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Foreign direct investments and round tripping between Cyprus and Russia
Abstract
Purpose
This paper aims to look at the linkage of Foreign Direct Investments and Round Tripping in the Cyprus – Russian corridor.
Design/methodology/approach
The paper is divided into two chapters. The first chapter looks at the relationship between Foreign Direct Investments and Round Tripping in Cyprus and Russia. The second chapter discusses and combines statistical data from different sources about illicit financial flows from Russia and the linkage of Foreign Direct Investments and Round Tripping with Cyprus.
Findings
Evidence suggests that, despite the obviously numerous and varied legislative provisions and initiatives, the movement of vast amounts of capital to or through the Cypriot financial system is a phenomenon, which has absolutely not been removed. The illegal outflow of money seems to grow rapidly over the years instead of decreasing. What actually happens is that after a dramatic decline in the years 2013-2015 the Foreign Direct Investments of the Russians to and from Cyprus in 2016 returned to pre-crisis levels of 2013 and so far it seems the inflows-outflows system returned to "normal" levels. Cyprus ranks first in Inward Foreign Direct Investment and Outward Foreign Direct Investment with almost 35% of total flows from Russia. An element, that demonstrates the presence of round-tripping, is the sharp and rapid parallel increase of Inward Foreign Direct Investment and Outward Foreign Direct Investment and that the category of total deposits in Cyprus by non-residents, including Special Purpose Entity, recorded significant fluctuations due to the large size of deposits, but also due to the short time remaining in the banking sector. Russia ranked in the second position of largest average illegal capital outflows countries in the years 2004-2013. Movement of capital to exploit the particularly beneficial Cyprus tax system is still a tax backdoor for Europe and worldwide (hence the neologisms like Cyp-Rus), especially after the “de-offshorization” Russian law since January 1, 2015.
Research limitations/implications
-
Practical implications
Evidences presented in this paper are important for national and super-national supervisory anti-money laundering bodies and compliance authorities to understand bad practices between Russia and Cyprus financial transactions.
Originality/value
Evidences presented in this paper are important for national and super-national supervisory anti-money laundering bodies and compliance authorities to understand bad practices between Russia and Cyprus financial transactions.
... The network also includes poor (but resource rich) countries such as Angola, and emerging countries such as Thailand. Other countries such as Cyprus (which, together with Luxembourg is the only EU member state in the rich-club) has quickly transitioned from the emerging to the affluent tier of world economies as its income per capita has more than tripled in the last thirty years, most likely also thanks to its gateway role for sheltered Russian foreign direct investment and money laundering (Repousis et al, 2019). ...
After the leak of 11.5 million documents from the Panamanian corporation Mossack Fonseca, an intricate network of offshore business entities has been revealed. The emerging picture is that of legal entities, either individuals or companies, involved in offshore activities and transactions with several tax havens simultaneously which establish, indirectly, an effective network of countries acting on tax evasion. The analysis of this network quantitatively uncovers a strongly connected core (a rich-club) of countries whose indirect interactions, mediated by legal entities, form the skeleton for tax evasion worldwide. Intriguingly, the rich-club mainly consists of well-known tax havens such as British Virgin Islands and Hong Kong, and major global powers such as China, Russia, United Kingdom and United States of America. Our findings build a ground for better understanding phenomena where the erosion of public trust may spark emergent social dynamics, such as social conflicts and political polarization, that are driven by the complex interconnected structure of tax evaders in a globalized economy.
... The network also includes poor (but resource rich) countries such as Angola, and emerging countries such as Thailand. Other countries such as Cyprus (which, together with Luxembourg is the only EU member state in the rich-club) has quickly transitioned from the emerging to the affluent tier of world economies as its income per capita has more than tripled in the last thirty years, most likely also thanks to its gateway role for sheltered Russian foreign direct investment and money laundering (Repousis et al, 2019). ...
