Russian business shifts upmarket
It has been a tough year for Russian businesses. The latest monthly forecast of the Economist Intelligence Unit (EIU) predicts a contraction in Russian real GDP of 3.8% in 2015 and another 0.5% in 2016.
“Structural weaknesses will keep trend GDP growth below 2% a year in the medium term,” the EIU says.
Public spending is being slashed, while low oil prices have weakened the rouble and put pressure on foreign exchange reserves. Nomura International told Bloomberg last week that reserves could run out by the end of 2016.
At the same time, Russian businesses operating abroad, including Cyprus, are encountering a much tougher regulatory environment, thanks to both international and Russian compliance rules.
On the international side, greater disclosure is required by amendments to the EU savings directive and the US FATCA (Intergovernmental Model 1 Agreement Foreign Account Tax Compliance Act), which Cyprus signed in December 2014.
Meanwhile, the Russian deoffshorisation rules that came into force in January 2015 have encouraged companies with international operations to increase their presence abroad.
Under the new rules, any entity that belongs to a Russian tax resident and is managed effectively from Russia will be taxed in Russia.
Profits of foreign companies belonging to Russian tax residents that have not been distributed to shareholders in Russia will also be taxed under Russian taxation rules.
Finally, there are also new rules on beneficial ownership.
An entity resident in a country outside Russia, which earns income from Russia, will not be able to benefit from the double tax treaty between Russia and the other country unless it can demonstrate that it is the beneficial owner of that income.
Overall positive impact on Cyprus
Taken on top of the 2013 Cyprus banking crisis, which led to a forced “haircut” on large Russian depositors caught by the bail-in, it is no surprise that many predicted Russians in Cyprus would head for the exit.
However, the truth is a bit more nuanced. While smaller Russian companies have found that the combination of new rules and a weak economy at home have made it simply too costly to make up for Cyprus’ attractive tax regime, larger companies have chosen to increase their presence in Cyprus.
“Given the new environment we are seeing a shift to groups with Russian investment increasing their substance in Cyprus,” says President of the Cyprus-Russia Business Association Evgenios Evgeniou.
Substance translates into demand for employment, offices and homes for executives coming from abroad. This is having a positive impact on real estate, especially in Limassol.
While the absolute number of building permits for Limassol fell by 6.6% year on year in January-August, the value leapt by 46.6% and the area by 31.9%. This reflects a concentration on large, high-value offices and apartments.
From quantity to quality
The new citizenship rules have also increased Russian investment in Cyprus. Subject to certain criteria, non-Cypriots who invest €5 million in real estate, companies or government bonds are eligible for Cypriot citizenship.
This has created demand for government bonds at a time when the government needed it and has brought Russian investment into Limassol hotels like the Meridien and Amathus.
One Russian was so grateful for his Cypriot citizenship that he has given away €0.5 million in charitable donations, the Cyprus Weekly has learned.
When changes were made to the Cyprus shipping register some 15 years ago, the country found that there was a switch from quantity to quality. Today there is a similar trend among Russian investors.
This can only be good for Cyprus, not only because it means jobs and investment, but because it also addresses all that bad international press that continues to linger.
