During the last decade, Cyprus seems to be involved in a balancing act, trying to mediate its relations with both Russia and the US without isolating either party (or for fear of being isolated by either party). Cyprus has been accused of trying to have its cake and eat it too; but is this true?
To what extent are the claims true, and what are the consequences of trying to stay everyone’s friend?
Cyprus has always been a favourable destination for Russian businessmen. CIS countries have always advocated the island’s advantageous settings in essence: its low tax rate and historically loose supervisory framework.
Russians quickly started to see Cyprus not just as a place to do business and store cash; but finally, as a new paradise both for vacationing and for permanent relocation. As a result of this new business dynamic, the entire structure of the country’s economy shifted. The services sector kept growing, with more Accountants and Solicitors qualifying than ever before in recent years.
For more information on the benefits of Cyprus as a jurisdiction, click here.
If it Seems to Good to be True, it Probably is
With this new-found economic invigoration, the real estate sector also began seeing the benefit of Russian investment. Seemingly, business was booming in every sector in Cyprus. However unsurprisingly, issues regarding reputability arose. Cyprus soon joined the tax haven paradise club, which undoubtedly hurt its credibility as a reliable jurisdiction.
Over the last five years, the Cyprus government and many providers in the professional services sector have launched collective efforts in order to redeem the country’s reputation, and thus remove directly from the source of evil: the cash. Banks and lenders had no choice but to follow suit, suspending any accounts that could be directly and indirectly related to money laundering.
Dependence on the US Dollar
Most Cyprus lenders only have one international bank to correspond for transactions in USD. If any of these banks were to leave their partnership, then the country’s banking system will have to find entirely new routes to be connected to the global economy.
Cyprus lenders and the Central Bank of Cyprus understand the seriousness of getting on the wrong side of FATCA. This is the reason they have started trying to convince international regulators and banks that the Cypriot banking system is making huge progress to this end.
This effort coincides with the US authorities being extra sensitive and reactive to the business relationships countries have with known Russian HNWIs, especially ones on the the US Department Treasury’s Offices sanction lists.
Cyprus is now trying to balance its relations with the US and Russia, while at the same time being a member of the EU: a political tango that if not handled in the correct way could have consequences for the island’s reputation as a dependable business hub.