After the leak of 11.5 million documents from the Panamanian corporation Mossack Fonseca, an intricate network of offshore business entities has been revealed. The emerging picture is that of legal entities, either individuals or companies, involved in offshore activities and transactions with several tax havens simultaneously which establish, indirectly, an effective network of countries acting on tax evasion. The analysis of this network quantitatively uncovers a strongly connected core (a rich-club) of countries whose indirect interactions, mediated by legal entities, form the skeleton for tax evasion worldwide. Intriguingly, the rich-club mainly consists of well-known tax havens such as British Virgin Islands and Hong Kong, and major global powers such as China, Russia, United Kingdom and United States of America. The analysis provides a new way to rank tax havens because of the role they play in this network, and the results call for an international coordination on taxation policies that take into account the complex interconnected structure of tax evaders in a globalized economy.
... The largest foreign investor in Belarus is Russia (USD 4.0 billion, 30.1% of total FDIs). The second largest investor is Cyprus (USD 2.3 billion, 17.6% of total FDIs); taking into account that this country is widely used as an off-shore investment platform for Russia (Repousis et al. 2019) and other former USSR republics, including Belarus (Chartyja'77, 2016), the Cyprian investments may be mainly of the Russian descent and some of them just domestic ones which have conducted a round trip for tax avoidance purposes. ...
This chapter discusses shaping up, evolution and the present situation in the state corporate control of three other post-communist countries where the role of the state-controlled sector is very significant and/or increasing: Hungary, Russia and Belarus comparing their experience with that of Poland and between each other. Analysis of each country, after discussing the specificity of challenges at the beginning of the transition, in an abridged form repeats the structure of the analysis of the Polish case presented in Chapters 4– 6: shaping up and evolution of the state corporate control, its present state, the portrait of the SOE sector and discussion on the factors that lay behind the identified processes and phenomena.
... The biggest foreign investor in Belarus is Russia (USD 4.0 billion, 30.1% of total FDI) and the second biggest investor is Cyprus (USD 2.3 billion, 17.6%). Taking into account that Cyprus is widely used as an off-shore investment platform for Russia (Repousis, Lois, and Kougioumtsidis, 2019) and other former Soviet republics including Belarus (Sidoruk, 2017), Cyprian investments may largely be of Russian descent with many of them simply domestic investments that have taken a round trip for tax avoidance purposes. The highest shares of foreign-owned companies ( Figure 4) are found in IT and communication (Belarus became popular for outsourcing IT services for European countries) and retail, with big chain stores entering the Belarusian market, whereas the highest volume of FDI was directed to industry (40.1% of the whole FDI inflow) (Mukha, 2019). ...
Belarus was among the few post-communist countries to resign from comprehensive market reforms and attempt to improve the efficiency of the economy through administrative means, leaving market mechanisms only an auxiliary role. Since its inception, the ‘Belarusian economic model’ has undergone several revisions of a de-statisation and de-regulation kind, but still the Belarusian economy remains dominated by the state. This paper analyses the characteristic features of the Belarusian economic system – especially those related to the public sector – as well as its evolution over time during the period following its independence. The paper concludes that during the post-Soviet period, the Belarusian economy evolved from a quasi-Soviet system based on state property, state planning, support to inefficient enterprises and the massive redistribution of funds to a more flexible hybrid model where the public sector still remains the core of the economy. The case of Belarus shows that presently there is no appropriate theoretical perspective which, in an unmodified form, could be applied to study this type of economic system. Therefore, a new perspective based on an already existing but updated approach or a multidisciplinary approach that incorporates the duality of the Belarusian economy is required.
