Sanctions imposed against Russia by the U.S. and the European Union, in response to the annexation of Crimea, “have had a limited impact on Cyprus so far, but as long as uncertainty continues, many business decisions will continue to be put off,” Elias Neocleous, vice chairman of legal firm Andreas Neocleous & Co LLC, said in an interview in Limassol, home to Cyprus’s largest Russian expatriate community. The firm’s 77 lawyers and six tax consultants represent many Russian and Ukrainian clients, he said.
Cyprus in March last year got a 10-billion euro ($13.8 billion) international lifeline to avoid a financial collapse in return for measures including forced losses for uninsured depositors at the country’s two largest banks and capital controls. The prospect of further sanctions on Russia could threaten the Cypriot services industry in what has become the conduit of choice for Russians moving money into and out of their country.
EU foreign ministers, meeting in Luxembourg on April 14, said the bloc should be prepared to impose a third round of sanctions, including economic measures. Ukraine has moved against separatists in its eastern Donetsk region after identifying elements of Russian special forces. Russian Foreign Minister Sergei Lavrov has denied his nation is involved.
Sanctions against Russia would “destroy” Cyprus’s economy, Cypriot Foreign Minister Ioannis Kasoulides told Die Welt newspaper in an interview published today. “There are indeed very strong economic ties between Cyprus and Russia,” and “irrespective of what the measures look like, we shouldn’t be hurt by them ourselves.”
Cyprus’s offshore reputation has largely survived a financial rescue that led to the seizure of bank deposits for the first time in the euro area as well as the imposition of capital controls, Andreas K. Christofides, managing director of KPMG Cyprus, said in an interview in Nicosia.
Cyprus is technically the biggest foreign investor in Russia with $69 billion accumulated through the end of last year, while the island is the second-biggest destination for Russian investment at $33 billion, according to the Moscow-based Federal Statistics Service. A double-tax avoidance treaty and low tax rates have boosted money inflows from Russia. The Cyprus Tourist Organization expects Russian visitors to increase 23 percent to 750,000 this year, after a 28 percent increase last year.
The services industry and tourism are the two main pillars of Cyprus’s economy and are of even more importance now as banking will take time to recover from the so-called bail-in, George Vassiliou, a former Cyprus president, said in an interview in Nicosia. Legal and accounting activities’ turnover rose 5.9 percent in the fourth quarter, a second quarterly increase, according to the country’s statistics service.
Cyprus’s economy, the third smallest in the 18-member euro area, shrank 5.4 percent last year under the weight of austerity measures and the restructuring of the financial industry. Professional services contracted less, or 4.6 percent, after average growth of about 5.8 percent in the previous three years. Economic output will fall 4.8 percent in 2014, according to a Feb. 25 estimate by the European Commission.
The Russia-Ukraine crisis will delay Cyprus’s return to growth, Theodore Panayotou, professor of economics and director of the Cyprus International Institute of Management said by phone. “This crisis will reduce tourism and investments in Cyprus expected from Ukraine and Russia,” he said.
“Russia and many other countries would like to see that business returning, but the reality is that business goes where its interest is best served,” said Vassiliou.