​Cyprus: Better together

Cyprus is on a tough road to recovery but Russian money is still flowing in, cementing the strong relationship between the two countries

The ties between Cyprus and Russia go back to the division of the Soviet Union in the 1990s when Russians began to use Cyprus as a place to spend their summer holidays. With a Mediterranean climate and a short three and a half hour flight from Moscow, Cyprus proved to be an appealing location for Russians. 

However, it is not just the warm sunshine Russians have sought in Cyprus – the country has become a hub for investment. Russian money has been storming into Cyprus with statistics from the Central Bank of Cyprus showing Russian money dominated foreign direct investment (FDI) into Cyprus during 2012 with a sum of €879m (£734m). 


AG Paphitis & Co managing director Angelos Paphitis explains that the reason for heavy Russian investment in Cyprus is the tax treaty that exists between the two countries. 

“The Treaty for Avoidance of Double Tax Payments dated 5th December 1998 includes provisions which no other country has with Russia,” Paphitis says. “This is a major reason why Russian businessmen are using Cyprus and Cypriot companies in their local or international trading and business. The double tax treaty between
Cyprus and Russia, combined with the very beneficial tax system of Cyprus, is a perfect vehicle for Russian businessmen.”

Following Cyprus’s bailout and banking crisis, there were concerns from many that investment from Russia and other countries would not be as strong. 


“After the bailout, a lot of people were saying Cyprus is no longer an interesting place to invest in,” says Andreas Neocleous & Co partner Elias Neocleous. “In contrast, the last couple of months have been much better than envisaged. Our end-of-year results show income similar to what we had last year, which is a tremendous result as 2012 was a very good year for us. 

“We were worried it would be much worse. The country has shown resilience and is doing much better than forecast.” 

Antis Triantafyllides partner Marios Hadjigavrie argues the breakthrough of Cyprus as an attractive hub for opportunities in investment came when Cyprus joined the EU.

“Cyprus’s accession to the EU in 2004 has increased its appeal to investors as a regulated jurisdiction. It’s worth mentioning that Cyprus has successfully passed various evaluations carried out by international organisations – including earlier this year the Moneyval Commission [Committee of Experts on the Evaluation of Anti-Money Laundering Measures] of the Council of Europe on its anti-money laundering legislation and procedures.

“Therefore Cyprus has delivered tremendous opportunities to investors investing in and out of Russia for investment and growth and has given them an efficient springboard into Europe, the US, CIS countries and India,” says Hadjigavrie. 

“Undoubtedly, the close economic relationship has been greatly beneficial to both countries and this relationship continues uninterrupted notwithstanding the unprecedented and cataclysmic developments in the economic and business environment of Cyprus following decisions taken by the Eurogroup last March,” Hadjigavrie adds, referring to the controversial bailout of Cyprus earlier this year, the first time the authorities had imposed a ‘tax’ on citizens of a struggling country by confiscating bank assets.


Energy opportunities

In particular, Cyprus’s oil and gas sector is a key target for investment at the moment. In terms of value, Thomson Reuters data shows Cypriot M&A this year to date has been dominated by oil and gas deals, accounting for 40.2 per cent of deals and a value worth over €5bn. Russian involvement accounts for the majority of this, with involvement from Russia in Cyprus’s oil and gas sector more than doubling from last year. 

“The energy sector will be a key sector for years to come. The strategic plan for the country is to become an energy hub for Europe and the Middle East,” says Neocleous.

Developments are still at an early and pre-infrastructure stage. Cyprus only ventured into the energy market in 2011 when exploratory drilling discovered up to 6 trillion cubic feet of natural gas off its shores. A second stage of exploration completed in September and more drilling is planned in the new year.


“The oil and gas market is a new area which is now being exploited,” says Paphitis. “The fact that Cyprus has now found natural gas on its southern offshore coast has put it on the gas and oil map of the world.”

He adds that there are still another 11 offshore gas blocks to be explored. But law firms are trying to keep themselves and their clients up to date with developments.

”However, it’s still too early for local law firms to enter the oil and gas market since it’s not yet a necessity at this stage,” Paphitis adds. “This stage is mostly political and focuses on geostrategic, economic and political implications and developments that involve Cyprus, Israel, Egypt and the surrounding neighbours, Greece and Turkey as well as countries with strong strategic interests, such as the US, Russia, China, France and Germany.”

It is no secret that the discovery of oil and gas in Cyprus is potentially a huge boost to the economy.

“The importance of the hydrocarbons discovery in Cyprus’ Exclusive Economic Zone is huge, because of its potential economic and geopolitical impact. Cyprus now has the opportunity of an economic boost from its hydrocarbons reserves. New jobs are expected to be created and new capital injected into the economy,” says Hadjigavrie.

“For Cyprus, the energy sector as a whole has great potential. Israel and Egypt are advancing fast and Lebanon is starting its own exploration activities. 