The interconnection between economic factors and environmental degradation is an established part of the discussion surrounding climate change, CO2 emissions, and mitigation policies. As part of this discourse, the pollution haven hypothesis, pollution halo hypothesis, and the Environmental Kuznets Curve are established theoretical constructs, shaping the discussion concerning the implications or consequences of this interplay. As a result, this project investigates these concepts by examining FDI and GDP’s possible correlation with environmental degradation. An anomaly in Cypriot FDI trends, observed through a preliminary inductive exploratory analysis, made Cyprus the focus of this investigation. Within a neoclassical theoretical framework, this project thus examines the possibility of validating these three hypotheses in the context of Cyprus. The relationship between economic and environmental variables is analyzed deductively through the conduction of a time series analysis. The time series analysis presents statistically significant results for a correlation of GDP and GDP2 with CO2 emissions, as well as a positive relationship between energy consumption and CO2 emissions. As such, it found results inverse to the EKC’s theoretical proposition, identifying a U-shaped curve instead of an inverse U-shaped one. Concerning the pollution haven/halo hypotheses, the analysis could not identify a significant relationship between FDI and CO2 emissions, thus confirming neither of the theories. However, a Granger causality test revealed FDI as a significant Granger-cause of CO2, indicating an existing influence. Due to the inconclusive pollution haven/halo test and an analysis of Cyprus’ permissive tax policies, this project results in the construction of a new hypothesis, stating that
Cyprus’ tax haven status influences the research variables’ causal relationships.
Belarus was among the few post-communist countries to resign from comprehensive market reforms and attempt to improve the efficiency of the economy through administrative means, leaving market mechanisms only an auxiliary role. Since its inception, the so-called Belarusian economic model has undergone several revisions of a de-statisation and de-regulation kind, but still the Belarusian economy remains dominated by the state. The paper analyses the characteristic features of the Belarusian economic system and its evolution over time trying to place them in the existing theoretical frameworks. The tentative conclusion is that during the post-Soviet period, the Belarusian economy evolved from a quasi-Soviet system based on state property, state planning, support to inefficient enterprises and the massive redistribution of funds to a more flexible hybrid model where the public sector still remains the core of the economy. The case of Belarus also shows that presently there is no appropriate theoretical perspective which, in an unmodified form, could be applied to study this type of economic system. Therefore, a new perspective based on an already existing but updated approach, or a multidisciplinary approach that incorporates the duality of the Belarusian economy is required.
The emphasis on economic cooperation between South Korea and Russia is growing according to the new foreign policies of the two countries. This study aims to draw policy implications for increasing inter South Korea-Russia investments as reflecting growing political significances of economic cooperation of the two countries. For that, we analyzed FDI data from Central Bank of Russia, Export-Import Bank of Korea, and KOTRA given that in globalized economies, above all the other entry modes in foreign markets, FDI plays a significant role in national economic growth as allowing firms to utilize cross-border production factors with high efficiencies. Based on the data analysis, we made the following meaningful conclusions. First, despite growing political importance, FDI flows between the two countries are insignificant, partially due to the profound sense of closeness. Second, the motivations of Korean FDI showed differences dependent on Russian cities. Third, Korean FDI in Russia is highly concentrated in the manufacturing industry. To increase FDI flows between the two countries, we recommend to launch cultural exchange programs in private sectors with longterm visions and diversify investment in a way to increase cooperation among SMEs, and start-ups in high value-added and innovative industries.
The paper addresses the problem of defining and assessing the scale of capital flight from Russia and of briefly reviewing
the channels through which capital, both of legal and illegal origin, illegally leaves Russia. It then highlights the determinants
of Russian capital flight, as the traditional view of a reaction to divergences among real domestic and foreign returns and
to economic and political risks proves inadequate. More important factors are linked to specific features of the transition
process under way, that is macroeconomic instability and variability of government policies, weak protection of property rights
and savings, a fragile banking system limiting access to investment finance, high and unevenly enforced taxes, a large share
of unofficial activities, and considerable levels of corruption.
Over the past 25 years, Cyprus has become the portal of choice for investment into and out of Russia and Central and Eastern
Europe. The new Russian de-offshorization law, which took effect on 1 January 2015, will have significant implications for
users of overseas structures. This article examines the main features of the law, its significance for users of Cyprus structures,
and the steps that might be taken to mitigate any adverse effects.
