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Back-to-back meetings, an air of discernible panic, policymakers engaged in frantic damage limitation and Cyprus once again in the eye of a Russia-related storm. It’s been an unusually fraught fortnight for the Mediterranean island’s newly installed president, arduous in ways that Nikos Christodoulides might never have imagined when he assumed office on 1 March.
First came the news that 13 Cypriot entities and individuals had been placed on Anglo-American sanctions lists for enabling Russian oligarchs. The measures were aimed at dismantling the financial networks of Roman Abramovich and Alisher Usmanov, both close allies of Vladimir Putin. Overnight, bank accounts and other assets belonging to their alleged “financial fixers” were frozen.
The Foreign Office acted after publication by the Guardian of the Oligarch files, a series of reports that raised concerns about sanctions enforcement in Cyprus.
But the US and UK sanctions also signalled something else: the realisation that what was at stake was nothing less than “Cyprus’ name as a reliable, financial and business centre”, in the words of the Greek Cypriot government spokesperson. A decade after the EU’s most easterly member narrowly averted economic collapse in a banking crisis that exposed the extent of the tiny island’s addiction to Russian money, its financial integrity appeared once again to be on the line.
“We must in no way allow or enable anyone to tarnish the name of our country,” Christodoulides told reporters earlier this week, saying he had asked the UK and US to provide further evidence to allow local authorities to investigate the violations.
By Wednesday a national sanctions implementation unit had been announced, and the government spokesperson, Konstantinos Letymbiotis, reiterated that the “nation’s credibility must be safeguarded” and that “no deviation from EU sanctions will be tolerated”. The new unit is to be established with technical support from the UK.
By Friday as rumours swirled of yet more Cypriots and Cyprus-based companies being added to sanctions lists drawn up by London and Washington to further penalise Russia for its war in Ukraine, the island’s largest lender, the Bank of Cyprus, confirmed that about 10,000 accounts belonging to 4,000 Russian depositors would be shut down. In a statement it revealed that affected account holders had been informed en masse about the decision.
“The Bank of Cyprus has notified 4,000 clients that have a Russian passport and are not resident in an EU country that their accounts will be closed,” it said citing customer acceptance policy and relevant risk appetite. “The action follows the suspension of Russia’s membership by the Financial Action Task Force and the designation of Russia as a non-cooperative tax jurisdiction by the EU.”
The reserves in the accounts amounted to less than 0.5% of the bank’s total deposits, it said.
The closures are regarded as going “above and beyond” restrictions on Russian bank holders elsewhere in the EU where depositors have had their transfers capped – with transactions over €100,000 (£88,000) banned – but have not been forced to close down accounts. Insiders insisted the lender’s decision predated the latest round of US and UK sanctions. But privately they also acknowledged “it did not have to be taken”. The Russians were told they have two months – a notice period described as standard bank procedure – to make alternative arrangements.
Fears of the bank being perceived as failing to comply with sanctions – and possibly ending up on the US Department of the Treasury’s specially designated nationals and blocked persons list – had undoubtedly played a role, Nicosia-based analysts said.
“If the US pulls a bank’s ability to transact in dollars, that bank cannot survive,” said Fiona Mullen, the director of Sapienta Economics, a consultancy based in the island’s capital. “I have been saying for a long time that the Republic of Cyprus needs to treat its reputation for international probity as an existential issue just as it does the Cyprus problem”, she added, referring to negotiations aimed at reuniting Europe’s only divided state. Peace talks with the breakaway Turkish Republic of Northern Cyprus have been frozen since 2017. “I think the penny has finally dropped,” she said.
Few countries have so masterfully exploited geopolitical turmoil as Cyprus. In the wake of Turkey’s 1974 invasion following a coup aimed at union with Greece, the country’s shattered economy recovered spectacularly after thousands of Lebanese, fleeing civil war, sought solace in the internationally recognised south. During the Yugoslav wars, the island, by then an established tax haven – a status lost four years ago when the corporate tax rate was raised to 12.5% – became the go-to place for the Milošević regime to launder money.
After the collapse of the Soviet Union in 1991 the first Russian oligarchs arrived. With its reputation for low taxes and light-touch regulation a thriving service industry was created with the express purpose of luring overseas investors and companies affiliated with Russia. The two Cypriots placed under sanctions by the UK last week headed a law office and accountancy firm – part of the network of well-connected businesses that have long facilitated oligarchs.
Abramovich, like others who would go on to amass fortunes soon after the USSR’s chaotic breakup, was among the billionaires who chose to park funds on the island, often hiding assets through a labyrinthine system of brass-plate companies and locally managed trusts. More than 1,000 Russians subsequently gained Cypriot nationality under a controversial “golden passport” scheme, instituted in 2013, permitting citizenship in return for real estate investments of €2m or more in the country. The programme, which resulted in extravagant real estate projects appearing in Limassol, the coastal city that is home to about 60,000 Russians, was credited with bringing in an estimated €7bn before being revoked in 2020 after outraged EU officials intervened. The scheme helped earn the island the moniker of “Moscow on the Med”. But in recent years Cyprus has also sought to distance itself from its dependency on Russian money under pressure from US regulators intent on not only minimising Russian investment but the country’s influence in the region. Bank accounts belonging to Russians have declined precipitously, and only 2.2% of all bank deposits are held by Russians, a far cry from the tens of billions parked in Cypriot bank accounts before the 2013 financial crisis.
Attending this week’s emergency meeting at the presidential palace, the island’s central bank governor, Constantinos Herodotou, said Cypriot authorities had not only closed 123,000 suspicious bank accounts but about 43,000 shell companies.
“Cyprus was addicted to Russian money before the Americans very efficiently began weaning them off it,” said Prof Hubert Faustmann who teaches history and political science at the University of Nicosia. “They really have cleaned up their act and what we are seeing is the very last act in a story that has gone on for decades.”
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