Tussle in Europe’s backyard

In the recorded history of over 10,000 years, this eastern Mediterranean island called Cyprus -- with harsh coastlines, sandy beaches, rocky hills and forest-covered mountains, has seen it all – from an era only of debilitating invasions, battles and warfare to the current financial crisis.

Perhaps, it was love for the “Cyprian” born, Greek goddess Aphrodite that aggressors chose this small, insignificant island – with half the population of Goa.

Russian Links

Since the days of the Cold War, Cyprus had been the principal overseas base of the Russian Secret Service –the KGB. The location was strategic because of its proximity to Syria and the turbulent lands of the Middle East.

Even after the collapse of the Soviet Union, the Russians hung about in Cyprus and many of the new Russian entrepreneurs found Cyprus a handy and welcoming nation from which to operate.

Not surprisingly, Cyprus was quickly lured and, ‘annexed’ into the European Union.

Cyprus and the Eu

However, the Cyprus that is much in the news around the world these days is only half of Cyprus -- the Greek-speaking half which joined the European Union in May 2004 as the Republic of Cyprus. It controls about 60 per cent of the island.

Most noteworthy are the large deposits of gas that have been discovered in this part. The rest is part of the Turkish Republic of Northern Cyprus.

There is much argument over the European Union’s endeavour to pilfer the money of the Cypriots in exchange for a financial bailout. This clearly, is a mistake. The politics of the episode are as interesting as the economics. Cyprus had been feeling the impact of the strict austerity measures which plunged its neighbour Greece into a financial gorge. Therefore, the Cypriot government lodged its request for an aid package from EU in June 2012.

The Russians do not just love Cyprus for its great climate. The conveniently anonymous shell companies, the discreet banks accounts and the low taxes attracted dirty money into Cyprus.

Around 30 per cent of Cyprus bank deposits originated overseas from Russia, with Cyprus’ banking system being eight times larger than the overall Cypriot GDP.

The Role of the Germans

Germans, it is believed, have been adamant about shutting down Cyprus’s financial channels with Moscow. It is a fact that Cypriot banks had lured billions into the country with low taxes, attractive interest rates and lax regulation - and much of that money came from dubious sources.

The Germans therefore, have been pressing other EU countries to rule against Russia for its alleged money-laundering activities and to trim the island's banking sector to tolerable levels as quickly as possible.

The long-term plan is also to promote non-Russian gas sources for Europe.

In general, Germans have long had an innate aversion to tax havens and have sought to correct the arbitrage in the financial system that gives rise to them. It may be recalled that in 2008, Berlin pursued through purchase of stolen data, uncollected taxes on accounts held in Liechtenstein.

Once again, in 2010 the German government pursued tax evaders in Switzerland with an equally shady data acquisition.

Presently, German agencies are providing detailed analyses and exposing other tax havens within Europe. Luxembourg, with a financial sector more than five times the size of its GDP has come under inquiry. And now, with a financial sector twice the size of its GDP, eyebrows are being raised on the United Kingdom.

Post-Cyprus

So, if you have a secret bank account in a ‘tax haven’ within Europe, you need to worry. The European Parliament could soon be voting on a law which would make Cyprus-style bank account confiscation the law of the land for EU.

(The author is a former Europe Director, CII and lives in Cologne, Germany. >blfeedback@thehindu.co .in)

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