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

Garry Knight via Creative Commons
Show Hide image

Why Barack Obama was right to release Chelsea Manning

A Presidential act of mercy is good for Manning, but also for the US.

In early 2010, a young US military intelligence analyst on an army base near Baghdad slipped a Lady Gaga CD into a computer and sang along to the music. In fact, the soldier's apparently upbeat mood hid two facts. 

First, the soldier later known as Chelsea Manning was completely alienated from army culture, and the callous way she believed it treated civilians in Iraq. And second, she was quietly erasing the music on her CDs and replacing it with files holding explosive military data, which she would release to the world via Wikileaks. 

To some, Manning is a free speech hero. To others, she is a traitor. President Barack Obama’s decision to commute her 35-year sentence before leaving office has been blasted as “outrageous” by leading Republican Paul Ryan. Other Republican critics argue Obama is rewarding an act that endangered the lives of soldiers and intelligence operatives while giving ammunition to Russia. 

They have a point. Liberals banging the drum against Russia’s leak offensive during the US election cannot simultaneously argue leaks are inherently good. 

But even if you think Manning was deeply misguided in her use of Lady Gaga CDs, there are strong reasons why we should celebrate her release. 

1. She was not judged on the public interest

Manning was motivated by what she believed to be human rights abuses in Iraq, but her public interest defence has never been tested. 

The leaks were undoubtedly of public interest. As Manning said in the podcast she recorded with Amnesty International: “When we made mistakes, planning operations, innocent people died.” 

Thanks to Manning’s leak, we also know about the Vatican hiding sex abuse scandals in Ireland, plus the UK promising to protect US interests during the Chilcot Inquiry. 

In countries such as Germany, Canada and Denmark, whistle blowers in sensitive areas can use a public interest defence. In the US, however, such a defence does not exist – meaning it is impossible for Manning to legally argue her actions were in the public good. 

2. She was deemed worse than rapists and murderers

Her sentence was out of proportion to her crime. Compare her 35-year sentence to that received by William Millay, a young police officer, also in 2013. Caught in the act of trying to sell classified documents to someone he believed was a Russian intelligence officer, he was given 16 years

According to Amnesty International: “Manning’s sentence was much longer than other members of the military convicted of charges such as murder, rape and war crimes, as well as any others who were convicted of leaking classified materials to the public.”

3. Her time in jail was particularly miserable 

Manning’s conditions in jail do nothing to dispel the idea she has been treated extraordinarily harshly. When initially placed in solitary confinement, she needed permission to do anything in her cell, even walking around to exercise. 

When she requested treatment for her gender dysphoria, the military prison’s initial response was a blanket refusal – despite the fact many civilian prisons accept the idea that trans inmates are entitled to hormones. Manning has attempted suicide several times. She finally received permission to receive gender transition surgery in 2016 after a hunger strike

4. Julian Assange can stop acting like a martyr

Internationally, Manning’s continued incarceration was likely to do more harm than good. She has said she is sorry “for hurting the US”. Her worldwide following has turned her into an icon of US hypocrisy on free speech.

Then there's the fact Wikileaks said its founder Julian Assange would agree to be extradited to the US if Manning was released. Now that Manning is months away from freedom, his excuses for staying in the Equadorian London Embassy to avoid Swedish rape allegations are somewhat feebler.  

As for the President - under whose watch Manning was prosecuted - he may be leaving his office with his legacy in peril, but with one stroke of his pen, he has changed a life. Manning, now 29, could have expected to leave prison in her late 50s. Instead, she'll be free before her 30th birthday. And perhaps the Equadorian ambassador will finally get his room back. 

 

Julia Rampen is the editor of The Staggers, The New Statesman's online rolling politics blog. She was previously deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines.