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Europe

Is Russia’s love affair with Cyprus about to end?

© AFP

Text by Nathalie SAVARICAS

Latest update : 2013-03-27

Ever since the collapse of the Soviet Union, wealthy Russians have looked to Cyprus as a safe haven for their capital, representing at least a third of the island’s wealth. But fears are growing that Russian investors may soon be looking elsewhere.

The tiny island state of Cyprus is known not only for its sun, sea and welcoming locals, but also as a prime destination for Russian investors. At least up until this week.

Ever since the collapse of the Soviet bloc in the early 1990s, wealthy Russians have flocked to the Mediterranean island in search of a safe haven for their capital.

Their assets are thought to represent at least a third of the island’s wealth.

Today those assets are the main target of an EU-backed rescue deal that will impose an estimated 30% haircut on all deposits over €100,000 at the country’s largest bank - the Bank of Cyprus.

'Economic Armageddon'

Dismay and fear on the streets of Nicosia after the deal

Eleni Constantinou, a Russian lawyer who has worked in the Cypriot capital of Nicosia for the past 20 years, describes the bailout deal “as an economic Armageddon for the country”.

“My clients are honest people who come from middle-class families, they have nothing to do with the accusations of money-laundering aimed at Russian investors,” she says, referring to frequent allegations that Russian oligarchs have deposited billions of roubles in illegal funds in the island’s banks.

Stephania, who runs a small market near Nicosia’s Eleftheria’s Square, says she believes Cypriots are being punished too harshly by Europe for their Russian ties.

“We expected much better treatment from our European family, some room to breathe and correct our mistakes,” she said. “Whatever we do now, we have a difficult path ahead."

Her daughter, a banker, says the consequences of the bailout deal will be felt across the Cypriot economy, because so many jobs are linked to the banking sector.

Benefits for Europe?

According to Yuri Palyev, the head of a Russian business association in Limassol, Cyprus’s second-largest city, the stringent terms of the rescue deal are likely to benefit other European countries as cash deposits in Cyprus flee to banks in mainland Europe.

“Not only is the deal dangerous and unjustified; it is also unfair competition,” he said.

Like Palyev, many Cypriots are concerned fellow EU members, such as Luxembourg or Malta, stand to benefit from Cyprus’s woes.

But Palyev, whose association includes Lukoil, Russia’s second-largest oil company, says it is still too early to know just how many Russian investors will flee the island.

“Some companies might consider the risk unacceptable and leave the island, but I also expect a substantial number of firms to stay behind – at least until they find out more about the new capital restrictions on banks,” he said.

Youri Soria, a shopkeepers’ representative in Cyprus, is more pessimistic. “Russians will try to take all their capital and leave Cyprus as soon as possible,” he says.

Should that happen, the Open Europe think tank has warned that Cyprus could turn into a “zombie economy” – reliant on funding from its European partners and the European Central Bank, but with little hope for growth.
 

Date created : 2013-03-27

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