“It’s expected that the developing oil and gas sector will provide great opportunities for companies to set up regional bases in Cyprus because the strategic position of Cyprus attracts logistics, petrochemical and other oil and gas companies to set up on the island.”

While the benefit of the oil and gas discoveries is yet to fully manifest, local firms are competing for what work is available to them, mainly by producing reports and analysis of local law and bidding processes on energy-related matters. 

Firms with sizeable corporate and finance practices arguably have the most to offer here.

“In addition, following the granting by the government of certain exploration licences for particular offshore blocks, our firm has been involved in obtaining the necessary permissions and licences from the authorities regarding the import-export and use of machinery and material required for the exploration and extraction of natural gas. We’re also involved in the negotiations for the plans and projects relating to these operations,” says Hadjigavrie. 

A parallel benefit to the oil and gas projects is an increase in work in service areas such as infrastructure and software.

Quick-fix needed

While the oil and gas discoveries could have a potential healthy impact in the future, Cyprus needs to find immediate solutions to deal with its current issues. 

Cyprus, one of the smallest economies in the Eurozone with GDP of $22.98bn, was one of the most affected by the financial crisis, eventually seeking a bailout in June 2012. The conditions eventually imposed on Cyprus by the ‘troika’ of the European Commission, the European Central Bank and the International Monetary Fund included the ‘bail in’ – forcing Cypriots to surrender their savings. While the terms were ultimately watered down, many did lose money as the €10bn bailout was agreed.

As things stand, Cyprus is on the right track to recovery, meeting its bailout targets and making good progress. 

“Although things haven’t been great, there are signs of complying with the troika’s requirements and conditions have improved,” says Hadjigavrie.

Cyprus’s GDP is still projected to fall by 7.7 per cent this year but this is an improvement from earlier predictions. The rate of decline for 2014 is -4.8 per cent at present.

Progress has particularly been made in restructuring the badly-hit banking sector. The Hellenic Bank has been successfully recapitalised by foreign investors including an American fund, and the biggest bank in the country, the Bank of Cyprus, recently elected a new executive board and appointed John Patrick Hourican, formerly chief executive of markets and international banking at the Royal Bank of Scotland, as its new CEO at the end of October.

Looking ahead, the government is currently looking at following the path taken by Greece, Ireland, Portugal and Spain to begin privatising state-owned companies with the goal of raising €1.4bn by 2018, the year the country expects to come out of its bailout programme.

Lawyers feel this is a good move by the government and hope that, as in other countries, the privatisation programme could benefit the legal market as well as the wider economy. They estimate that legal work has dropped by 10 per cent during the crisis, so anything which contributes is welcome.

“Privatisations would be very beneficial to the economy, offering opportunities and new money,” says Neocleous.

“The government is much more energetic and is making good decisions,” adds Paphitis.

The key for Cyprus remains to get out of the recession and be seen in a more positive light. However, Cyprus remains on track and with recovery on the horizon, continuing strong investment from Russia and positive signs in the emerging oil and gas sector, lawyers are justified in feeling optimistic.

“After the events in March, nobody knew how long this state of feeling would remain in Cyprus. Even though we have experienced a big financial crisis, we believe things will get better,” says Paphitis.


Harneys managing partner Pavlos Aristodemou concludes: “The worst is clearly behind us and we expect an increase in legal work in the years to come.”

Tax haven or not?

There has been much talk of Cyprus as a ‘tax haven’, particularly before the recent bailout. However, lawyers are keen to brush off this tag.

Cyprus has always been seen as an attractive location for investment due to its low personal and corporate tax rates. Before the bailout, corporate tax on net income in Cyprus was 10 per cent but this has increased to 12.5 per cent as a condition of the bailout. However, this is still the lowest corporate tax rate in the EU – equal to Ireland. Value-added tax rates are also set to increase, to 19 per cent next year from 18 per cent currently.

The country also offers non-EU citizens permanent residence if they purchase property worth more than €300,000.

Meanwhile, Cyprus’s tax treaty with Russia is just one of 50 tax information exchange agreements signed with other jurisdictions. Of these, 32 meet international standards, 14 are unreviewed by the Organisation for Economic Cooperation and Development’s (OECD) peer group and four fail to meet standards. The most recent agreement was signed with Portugal in August.

“Cyprus is not a tax haven country but a fully tax compliant jurisdiction,” says Antis Triantafyllides’ Marios Hadjigavrie.

Top deal of 2013

Russian oil giant Rosneft has launched a tender offer to acquire the remaining 15.334 per cent stake in oil and gas company RN Holding for RUB67 (£1.30)
per share or a total value of RUB153.303bn (£2.879bn).


Key figures: Cyprus 

GDP (2012): $22.98bn

Inflation (October 2013): -1.6%

Population: 1.129m

Life expectancy at birth: 79

Unemployment (Q2 2013): 15.5%

Source: Statistical Service of Cyprus, World Bank