Cyprus Sees Russia as a Lifeline During Crisis

LIMASSOL, Cyprus -- Along the island's main four-lane highway, billboards invite Russians to purchase land and tourist packages. Small groceries with Russian goods dot the main boulevard of Limassol, the country's second-largest city, and in the seaside village of Paphos waiters take their customers' orders in Russian.

Cyprus, an island that until 1960 was a British colony, is Russian country now.

"Russia controls more of Cyprus than it could ever control of any other European Union country" through its business presence, Stelios Platis, managing director of financial services advisory MAP S.Platis, said in his office overlooking Limassol. "Now Russia is the lifeline of Cyprus in the midst of this crisis."

The island has long been a haven for Russian business, with its low corporate taxes having attracted investors in the 1998 crisis. Now the government and local businesses are pushing hard to attract Russian cash -- this time through tourism.

Boros Georgiades, head of the Cyprus Tourism Organization, said he was hoping that an influx of Russians would compensate for falling numbers of British tourists, who account for more than half of the island's visitors.

The organization says it expects as much as 25 percent fewer Britons this year and consequently a 10 percent drop in visitors overall. But the organization has already substantially increased its Russian advertising budget, Georgiades said, and it hopes to see modest growth this year after a 24 percent jump in Russian tourists in 2008. "In real numbers, having one Russian is like having 2 1/2 Britons," he said. "Even though we are losing a lot of British numbers, we believe even the small number of Russians we might gain in 2009 will help cover a lot of these losses."

The average Russian tourist to the island spends 1,000 euros ($1,300) per trip, compared with 400 euros per Briton. "Generally speaking, we look at the Russian market as the future for Cyprus," Georgiades said.

During the Soviet period, Cypriots had the opportunity to go study in the Soviet Union, and a number of prominent politicians speak Russian, including President Dimitris Christofias and the mayors of both Limassol and the capital, Nicosia. Cyprus became a sanctuary for Russian businesses during the country's 1998 economic collapse because of its low corporate tax rate, which was less than 5 percent at the time.

Even after the island adopted tougher measures against money laundering when it joined the EU in 2004, Russia has maintained its position as one of the largest foreign investors in Cyprus.

"Cyprus has proven during this crisis to be a safe haven for Russian money, which is very important. We have seen money being shifted in from Switzerland to Cyprus for safety reasons," Platis said.

And while the corporate tax rate is now 10 percent, Platis said three of the five foreign investment firms he helped register in Cyprus last year were Russian. In Limassol, an estimated 10,000 to 15,000 Russians live among the population of 230,000, including nonpermanent residents.

And now, Cyprus is even creating a financial presence in Russia. In November, Bank of Cyprus acquired an 80 percent stake in Russia's Uniastrum Bank, making it the first Greek or Cypriot lender to make so large an investment in the Russian banking sector. Analysts said the move was beneficial for both the Bank of Cyprus and the Cypriot economy, which is beginning to slow.

"The Cyprus economy has been affected by the crisis but not to the extent as other EU countries," said Maria Sambarloukou, manager of planning and research at Bank of Cyprus. "We will have an economic slowdown but not a recession. Economic growth was 3.6 percent for 2008, and we are expecting 2 percent for 2009."

Sambarloukou said that while Cyprus' financial sector still benefited from its low corporate tax rate -- the lowest in the EU -- demand in the real estate and tourism sectors was dropping quickly.

One advantage Cyprus offers Russians is a relaxed visa policy, a perk not lost on Andrei, a self-described "honest businessman" returning from a two-day trip to Cyprus. Andrei, who declined to give his last name, noted that Cyprus's year-round warm weather was a draw, as was the "calm and comfortable atmosphere" for doing business there. He also said he had noticed an increase in middle class Russians traveling to Cyprus. Showing off his multientry visa, valid for a period of three years, Andrei said he travels to Cyprus several times a year and scoffed at the idea he might change the frequency of his trips because of the crisis. "It doesn't depend on the crisis. It depends on whether I feel that it's a necessity," he said, sitting in the first-class cabin of his Aeroflot flight back to Moscow. "The crisis isn't as scary as everyone makes it out to be. On one level, it's just psychological."