Being a warm and sunny island, Cyprus is a popular destination for Russian sun worshipper. Yet, it is not only the favorable climate, that makes Cyprus so attractive for Russian citizens – it has mainly to do with mundane mammon.

The Federal Intelligence Service of Germany (BND) has reported that Russians have deposited some 26bn Dollars on Cypriot banks – which is more than the annual GDP of the country. In addition, over 40,000 firms are officially registered on this small island, most of them serving as notorious “letterbox companies”. Over 2,000 of these are Russian provenance – officially.

This has less to do with the “religious ties” between the large orthodox communities in both countries; the low corporate tax of 10% for businesses, making Cyprus a European tax heaven, can be seen as a more reasonable explanation. It is stunning: Eight out of ten Russian firms with a profit greater than 1bn Dollar have one of their main offices in Cyprus.
Besides this legal activity of tax minimization by Russian companies, there is also a sinister side of it: Money laundering. Even though the Cypriot government contradicts all accusations, the report of the BND arouse suspicion that Oligarchs use the small island to wash their money and transfer it back and forth to Russia and the EU.

As if that would not cause enough annoyance for the European states, Cyprus has officially requested a credit line of 17,5bn Euro from the EU and IMF to prevent the fiscal collapse of the country. Cypriot banks have massively invested in Greek Sovereign bonds, and were hardly hit by the spiraling fall in value of these bonds due to the debt crisis of the Hellenic state. Financial Services make out 70% of the Cypriot economy. A default of this sector would have severest repercussions for the state. That total assets of Cyprian banks are nine times higher than the GDP of the country does not really alleviate the situation, either.

The problem is: Granting the credit would help Russian investors at least as much as Cyprus itself, since it mainly ensures the stability of Cyprian banks – which largely administers Russian capital. Taking into account the accusations of money laundering, it may not be that easy to explain this to the European electorate. Behind the scene, negotiations about possible rescue plans run at full speed – the questionable economic model of Cyprus should be a paramount item on the agenda.

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