Russians return to Cyprus, a favorite tax haven
When the Cypriot government forced bank depositors — many of them Russian — to pay their share of an international bailout last spring, Vasilis Zertalis's phone started ringing.
The companies his consultancy helps incorporate on this breezy Mediterranean island — many of them Russian, too — wanted to know how quickly they should get out.
These days, the calls are coming for another reason: Businesses are eager to get in.
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"We are registering twice as many companies than when after the crisis hit," Mr. Zertalis, the head of a big registrar, Prospectacy Limited, said as the sun set over palm trees near his office one recent weekday. "Russians, Germans, Latin Americans, Canadians — they're all coming," he said.
Especially the Russians. And that is even though they were the category of foreign investors that the Cypriot government and its international bailout creditors seemed to single out for punishment last spring, when officials tried to turn the economy here into something more than an offshore tax haven whose banks looked the other way as money of questionable provenance rolled in from abroad.
The banking system has been drastically overhauled. But the tax haven part less so.
"People are still interested because the legal and tax system remains much more stable than in Russia, and they think that the threat of another haircut is remote," said Costas Erotocritou, the vice president of the Russian Business Association here, and a lawyer whose firm specializes in setting up offshore accounts.
The haircut he referred to was the Cypriot government's move last spring to seize vast sums, much of it deposits from wealthy Russians, at the nation's biggest banks. (Because part of the money seized was converted into bank shares, one other anomaly of the bailout was that it turned wealthy Russians into some of the biggest shareholders in Cypriot banks.)
A year after the bailout, Cyprus's economy is still in deep trouble and its banking sector is half its former size. With bank tellers, construction workers and retail employees caught in the fallout, unemployment has jumped to 17.5 percent from 14 percent a year earlier; youth unemployment is above 40 percent.
Banks sharply curbed lending as the level of deposits shrank, and nearly half their outstanding loans are in arrears or default. Private debt has surged to around 300 percent of Cyprus's 17 billion euro economy.
But the one rebounding business is foreign incorporation. Cyprus is once again a favorite tax haven, even after international bailout officials forced the government to nudge the corporate tax rate up to 12.5 percent, from 10 percent. That is still the lowest in the euro zone, on par with Ireland and well below Germany's 29.5 percent and France's 33.3 percent.
The registration of what are mostly shell companies created to shelter income was 1,454 in January alone. That is more than double the nadir of last spring, after the bailout, and even slightly more than were registered in December 2012, before the collapse.
As a result, there are now about 273,000 companies on Cyprus's corporate registry, a staggering figure in a country whose population is only 839,000. "This is not an industry that has died," said Yiorgos Lakkotrypis, Cyprus's commerce and energy minister.
And the Russians have dug in.
"The Russians won't leave because they really don't have any other option," Mr. Zertalis said. "Sure they lost money in the haircut, but when it comes to business they will continue to use the island because returning to Russia is not a better solution for them."
But there is one place where neither the Russians nor any other foreign investors are putting much money: Cypriot banks.
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After deposits were seized, "companies generally won't hold more than 100,000 euros in a Cypriot bank now," said Mr. Erotocritou.
He was referring to the radical move by officials who, for the first time in a euro zone bailout, forced some depositors to take a loss. The authorities last spring liquidated Laiki Bank, Cyprus's second-biggest financial institution, and folded its remains into the largest one, Bank of Cyprus, where the government then confiscated 60 percent of deposits above €100,000 to recapitalize the lender.
Total deposits in Cypriot banks, which were €57 billion last April, dropped to €47 billion by November. They might have fallen further and faster if the government had not tightly controlled withdrawals and foreign transfers at the height of the crisis.
By now those controls have been relaxed to the extent that they hardly affect business operations anymore, enabling companies that are still comfortable keeping their money in a Cypriot bank account to conduct transactions more easily than they did six months ago.
Some controls remain in place for individual accounts, including a €300 daily withdrawal limit and central bank vetting of large cash transfers. But last week the finance ministry said further loosening of the rules was in the offing. That was in response to a review by the International Monetary Fund, which found that Cyprus was fulfilling the fiscal promises it made as part of the bailout.
Even so, many businesses are taking no chances. They are setting up bank accounts entirely outside of the euro zone on the concern that, as in Cyprus, their assets could be seized to pay for banking crises that might blow open in other European countries, Mr. Zertalis, the consultant, said.
"No matter what European leaders say now, all of our clients are saying, 'Let's split our accounts among as many different countries and banks as we can,' " Mr. Zertalis said. "They say 'We won't keep our money in Cyprus, but we don't feel secure about Europe anymore, either.' " He said many had turned to financial institutions in Canada, Switzerland and Asian countries.
Yet while financial agents like Mr. Zertalis are enjoying a bounce-back — he doubled the size of his small staff in the last six months and plans to double it again this year — many other people across the island are casualties of the banking collapse.
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Thousands of small and midsize businesses have been hobbled by the dearth of bank lending, said George Pamboridis, a senior partner at the law firm Pamboridis.
On Nicosia's main shopping street, storefronts once adorned with mannequins, shoes and electronics now sit empty. In Nicosia's main square, retail space formerly occupied by a Laiki Bank branch is vacant, with debris strewn where teller windows once stood.
Outside Nicosia, at a hulking warehouse near green meadows and olive trees, volunteers at the Alkyonides charity rushed on a recent weekday to prepare for the 50 families who had trekked there to receive handouts of food, diapers and used clothing.
Two years ago, the charity typically served around 15 families a month. Today, it is overwhelmed with as many as 1,000 families in need, mostly people who used to work in banking, construction or retailing, said Koulla Demetriou, a volunteer.
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"Many people can't find jobs, and every month it gets worse," Ms. Demetriou said, as she typed up a food ticket for Angeliki, 42, a mother of three who recently lost her job working in security for a bank.
"The main hope now is that the people of Cyprus will care for each other."
In the meantime, the gap between Cypriots out of luck and foreigners with money — especially the Russians — has never been starker.
"Rich Russians love this country," Mr. Erotocritou said. "They will keep coming back."
Efforts to curb Cyprus's allure as a tax haven have failed.