For decades, Cyprus built an economy that courted Russians — Russian tourists, Russian investors, Russian oligarchs.

Now, with Europe severing its connections to a warmongering Russia in the course of just a few days, Cyprus is confronting an existential question: What happens if these Russians suddenly disappear?

In Cyprus, Russian connections are everywhere.

They show up in economic figures. Hundreds of thousands of Russian tourists come through each year — no small number in a nation of just 1.2 million. Over €100 billion in investments came from Russia in 2020 alone — roughly a quarter of all foreign investments coming into Cyprus. 

Other connections are more cultural — and questionable. The Mediterranean island has long served as a banking home for the gray fortunes of Russian investors, from arms dealers to gambling firms and pornographic websites. In the early 1990s, post-Soviet figures like Slobodan Milošević traveled to the island with cash-filled suitcases. 

In the last decade, Cyprus has gone a long way toward untying these knots. But the EU is now forcing it to untie many more, almost instantaneously. 

Cyprus, an EU member, has backed the bloc’s escalating sanctions against Russia in the wake of its Ukraine invasion. Yet officials acknowledge that support comes with a price: The sanctions will corrode portions of the Cypriot economy, even if it has already started to turn away from Russian money.

Banking is one area likely to be affected. At least five people on the EU’s sanctions list have assets in Cypriot banks, according to bank officials. Luxury real estate is another — dozens of high-end apartments will likely now sit unsold. Tourism will be the most affected.

“The Cypriot economy is disproportionately affected compared to other countries due to the structure of the Cypriot economy and its reliance on Russian tourists,” Cypriot Finance Minister Constantinos Petrides told POLITICO.

“Based on our estimates, we expected to have one million tourists from Ukraine and Russia this year, some 20-25 percent of the tourist market of Cyprus,” Petrides said. “Τhe key is the duration of this crisis. If this ends in a month, we will come out unscathed. If it lasts more, no economy will manage to come out clean.”

Walking the line

In the days after Moscow sent troops streaming into Ukraine, the EU, U.K. and U.S. all moved with historic speed to cripple the Russian economy, block Russian banks from international markets and bar Russian airplanes from their skies. They also drew up plans to flood Ukraine with humanitarian assistance and, eventually, even some weapons. 

Cyprus generally supported these plans. But there were signs of hesitation along the way.

Cypriot authorities were initially against banning major Russian banks from the SWIFT international payment network, a key driver of global business, before later coming around. And while Cyprus agreed to close its airspace to Russian planes, it added the caveat that it might reconsider if Turkey refused to follow suit. And until an announcement Tuesday, Cyprus was the only EU country that had not contributed any emergency assistance to Ukraine.

Meanwhile, at least some Russian executives were looking to use Cyprus to skirt the looming sanctions. The Russian state-owned VTB Bank quietly transferred all its shares in the Cypriot RCB bank to Cypriot shareholders, making it a 100 percent Cypriot-owned bank. The new ownership structure is now awaiting signoff from European authorities. VTB is one of the banks the EU has kicked out of SWIFT.

Looking at it through an economic lens, the actions can be easily explained.

In Cyprus, the service industry, including tourism, accounts for more than 80 percent of the economy. And Russians have long kept the service industry humming. 

Cypriot authorities are now trying to make up for the expected losses, reaching out to other markets. But they acknowledge it will be hard, especially after the pandemic already damaged the tourism industry. 

“We had a very good flow of bookings from Russia until the airspace closure was announced. Then everything froze,” said Charis Loizides, president of the Cyprus Hotels Association.

“We are in touch with the tour operators from Russia and they are disappointed,” he added. “We managed to survive the last two years under very difficult circumstances, and we hoped 2022 would bring us back to normal.”

Predictably, Russia’s Ambassador to Cyprus Stanislav Osadchiy brought a more menacing tone to the situation.

“Where will Cyprus get its Russian tourists from? They won’t come,” he told a Cypriot TV station. “Where will they go — to Turkey, is that what you want? For them to go spend their money over there? Summer is coming up, you’ve closed your airspace — you shot yourselves in the foot.”