Recent economic geography research has identified the round-tripping of capital from emerging economies to offshore financial centers (OFCs) and back as foreign direct investment (FDI) as a central element of the global offshore FDI network. However, the factors behind this phenomenon are not yet fully understood. Our study develops a general framework that conceptualizes the phenomenon of round-trip investment. In particular, we argue that secrecy arbitrage, defined as interplay of onshore corruption and offshore secrecy, largely explains round-trip investment between onshore jurisdictions and OFCs. First, we argue that part of the round-trip FDI consists of proceeds from corruption, which is laundered in OFCs and reinvested back to the location of origin. Second, we maintain that the secrecy dimension of the OFC also motivates the round-tripping of licit capital, as businesses use the secrecy provided by OFCs to hide their true identities from corrupt authorities in the home location. To test the validity of our argument about onshore corruption as a driver for round-trip investment, we empirically analyze firm-level data on the distribution of offshore FDI (which, we argue, is largely round-trip) across Russian regions. Our empirical findings confirm that FDI from OFCs is positively associated with host region corruption, and this relationship is stronger for OFCs with a higher secrecy score. Hence, we conclude that round-trip FDI is strongly motivated by the interplay between onshore corruption and offshore secrecy.
This paper considers the role of secrecy jurisdictions in creating a supply-side stimulus for corrupt practices and explores the use of the newly created Financial Secrecy Index as a tool for assessing and ranking such jurisdictions. Secrecy jurisdictions are a prominent feature of international financial markets, providing a combination of low or zero tax rates, lax regulation, weak international judicial cooperation, and—above all—legalised secrecy facilities. Citing the case of Barbados, this paper shows how an environment of legalised secrecy is purposefully created by not requiring disclosure of ownership information for corporations, trusts, foundations and other legal entities; through non-participation or ineffective participation in judicial cooperation and information exchange; and through laws to protect banking secrecy arrangements. Taken in combination these factors make secrecy jurisdictions attractive conduits for illicit cross-border financial flows and the harbouring of dirty money. Using secrecy jurisdictions as platforms for their operations, legal and financial intermediaries create complex and opaque offshore structures to facilitate economic crime and impede investigation. Current international efforts to stem the activities of secrecy jurisdictions are largely ineffective, but civil society is raising pressure for effective action to be taken against offshore secrecy.
In recent years tax havens and o¤shore ?nancial centres have come under increasing political pressure to cooperate with other countries in matters of taxation and e¤orts to crowd back tax evasion and avoidance. As a result many tax havens have signed tax information exchange agreements (TIEAs). In order to comply with OECD standards tax havens are obliged to sign at least 12 TIEAs with other countries. This paper investigates how tax havens have chosen their partner countries. We ask whether they have signed TIEAs with countries to which they have strong economic links or whether they have systematically avoided doing this, so that information exchange remains ine¤ective. We analyse 555 TIEAs signed by tax havens in the years 2008-2011 and ?nd that on average tax havens have signed more TIEAs with countries to which they have stronger economic links. Our analysis thus suggests that tax havens do not systematically undermine tax information exchange by signing TIEAs with irrelevant countries. However, this does not mean that they exchange information with all important partner countries.
We estimate capital flight from seven countries of the Commonwealth of Independent States for the period 1995–2005. In some countries capital flight is large and growing, but other countries, despite similar macroeconomic and political circumstances, have little capital flight. We develop a model of capital flight that incorporates costs of moving money to offshore locations and show that such costs are an important determinant of capital flight. Liberalizing the trade and financial sectors accelerates capital flight by making it easier to move capital abroad. In the short run, greater regulation rather than external sector liberalization appears to have more potential to combat capital flight.
Keywords Capital flight–Illicit money flows–Financial sector liberalization–Russia–Commonwealth of Independent States
The Cyprus-Russia connection: implications for the European Union”, available at: www.researchgate.net/publication/278674277_The_Cyprus-Russia_connection_Implications_for_the_European_Union
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