InsiderBusinessA forgotten bilateral agreement puts Russian investments in Cyprus at risk

A forgotten bilateral agreement puts Russian investments in Cyprus at risk

How Moscow is exerting pressure for the repatriation of Russian investments

By Nicholas Anderson

When asked about the relationship between Cyprus and Russia, the average individual will most probably refer to the historical and close ties between the two countries. After all, many thousands of Russians have chosen Cyprus as a holiday destination, their permanent residence and, most importantly, their investments. This last category is what Moscow seems to have its eye on, as it has made it clear for quite some time now that it intends to repatriate Russian capital.

The economic and political instability of the first years following the fall of the USSR made relocating to another country, or at least founding investment companies abroad, a wise choice for Russian entrepreneurs seeking to protect their money. Many things have changed since then, however, and Russia’s ability to impose its own terms is certainly one of them.

The year 2020, the Covid-19 year, had some interesting developments in store, when it came to the relations between Cyprus and Russia, primarily in the economic field, which slipped our attention due to the rapidly unfolding events relating to the pandemic. Many have probably read the headlines about the new treaty for the avoidance of double taxation between the two countries.  Little attention was paid to its content, however, as well as other forms of bilateral agreements whose absence create an unfavourable framework for Russians operating in Cyprus.

Today, almost one year on, it is easier to understand what Moscow was aiming to achieve through the negotiation process for the new agreement.  Besides, since August 2020, the Russian Minister of Finance has talked of “total accord between the Cypriot delegation and their Russian counterpart”. This new agreement has seen the tax on dividends and interest of Russian businesses active in Cyprus increase to 15%. Which is something that satisfies Russia’s desire to make engaging in activities abroad less favourable for Russian businesses, to a great extent.

Moreover, Cyprus is not alone. Moscow is seeking to establish similar agreements that make it harder for Russian businesses to operate abroad with a number of other countries as well, such as Luxemburg, Malta, the Netherlands or Switzerland. However, many of these countries have not been as keen to align themselves with Russia’s wishes, as Cyprus. Whether it is due to their stronger negotiating position, or their upgraded international political role, many of them have avoided or delayed amending the relevant agreements and increasing their tax rate.

Russian businesses in Cyprus under pressure

Apart from the more adverse terms that came into effect after the double taxation avoidance treaty was signed, Russian businesses in Cyprus also have to face the lack of a Bilateral Investment Treaty that would include mutually agreed measures to protect investments between the two countries, such as fiscal and procedural provisions, dispute resolution mechanisms etc. Cyprus and Russia were close to reaching an agreement way back in 1997, when a BIT was signed; but it was never ratified by Moscow and has remained on paper. According to business circles, however, our country ought to have already taken steps towards signing a new BIT, especially following the negative impact from the new terms of the double tax avoidance treaty.

The absence of an investment treaty is mainly due to the policies the Kremlin has been putting in place in recent years to repatriate Russian capital invested abroad over the last decades. Presented with fiscal incentives for domestic investments, as well as counterincentives – such as the tax rate increase in the revised double tax avoidance treaties – entrepreneurs are being forced to consider returning to Russia.

Adding to this are the problems arising from the absence of a BIT, which has been affecting an increasing number of entrepreneurs based in Cyprus. The case of Sergey Petrov, owner of the biggest car dealership in Russia, made the international news when he was charged with transferring money from one of his companies in Russia to another company of his in Cyprus. This would not have happened if a BIT was in place that protected the transfer of corporate capital. In a similar case, Vladimir Stolyarenko and Alexander Bondarenko, two entrepreneurs active in the hydrocarbons sector in Siberia, have been targeted by the Russian Authorities for owning a Direct Investments Portfolio company in Cyprus, with huge investments in Russia. Well-known dissidents and supporters of transparency and reform in their country, Stolyarenko and Bondarenko found themselves facing charges of widespread fraud, which however were rejected by Interpol that described Russia’s demand for their extradition as “politically motivated”, referring to civil disputes that had been written off. In both cases, it is easy to see the Russian modus operandi, which is to convince Russian entrepreneurs to withdraw their activities from foreign countries. In the absence of a bilateral treaty to protect investments between Cyprus and Russia, more and more Russian entrepreneurs will end up being targeted by the Russian state, whose tactic is to exert pressure on entrepreneurs who are not government-friendly and gain control over their businesses.

UN also urges action

Business circles have highlighted the need for an initiative to reach a modern bilateral treaty to protect investments between Cyprus and Russia as soon as possible, given that as time goes by and Cyprus-based entrepreneurs remain exposed to the will of the Russian Authorities, the investment environment in Cyprus will become less and less favourable. Besides, the need to update the bilateral investment treaties, on the basis of recent developments in the fields of technology, taxation and the environment, was also underlined at the United Nations Conference for Trade and Development. Many countries have seized the opportunity to revisit their BITs, introducing provisions for sustainable development, the protection of investments and investors, as well as safeguards for the resolution of possible disputes between contracting parties. Morocco, for instance, although offering less favourable terms compared to Cyprus, is seeking to become one of the biggest destinations in the Mediterranean for Foreign Direct Investments. Undoubtedly, Cyprus is no longer the only, nor first choice for foreign investors – particularly Russians. If it does not adapt to the modern needs, providing protection and incentives for investments and investors, it is possible that it will find itself lagging behind other countries of the region that appear to be significantly more active.

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