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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Geoffrey Howe dies, aged 88

Howe was Margaret Thatcher's longest serving Cabinet minister – and the man credited with precipitating her downfall.

The former Conservative chancellor Lord Howe, a key figure in the Thatcher government, has died of a suspected heart attack, his family has said. He was 88.

Geoffrey Howe was the longest-serving member of Margaret Thatcher's Cabinet, playing a key role in both her government and her downfall. Born in Port Talbot in 1926, he began his career as a lawyer, and was first elected to parliament in 1964, but lost his seat just 18 months later.

Returning as MP for Reigate in the Conservative election victory of 1970, he served in the government of Edward Heath, first as Solicitor General for England & Wales, then as a Minister of State for Trade. When Margaret Thatcher became opposition leader in 1975, she named Howe as her shadow chancellor.

He retained this brief when the party returned to government in 1979. In the controversial budget of 1981, he outlined a radical monetarist programme, abandoning then-mainstream economic thinking by attempting to rapidly tackle the deficit at a time of recession and unemployment. Following the 1983 election, he was appointed as foreign secretary, in which post he negotiated the return of Hong Kong to China.

In 1989, Thatcher demoted Howe to the position of leader of the house and deputy prime minister. And on 1 November 1990, following disagreements over Britain's relationship with Europe, he resigned from the Cabinet altogether. 

Twelve days later, in a powerful speech explaining his resignation, he attacked the prime minister's attitude to Brussels, and called on his former colleagues to "consider their own response to the tragic conflict of loyalties with which I have myself wrestled for perhaps too long".

Labour Chancellor Denis Healey once described an attack from Howe as "like being savaged by a dead sheep" - but his resignation speech is widely credited for triggering the process that led to Thatcher's downfall. Nine days later, her premiership was over.

Howe retired from the Commons in 1992, and was made a life peer as Baron Howe of Aberavon. He later said that his resignation speech "was not intended as a challenge, it was intended as a way of summarising the importance of Europe". 

Nonetheless, he added: "I am sure that, without [Thatcher's] resignation, we would not have won the 1992 election... If there had been a Labour government from 1992 onwards, New Labour would never have been born."

Jonn Elledge is the editor of the New Statesman's sister site CityMetric. He is on Twitter, far too much, as @JonnElledge.