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

Getty
Show Hide image

Hillary Clinton can take down the Donald Trump bogeyman - but she's up against the real thing

Donald Trump still has time to transform. 

Eight years later than hoped, Hillary Clinton finally ascended to the stage at the Democratic National Convention and accepted the nomination for President. 

Like her cheerleaders, the Obamas, she was strongest when addressing the invisible bogeyman - her rival for President, Donald Trump. 

Clinton looked the commander in chief when she dissed The Donald's claims to expertise on terrorism. 

Now Donald Trump says, and this is a quote, "I know more about ISIS than the generals do"

No, Donald, you don't.

He thinks that he knows more than our military because he claimed our armed forces are "a disaster."

Well, I've had the privilege to work closely with our troops and our veterans for many years.

Trump boasted that he alone could fix America. "Isn't he forgetting?" she asked:

Troops on the front lines. Police officers and fire fighters who run toward danger. Doctors and nurses who care for us. Teachers who change lives. Entrepreneurs who see possibilities in every problem.

Clinton's message was clear: I'm a team player. She praised supporters of her former rival for the nomination, Bernie Sanders, and concluded her takedown of Trump's ability as a fixer by declaring: "Americans don't say: 'I alone can fix it.' We say: 'We'll fix it together.'"

Being the opposite of Trump suits Clinton. As she acknowledged in her speech, she is not a natural public performer. But her cool, policy-packed speech served as a rebuke to Trump. She is most convincing when serious, and luckily that sets her apart from her rival. 

The Trump in the room with her at the convention was a boorish caricature, a man who describes women as pigs. "There is no other Donald Trump," she said. "This is it."

Clinton and her supporters are right to focus on personality. When it comes to the nuclear button, most fair-minded people on both left and right would prefer to give the decision to a rational, experienced character over one who enjoys a good explosion. 

But the fact is, outside of the convention arena, Trump still controls the narrative on Trump.

Trump has previously stated clearly his aim to "pivot" to the centre. He has declared that he can change "to anything I want to change to".  In his own speech, Trump forewent his usual diatribe for statistics about African-American children in poverty. He talked about embracing "crying mothers", "laid-off factory workers" and making sure "all of our kids are treated equally". His wife Melania opted for a speech so mainstream it was said to be borrowed from Michelle Obama. 

His personal attacks have also narrowed. Where once his Twitter feed was spattered with references to "lying Ted Cruz" and "little Marco Rubio", now the bile is focused on one person: "crooked Hillary Clinton". Just as Clinton defines herself against a caricature of him, so Trump is defining himself against one of her. 

Trump may not be able to maintain a more moderate image - at a press conference after his speech, he lashed out at his former rival, Ted Cruz. But if he can tone down his rhetoric until November, he will no longer be the bogeyman Clinton can shine so brilliantly against.