Global Policy Forum

By Jeremy Page

He's got the Mercedes S-Class, the apartment in Paris and the kids at private school in Switzerland -- all the trappings of the new Russian rich. But Igor also has a headache common to Russia's well-heeled: what to do with the rest of his money?

An offshore company in Cyprus used to be the default option for Russians keen to avoid taxes and secrete their share of an estimated $200 billion spirited out of Russia since the collapse of the Soviet Union in 1991.But the Mediterranean island has cleaned up its offshore sector to improve its eligibility for the European Union, which it hopes to join in 2004. For the same reason, it will end visa-free travel for Russians this year."Cyprus used to be the best place to register my business," said Igor, tucking into a chunk of fatty tuna in a fashionable Moscow sushi restaurant."Now it is not so attractive for me -- the tax, the visa situation," said the businessman, who asked to be identified only by his first name. "Plus, I think the Russian authorities know everything that is going on there."

Russian business poured into Cyprus in the 1990s attracted by a secure banking system, a double tax treaty with Moscow, a flat tax of 4.25 percent on offshore firms, and a lax regulatory environment, analysts say.It was a popular base for shell companies to buy state assets at way below market prices and then siphon off hard currency profits during the fire sale privatisations of 1995-6.Until recently, most of the island's 14,000 or so offshore companies were Russian -- the majority "brass plate" firms with no physical operations there and opaque ownership structures.Cyprus has also become one of the largest foreign investors in Russia, due mainly to Russian money re-entering the country.

NERVES RATTLED

Igor followed the crowd, setting up a trading company and buying a villa on the island in the early 1990s. But he said his nerves were rattled earlier this year by a story in the influential Russian newspaper, Kommersant. It quoted the head of Russia's Federal Securities Commission (FSC), the country's stock market watchdog, as saying the central bank of Cyprus was fully disclosing to the FSC the beneficial owners of Russian companies registered there. In other words, the Russian authorities knew exactly who controlled money passing through the island, the paper said. The Cypriot central bank and the FSC quickly issued denials. "No 'panic' whatsoever has been created among Russian businessmen operating from Cyprus and, certainly, not a single Russian businessman has left Cyprus 'in a hurry' as Kommersant is wishing or imagining or inventing to be happening," said a statement on the central bank's Web site.

But among the wary Russian business elite, some felt there was no smoke without fire. "I was inundated with calls from Russian businessmen asking me if it was true," said a Cypriot central bank official, who asked not to be identified. "There isn't a kernel of truth in it. These articles are politically motivated. There are machinations between the Russian press and the government and we're the victims." Some analysts see it as part of a government campaign to scare Russians into repatriating funds stashed overseas. "The basic issue is that $200 billion was taken out of the country illegally -- a lot through Cyprus," said Chris Weafer, chief strategist at Alfa-Bank, Russia's largest private bank. "So if the tax police or the chief prosecutor decide to go after you, if they can get this information from Cyprus, that's what they'd use."

CLEANING UP

Without doubt, Cyprus has done well out of Russian business. Russian firms have hired lawyers and accountants, bought and rented offices and villas and invested in the stock market. An estimated 50,000 Russians live on the island and some 130,000 Russian tourists visited last year alone. But Cyprus has had to fend off persistent accusations of being a tax haven and money-laundering centre. In 2001, it was the focus of an investigation into billions of dollars that went missing from Yugoslavia under former president Slobodan Milosevic. Cypriot authorities denied any wrongdoing. After the September 11, 2001 attacks on the United States, Cyprus angrily denied an accusation by an ex-CIA chief that it was reluctant to cooperate in an investigation into the wealth of Osama bin Laden. The U.S. government said his views did not reflect policy. But Cyprus became keener than ever to clean up its image.

"Cyprus has decided to go the route of becoming a respectable, reputable business centre," said Elias Neocleous, a Cypriot lawyer specialising in Russian offshore business. "We only want to attract legitimate, respectable clients." In January, Cyprus introduced a uniform corporate tax rate of 10 percent for foreign and local firms. The island now boasts one of the world's toughest anti-money laundering laws. It has been excluded from an international money-laundering black list. And it will introduce visas for Russian citizens in October this year, the embassy in Moscow said. Cypriot officials say the island's low taxes, skilled human resources and sophisticated service sector will still attract Russian firms engaged in legitimate business.

But that is little comfort for those, like Igor, who like to operate in a slightly greyer area. "I think I'll find a new place," he said with a shrug, swigging back the last of his sake. "But it is harder these days. Maybe it is time to start putting money back into Russia."

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