Loizides said that even if Cyprus reopened its airspace to Russian planes, it would make little difference. The Russian ruble is in freefall, and broader restrictions and uncertainty are sure to keep away many Russians.

It’s a reality that will hit hard in coastal cities like Limassol and Famagusta, where Russian tourists have historically flocked. Russian tourists are known locally as the biggest spenders, not like British tourists, who, the local saying goes, “only buy beer, burgers and condoms.”

As a result, Cypriot support for the Russian sanctions has not gone over well with everyone.

“It is as if we want to punish Russia and we are punishing ourselves,” said Panicos Demetriades, a former central banker of the island.

“We are also punishing the Russians who need to be separated from the dictator of their country,” added Demetriades, also an emeritus professor at Leicester University. “Τhere are thousands of Russians who can’t stand Putin’s Russia and want to leave and we isolate them.”

Deep ties

Since the fall of the Soviet Union, Cyprus has been inextricably linked with Russia.

“There was a conscious decision 20-30 years ago when the Soviet Union had collapsed to tie the Republic of Cyprus to Russia with all the risks that this involved, which one could have easily recognized only by reading news about the political and social situation in Russia,” said Stelios Orphanides, a Cypriot investigative journalist who works for the Organized Crime and Corruption Reporting Project.

In some ways, those ties became stronger after 2003, when Russian President Vladimir Putin started to curtail the independence of Russia’s oligarchs. Numerous prominent Russian executives decided to shift their finances out of the country. One of their preferred places to park funds? Cyprus.

In 2013, years of handing out overly favorable loans boomeranged back on Cypriot banks, causing a financial crisis. Many Russians with large local deposits were given ownership shares in Cypriot banks in exchange for their losses. Ironically, the plan meant Russians became major stakeholders in Cypriot banks after the crisis abated.

However, banks also started to enforce anti-money laundering rules more rigorously after the crisis. And in 2018, U.S. regulators started to aggressively go after illicit Russian money circulating internationally. As part of the initiative, the Central Bank of Cyprus shut down thousands of shell companies, presaging a broader shift in the island’s business model.

In 2020, Cyprus suspended the controversial “Golden Visa” scheme, which gave foreigners a passport in exchange for massive investment in the country. The scheme, established in 2013, netted Cyprus some €7 billion — and scored passports for many Russian oligarchs. 

Now, with the new sanctions, a group of accountants, lawyers and agents still working with Russians are likely to lose business. But authorities insist this won’t spill over into the broader economy. 

Specifically, Petrides, the Cypriot finance minister, argued the country’s banks are safe. 

“There is a surrounding atmosphere due to the past, but the Cypriot economy is no longer so dependent on Russia. There are other countries that have bigger problems,” he said.

“The sanctions concerning the EU banking system do not affect Cyprus to a large extent, as Cyprus’ banking system has no exposure to Russia,” Petrides added. “The banking system maintains one of the highest levels of capital adequacy and liquidity ratios. Τhe Central Bank of Cyprus has no reserves held by the Russian Central Bank abroad.”

Officials also noted that around a dozen businesses from Russia and Ukraine are looking to relocate their operations out of the conflict zone and could benefit from the quick bureaucratic process in Cyprus. Additionally, around 1,000 people have recently requested a business visa in Cyprus, they said.

Bank officials also argued Cyprus has already learned to work around financial penalties on Russians. They point out that many of the Russians who own large shares of Cypriot banks were sanctioned by the U.S. and U.K. in 2018.

Still, Russian deposits in Cyprus are estimated at €1 billion. And Demetriades, the former central banker, pointed out that bank liquidity depends on investors trusting the system — something that can change swiftly.

“Cyprus is a small country and is known for its past relationship with Russia and the oligarchs, thus it is very difficult to support itself and could become a victim of sanctions,” said Demetriades. “Because of old sins, Cyprus is in the gray list and others are always suspicious.”