doubts they could mop up the business if Russian cash leaves Cyprus. Even the Channel Islands and the Isle of Man may now be too tightly regulated.

“For the bandits, it could be Panama or the British Virgin Islands, and for those looking for security, Singapore,” he said.

No one wants to have to get up in the middle of the night to deal with his banker, so perhaps the Russian oligarchs’ days of hassle-free, tax-free, risk-free banking are finally over – until another country taps in to the money to be made in banking for them.

The Cypriot port of Limassol. Photograph: Getty Images

This article first appeared in the 25 March 2013 issue of the New Statesman, After God

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The Brexit Beartraps, #2: Could dropping out of the open skies agreement cancel your holiday?

Flying to Europe is about to get a lot more difficult.

So what is it this time, eh? Brexit is going to wipe out every banana planet on the entire planet? Brexit will get the Last Night of the Proms cancelled? Brexit will bring about World War Three?

To be honest, I think we’re pretty well covered already on that last score, but no, this week it’s nothing so terrifying. It’s just that Brexit might get your holiday cancelled.

What are you blithering about now?

Well, only if you want to holiday in Europe, I suppose. If you’re going to Blackpool you’ll be fine. Or Pakistan, according to some people...

You’re making this up.

I’m honestly not, though we can’t entirely rule out the possibility somebody is. Last month Michael O’Leary, the Ryanair boss who attracts headlines the way certain other things attract flies, warned that, “There is a real prospect... that there are going to be no flights between the UK and Europe for a period of weeks, months beyond March 2019... We will be cancelling people’s holidays for summer of 2019.”

He’s just trying to block Brexit, the bloody saboteur.

Well, yes, he’s been quite explicit about that, and says we should just ignore the referendum result. Honestly, he’s so Remainiac he makes me look like Dan Hannan.

But he’s not wrong that there are issues: please fasten your seatbelt, and brace yourself for some turbulence.

Not so long ago, aviation was a very national sort of a business: many of the big airports were owned by nation states, and the airline industry was dominated by the state-backed national flag carriers (British Airways, Air France and so on). Since governments set airline regulations too, that meant those airlines were given all sorts of competitive advantages in their own country, and pretty much everyone faced barriers to entry in others. 

The EU changed all that. Since 1994, the European Single Aviation Market (ESAM) has allowed free movement of people and cargo; established common rules over safety, security, the environment and so on; and ensured fair competition between European airlines. It also means that an AOC – an Air Operator Certificate, the bit of paper an airline needs to fly – from any European country would be enough to operate in all of them. 

Do we really need all these acronyms?

No, alas, we need more of them. There’s also ECAA, the European Common Aviation Area – that’s the area ESAM covers; basically, ESAM is the aviation bit of the single market, and ECAA the aviation bit of the European Economic Area, or EEA. Then there’s ESAA, the European Aviation Safety Agency, which regulates, well, you can probably guess what it regulates to be honest.

All this may sound a bit dry-

It is.

-it is a bit dry, yes. But it’s also the thing that made it much easier to travel around Europe. It made the European aviation industry much more competitive, which is where the whole cheap flights thing came from.

In a speech last December, Andrew Haines, the boss of Britain’s Civil Aviation Authority said that, since 2000, the number of destinations served from UK airports has doubled; since 1993, fares have dropped by a third. Which is brilliant.

Brexit, though, means we’re probably going to have to pull out of these arrangements.

Stop talking Britain down.

Don’t tell me, tell Brexit secretary David Davis. To monitor and enforce all these international agreements, you need an international court system. That’s the European Court of Justice, which ministers have repeatedly made clear that we’re leaving.

So: last March, when Davis was asked by a select committee whether the open skies system would persist, he replied: “One would presume that would not apply to us” – although he promised he’d fight for a successor, which is very reassuring. 

We can always holiday elsewhere. 

Perhaps you can – O’Leary also claimed (I’m still not making this up) that a senior Brexit minister had told him that lost European airline traffic could be made up for through a bilateral agreement with Pakistan. Which seems a bit optimistic to me, but what do I know.

Intercontinental flights are still likely to be more difficult, though. Since 2007, flights between Europe and the US have operated under a separate open skies agreement, and leaving the EU means we’re we’re about to fall out of that, too.  

Surely we’ll just revert to whatever rules there were before.

Apparently not. Airlines for America – a trade body for... well, you can probably guess that, too – has pointed out that, if we do, there are no historic rules to fall back on: there’s no aviation equivalent of the WTO.

The claim that flights are going to just stop is definitely a worst case scenario: in practice, we can probably negotiate a bunch of new agreements. But we’re already negotiating a lot of other things, and we’re on a deadline, so we’re tight for time.

In fact, we’re really tight for time. Airlines for America has also argued that – because so many tickets are sold a year or more in advance – airlines really need a new deal in place by March 2018, if they’re to have faith they can keep flying. So it’s asking for aviation to be prioritised in negotiations.

The only problem is, we can’t negotiate anything else until the EU decides we’ve made enough progress on the divorce bill and the rights of EU nationals. And the clock’s ticking.

This is just remoaning. Brexit will set us free.

A little bit, maybe. CAA’s Haines has also said he believes “talk of significant retrenchment is very much over-stated, and Brexit offers potential opportunities in other areas”. Falling out of Europe means falling out of European ownership rules, so itcould bring foreign capital into the UK aviation industry (assuming anyone still wants to invest, of course). It would also mean more flexibility on “slot rules”, by which airports have to hand out landing times, and which are I gather a source of some contention at the moment.

But Haines also pointed out that the UK has been one of the most influential contributors to European aviation regulations: leaving the European system will mean we lose that influence. And let’s not forget that it was European law that gave passengers the right to redress when things go wrong: if you’ve ever had a refund after long delays, you’ve got the EU to thank.

So: the planes may not stop flying. But the UK will have less influence over the future of aviation; passengers might have fewer consumer rights; and while it’s not clear that Brexit will mean vastly fewer flights, it’s hard to see how it will mean more, so between that and the slide in sterling, prices are likely to rise, too.

It’s not that Brexit is inevitably going to mean disaster. It’s just that it’ll take a lot of effort for very little obvious reward. Which is becoming something of a theme.

Still, we’ll be free of those bureaucrats at the ECJ, won’t be?

This’ll be a great comfort when we’re all holidaying in Grimsby.

Jonn Elledge edits the New Statesman's sister site CityMetric, and writes for the NS about subjects including politics, history and Brexit. You can find him on Twitter or Facebook.