Russian hot money is everywhere in Cypriot town of 'Limassolgrad'
IN THE seaside Cypriot town of Limassol, an image of the Kremlin's domes adorns the doors of a local mini-market. Ferraris stand ready for hire and shops selling mink coats line streets drenched in warm Mediterranean sunshine.
Home to over 30,000 Russians who began flocking to Cyprus after the Soviet Union's collapse and catering to many more tourists each year, locals jokingly refer to the town, complete with Russian signs and schools, as "Limassolgrad".
Located in the Greek speaking Cypriot south, Limassol epitomises the love affair between two Orthodox Christian nations that can be traced back to Byzantine times and is now underpinned by deep financial ties.
But those ties are coming under unprecedented scrutiny by European policymakers who question whether Cyprus is a hub for Russian money laundering, while pressing Moscow to extend its €2.5bn loan to help the island avoid bankruptcy.
Eye-popping amounts of cash wash between the two countries every year – several times Cyprus's €18bn national income – as Russians take advantage of a treaty that lets them pay the island's low tax rates but also raises suspicions among some EU states that complex transfers are used to launder money that was illegally earned or on which more tax should be paid.
Cyprus – which will elect a president in a run-off vote on Sunday – is still waiting on EU aid eight months after asking for help, with a bailout held up partly on German fears that the eurozone could inadvertently be bailing out wealthy Russians who have parked their money in financial institutions in Cyprus.
Eurozone finance ministers commissioned a private report this month into the island's anti-money laundering safeguards but the suggestion of illicit money flowing through Cyprus provokes reactions ranging from perplexity to fury in Limassol, where some think the EU is looking for excuses not to help out.
Allegations of money laundering are hotly denied by Cyprus, which says it got top marks in assessments by independent review bodies, such as Moneyval, an arm of the Council of Europe.
Cyprus had dismissed the idea, aired in international media, that losses may be imposed on banks as a condition for EU aid. But Anreas Neocleous, a top Cypriot lawyer who has been involved in Russian deals since setting up a Moscow office in 1991, says some Russians saw a "red lamp" and began pulling money out, although others saw no sign of an exodus.
Like many on the island, Neocleous accuses fellow Europeans of hypocrisy, saying Europe and the US take a much bigger share of Russian business than Cyprus.
"Russian business is a very big cake. Cyprus takes out of this cake . . . nothing," he said. "It's not even sitting at the table – it takes some rubbish that falls on the ground."
European concerns focus on why tiny Cyprus is such a big magnet for Russian money.
Russian banks held $9bn (€7bn) of their deposits abroad in Cyprus at the end of 2011. Over the last five years Cypriot entities accounted for $6bn, or 23pc, of foreign direct investment into Russia, while 30pc of Russian investment abroad was in Cyprus, according to Russian central bank data.
That means Cyprus – which accounted for 28pc of the FDI stock in Russia at the end of 2011 – astonishingly invests five times the size of its economy in Russia, according to central bank data cited this month in a report by Morgan Stanley.
In reality, the links are more virtual than real, and the ultimate owner of most of Russian FDI tends to be Russian since many Russian owners simply structure firms as a Cypriot parent owning a Russian unit, Morgan Stanley said.
In other words, few Russians are investing in physical assets in Cyprus – beyond some villas and yachts – and few Cypriots are investing heavily in Russia. The figures simply reflect the flow of cash from Russia to Cyprus and back again.
Both sides say there is nothing dubious about it. The use of such vehicles is driven by factors like a 1998 Russia-Cyprus tax treaty that lets Russians pay a low 5pc rate on dividends, the former British colony's use of English law, a reputation for "light touch" regulation and Russian political risk.
By parking assets on the island, Russians still wary of the state after 70 years of communism can also hope to shield their savings from the risk of future confiscation, analysts say.
But complex transfers cloud the origins and ownership of funds in a way familiar to money laundering investigators.
Just last week, the head of Russia's central bank complained that $49bn was siphoned abroad last year – 2.5pc of the national income – as a result of illegal transactions ranging from bribes and drug deals to tax evasion.
The influence of Russian money is plainly visible in Limassol, where large billboards in Russian advertise seaview apartments and villas with infinity pools.
At his fur shop near the seafront where minks and fox fur coats retail for up to €3,000, Andreas Charalambous proudly describes his clientele: "One hundred per cent Russian."
Farther down the road, a car rental agency two years ago began offering Ferraris and Porsches for €1,500 a day, mainly to Russian tourists, whose numbers have more than doubled from three years ago to over 474,000 last year thanks to an online visa process.
Many of the swanky yachts docked at Limassol's marina are owned by Russians, who have also snapped up luxury seaview condos in high-rises where prices start at over €1m.
Gated communities – a novelty for a country with low crime levels – have also begun popping up around town, many with private pools and central heating – all unusual for Cypriots.