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

Photo: Getty Images
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I'll vote against bombing Isis - but my conscience is far from clear

Chi Onwurah lays out why she'll be voting against British airstrikes in Syria.

I have spent much of the weekend considering how I will vote on the question of whether the UK should extend airstrikes against Daesh/Isis from Iraq to Syria, seeking out and weighing the evidence and the risks.

My constituents have written, emailed, tweeted, facebooked or stopped me in the street to share their thoughts. Most recognised what a difficult and complex decision it is. When I was selected to be the Labour candidate for Newcastle Central I was asked what I thought would be the hardest part of being an MP.

I said it would be this.

I am not a pacifist, I believe our country is worth defending and our values worth fighting for. But the decision to send British Armed Forces into action is, rightly, a heavy responsibility.

For me it comes down to two key questions. The security of British citizens, and the avoidance of civilian casualties. These are separate operational and moral questions but they are linked in that it is civilian casualties which help fuel the Daesh ideology that we cannot respect and value the lives of those who do not believe as we do. There is also the important question of solidarity with the French in the wake of their grievous and devastating loss; I shall come to that later.

I listened very carefully to the Prime Minister as he set out the case for airstrikes on Thursday and I share his view that Daesh represents a real threat to UK citizens. However he did not convince me that UK airstrikes at this time would materially reduce that threat. The Prime Minister was clear that Daesh cannot be defeated from the air. The situation in Syria is complex and factionalised, with many state and non-state actors who may be enemies of our enemy and yet not our friend. The Prime Minister claimed there were 70,000 ground troops in the moderate Free Syrian Army but many experts dispute that number and the evidence does not convince me that they are in a position to lead an effective ground campaign. Bombs alone will not prevent Daesh obtaining money, arms and more recruits or launching attacks on the UK. The Prime Minister did not set out how we would do that, his was not a plan for security and peace in Syria with airstrikes a necessary support to it, but a plan to bomb Syria, with peace and security cited in support of it. That is not good enough for me.

Daesh are using civilian population as human shields. Syrians in exile speak of the impossibility of targeting the terrorists without hitting innocent bystanders. I fear that bombing Raqqa to eliminate Daesh may be like bombing Gaza to eliminate Hamas – hugely costly in terms of the civilian population and ultimately ineffectual.

Yet the evil that Daesh perpetrate demands a response. President Hollande has called on us to join with French forces. I lived in Paris for three years, I spent time in just about every location that was attacked two weeks ago, I have many friends living in Paris now, I believe the French are our friends and allies and we should stand and act in solidarity with them, and all those who have suffered in Mali, Kenya, Nigeria, Lebanon, Tunisia and around the world.

But there are other ways to act as well as airstrikes. Britain is the only G7 country to meet its international development commitments, we are already one of the biggest humanitarian contributors to stemming the Syrian crisis, we can do more not only in terms of supporting refugees but helping those still in Syria, whether living in fear of Daesh or Assad. We can show the world that our response is to build rather than bomb. The Prime Minister argues that without taking part in the bombing we will not have a place at the table for the reconstruction. I would think our allies would be reluctant to overlook our financial commitment.

We can also do more to cut off Daesh funding, targeting their oil wells, their revenues, their customers and their suppliers. This may not be as immediately satisfying as bombing the terrorists but it is a more effective means of strangling them.

The vast majority of the constituents who contacted me were against airstrikes. I agree with them for the reasons I set out above. I should say that I have had no experience of bullying or attempts at intimidation in reaching this decision, Newcastle Central is too friendly, frank, comradely and Geordie a constituency for that. But some have suggested that I should vote against airstrikes to ensure a “clear conscience” ’. This is not the case. There will be more killings and innocent deaths whether there are UK airstrikes or not, and we will all bear a portion of responsibility for them.

A version of this article was originally sent to Chi Onwurah's constituents, and can be read here