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Round-tripping of Russian foreign investment via Cyprus

The design of the recent bailout package for Cyprus preserves the offshore banking status that is used by Russian depositors and round-trip investors. Is it worth it?
By Olena Havrylchyk, Svetlana Ledyaeva
 Post, March 18, 2013

The bailout package for Cyprus, announced on 16 of March 2013, includes a tax on depositors: deposits over €100,000 will be taxed by a levy of 9.9%, while smaller deposits will bear the tax of 6.75%. The latter tax is surprising because these deposits are insured by deposit insurance and it is not clear why they should carry the burden of the bankrupt banking system. According to the Central Bank of Cyprus, if only large deposits were taxed, the tax rate would amount to 15.5%, a rate that would probably destroy the off-shore banking activity. The decision to spread the burden between (mostly foreign) large depositors and (mostly domestic) small depositors appears to be an attempt to preserve Cyprus' viability as an offshore banking centre. The banking sector of this small island is eight times the GDP and, as Cypriot President Nicos Anastasiades put it in his official statement, this plan will save "8,000 jobs in the banking sector and thousands of others which would be lost as a corollary of not maintaining the operations of banks."

So what is the role of the Cypriot financial sector? A number of recent analysts have pointed out that Cyprus is the preferred place of Russian and Ukrainian oligarchs to place their money. Cyprus is also famous for the “round-tripping” phenomenon, i.e. the transfer of funds abroad in order to bring some or all of the investment back to the home country as foreign investment. In recent years, Cyprus has been listed as the second largest foreign investor in Russia after Switzerland (10.6% of total investment in Russia in 2011 or 20 billion US dollars). Another large and surprising source of foreign investment in Russia is British Virgin Islands. At the same time, Cyprus and British Virgin Islands are among the key destinations of Russian registered capital outflows. According to Rosstat, in 2009, Cyprus has been the second largest destination of Russian capital after Netherlands (20 billion US dollars or 24% of the total) and British Virgin Islands – the fifth one (6 billion US dollars or 7% of the total).

When discussing Russian deposits in the Cypriot banking sector and the phenomena of round-tripping investment, experts talk about money laundering and corruption. In particular, Shelley (2003) argues that Russia’s billions earned through corruption have been laundered in many countries including offshore locations. She further argues that the true extent of Russian organized crime’s capital resources will never be known “because much of it is parked in anonymous bank accounts and carefully masked trusts in offshore locations.”

Indeed, there is little direct evidence about corruption and money laundering. The Cypriot banking sector is notoriously opaque, the quality that makes it so attractive as an offshore financial centre. However, academic research provides some indirect evidence. In a recent CEPII working paper, Ledyaeva et al. (2013) analyze firm-level data for 20,000 firms with foreign capital registered in Russia in the period between 1997 and 2011. From this dataset they extract two types of firms. The first group consists of firms whose foreign ownership is represented by investors from Cyprus and British Virgin Islands (i.e. round-trip investors). The second group consists of firms whose foreign ownership is represented by genuine foreign owners that are registered mainly in Germany, USA, Finland, China, Turkey, France and Sweden. 

Figure 1 - The percentage and number of foreign firms by type of investor by sector in Russia (as cumulative in the period of 1997-2011)

Note: The numbers on the chart denote the number of established firms by a certain type of investor in a certain industry

The analysis provides two interesting results. First, the industrial distribution of firms between round-trip and genuine investors is striking. As it can be seen from Figure 1, around 70% of firms in manufacturing, trade and repair sector are established by genuine foreign investors. In contrast, 70% of firms in real estate sector and around 80% firms in financial sector are established by round-trip investors. The dominance of foreign investments from Cyprus and BVI in financial and real estate activities indicates that they might be largely related to corruption and money laundering via offshore financial centres. Second, econometric analysis shows that round-trip investors from Cyprus and British Virgin Islands tend to invest more in corrupt regions and in resource-based industries compared to genuine foreign investors. In contrast, genuine foreign investors tend to invest more in regions with higher level of skilled labor, are more technologically advanced and are associated with export-oriented activities.

Whether the smaller tax rate of 9.9% on large deposits will be able to reassure Russian investors and preserve the role of Cyprus as an offshore financial centre is not clear. But, in light of the above discussion, the Cypriot authorities should ask themselves whether they want to preserve the status of financial centre at all.


Ledyaeva, S., P. Karhunen, J. Whalley (2013) "If foreign investment is not foreign: round-trip versus genuine foreign investment in Russia", CEPII working paper, N°2013-05.

Shelley L. (2003) International Dimensions of Corruption: The Russian Case. Working Paper Series on Russia and the Former Soviet States, August 2003.
Money & Finance 
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