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Russia, Cyprus, and Ukraine
An island nation long friendly to Russian investment mulls the economic fallout
On Saturday, March 6, 2022, a group of Russian naval vessels attempted to dock at the Cypriot port city of Limassol to refuel. Despite having a treaty with Russia permitting the use of Limassol port for this purpose, the Republic of Cyprus forbade the entrance of the Russian warships due to the ongoing Russian invasion of Ukraine.
The gesture was a symbol of the complex relationship between Cyprus and Russia. After all, the island’s second largest city, Limassol, is often nicknamed “Limassolgrad” due to its sizable Russian expatriate population. The 2011 Cypriot census states that 8,653 Russian nationals lived in the Republic of Cyprus at that time of the census (a total of 1.2 million people reside in the country). Because of its connections with Russia, Cyprus has a lot to lose from the conflict on the continent.
Bailouts, haircuts, and “Golden Passports”
Cyprus’ de facto division plays into the Cypriot-Russian relationship as well. Historically, Cyprus has often been supported by Russia geopolitically, as the UK has often placed favor on Turkey, the country that, in the view of the larger international community, has occupied the northern third of the island since 1974 (the area also known as the self-declared, unrecognized state of the “Turkish Republic of Northern Cyprus” recognized by Turkey alone).
Since 2004, the Republic of Cyprus has been a member of the European Union (though it has never joined NATO). In its early years of independence, the Republic of Cyprus tried to pursue a non-aligned status during the Cold War, following the example of Yugoslavia and Egypt. As late as the 1990s, the Cypriot purchase of missile systems from Russia led to an international crisis.
This complicated geopolitical situation is compounded by the fact that, like island nations in the Caribbean, Cyprus is a tax haven that has long been associated with alleged money laundering operations.
Cyprus achieved a new fiscal dependency from Russia in 2013. Following the 2008 crash, Cypriot banks fell into dire straits. During that crisis, a $2.5 billion bailout from Russia helped bridge that gap, but it wasn’t enough.
What ended up rescuing Cyprus’s financial system became known as “the haircut,” a dramatic levee imposed by the troika (the IMF, the European Central Bank, and the European Commission) which basically made Cypriot banks bail themselves out. I’m simplifying for the purposes of this post, but essentially, what happened was that deposits over $100,000 in certain Cypriot banks (such as in Cyprus Popular Bank) were seized and sent to the European Central Bank to raise $7.5 billion, alongside Germany’s $13 billion contribution. (Some of the account holders who lost assets were given shares in the banks as compensation). While this astonishing policy definitely impacted the fortunes of expat Russian oligarchs in Cyprus, it obviously severely affected everyday Cypriots as well.
Following this disaster, Cyprus needed to come up with a new way to generate revenue. Its solutions led to further scandal. The most infamous of these programs was the Cyprus “Citizenship by Investment Program” which offered Cypriot (and therefore EU) citizenship, in exchange for about $2.5 million in real estate investment. This led to at least one thousand Russians, of which included Russian oligarchs, receiving citizenship during this time. Ultimately 2,500 participants ended up a part of the “Golden Passport” program.
A 2020 sting operation by Al Jazeera, in which a reporter posed as a prospective applicant with a criminal record to the Citizenship by Investment Program, revealed Cypriot officials expressing no qualms in allowing the reporter’s participation in the so-called “Golden Passport” program despite the reporter being up-front about his “criminal background.” The blockbuster article and the ensuing “Cyprus Papers” led to the suspension of the investment program in November 2020 due to the revelations that many Golden Passport participants had been associated with criminal activity in their countries of origin.
Cyprus’s response to the Russian invasion of Ukraine
In the month that the Russian invasion began, the majority of the world’s nations have united against Russia. On March 2, 2022, a total of 141 of 193 national delegations in the United Nations General Assembly voted to condemn Russia’s invasion of Ukraine, including Cyprus.
Not only has Cyprus barred Russian ships from its ports, the island has also endorsed the EU sanctions against Russia and the exclusion of Russia from the SWIFT banking system. As a member state, Cyprus must follow the EU’s lead.
At the same time, about 3,000 Ukrainians have arrived in the Republic of Cyprus as displaced persons.
Other financial developments on the island have proved interesting—and instructive. According to the Organized Crime and Corruption Reporting Project:
“The day Russia invaded Ukraine, Russian state-owned VTB Bank, which got slapped by the U.S. with sanctions the same day, transferred its stake in Cyprus’ RCB Bank to the two remaining shareholders, both of which are companies registered in Cyprus.”
Essentially, the move made RCB a completely Cypriot-owned bank, as VTB was one of the banks targeted by the EU’s SWIFT ban.
Meanwhile, the invasion has been politicized on the island in various ways, for different purposes. Protests against the Russian invasion have taken place in Nicosia in Eleftheria Square (see photo at top) and in front of the Russian consulate in Limassol. Reports of “spats” between Ukrainian and Russian students on the island have added to the tension. On March 12, a pro-Putin rally also took place at the Russian Embassy, contributing to the complex situation.
Cyprus also depends heavily on Russians for the island’s tourism industry. As quoted in Politico on March 8, 2022, Cypriot Finance Minister Constantinos Petrides said, “Based on our estimates, we expected to have one million tourists from Ukraine and Russia this year, some 20-25 percent of the tourist market of Cyprus.”
The Russian invasion of Ukraine is just the latest shock to the world economy. The borderland island will certainly feel the effects. Whatever happens next, we can at least be sure of the maxim of the fictional financier Gordon Gekko—“money never sleeps.”
Corrections issued 24 March 2022: A previous version of this post misstated the number of Russian nationals living in the Republic of Cyprus as 40,000. That number has been revised to 8,663 to reflect the 2011 census. An old reference to Cyprus being the third largest investor in Russia has been removed. A reference to an article in The Atlantic about the 2013 crisis has been omitted for clarity. A reference to an article in The Guardian which claimed that the Cypriot GDP would contract 2% due to the loss of Russian tourism has been removed.
This is the twelfth post in The Cyprus Files, a limited-run newsletter series from The Usonian chronicling my Fulbright experiences in Cyprus. You can read all the posts in The Cyprus Files here. Thanks for reading, and don’t forget to subscribe so you don’t miss a (free) dispatch from the island of Aphrodite!