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Russians Seek New Tax Havens as South-Cyprus Cleans up
By Fanos Droushiotis

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?

Any offshore company in South-Cyprus used to be the default option for Russians that were keen to avoid taxes. They also had to 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 joined in 2004. For the same reason, it will end visa-free travel for Russians this year. "South-Cyprus used to be the best place to register my business," said Igor, tucking into a chunk of fatty tuna in a fashionable Nicosia fish-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 South-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. It was a popular base for shell companies to buy state assets at prices well below the average market status. Then they would siphon off hard currency profits during the privatesations of 1995-6.Until recently; most of the island's 14,000 or so offshore companies were Russian. The majority of them consisted of so- called "brass plate" firms with no physical operations there and opaque ownership structures, South-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 South-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 South-Cyprus and, certainly, not a single Russian businessman has left South-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.
CLEANING UP
Without doubt, South-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 South-Cyprus has had to fend off persistent accusations of being a tax haven and money-laundering center. 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, South-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 South-Cyprus became keener than ever to clean up its image.
But that is little comfort for those, like Igor, who like to operate in a slightly grayer 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."
Wouldn’t you?