* Despite EU pressure, ‘investment-for-citizenship’ raised €650 mln
By Kyriacos Kiliaris
The retail bonds programme, launched in 2014 as a quick-fix to urgently raise funds for the cash-strapped government soon after the economic meltdown a year earlier, is expected to continue after 2020 when the first cycle matures and the government repays the deposits at a higher interest rate than the six-year bonds carry at present.
Despite pressure, mainly from other EU member states, as well as international watchdogs such as the Organisation for Economic Co-operation and Development (OECD), accusing Cyprus of using the scheme to sell passports to Russian oligarchs, the government and its agencies are trying to fend off such allegations by saying that the scheme is no longer aimed for this purpose. Officials say the programme has ceased to be effective from November 2016, when applications by non-EU nationals were first rejected.
The European Commission also launched an inquiry last year into citizenship-by-investment programmes in the EU and the outcome is expected later this year.
The Republic of Cyprus, in an effort to dismiss the accusations, took the decision in November 2016 to remove the retail bonds from the list of eligible instruments for foreign investors seeking to obtain the Cypriot nationality through investments on the island. As a result, income from the programme was slashed.
The retail bond programme, initiated in June 2014, has attracted to date nearly EUR 650 mln. Some EUR 205 mln came in during 2015 and EUR 282.5 mln in 2016, with amounts dropping to just over EUR 72 mln in 2017, the year following the government’s decision to exclude retail bonds from the citizenship scheme. The impact of the decision is also made clear from the fact that while monthly revenue from the retail bonds scheme stood at an average of EUR 27.5 mln, in November 2016 alone the government only managed to rake in EUR 364,000, after rejecting applications worth EUR 7.5 mln from foreign investors.
Apart from the naturalisation incentive, foreign investors could also benefit from the attractive interest rate set at 5.75% at the beginning of the programme in 2014, only to drop to 3.25% by 2015. Furthermore, interest earned is taxed at 5%, while deposits in commercial banks carry a 30% tax on interest.
Following the cabinet’s decision, not a single cent from foreign investors has been deposited in the retail bonds scheme, but alternative instruments are now available to non-EU nationals.
As of November 2016, the government allows foreign investors to invest in a special retail bond introduced to replace purchases of the six-year retail bonds by foreigners. These bonds have a maturity of seven years and the investment ceiling per investor is set at EUR 500,000, carrying an interest rate of just 0.75%. The special bonds issues in 2017 attracted a mere EUR 770,000, a clear indication that this bond class is of no interest to foreign investors seeking naturalisation.
According to Ministry of Finance sources, the new decision aimed to provide foreign investors with the means to complete the EUR 2 mln investment needed for naturalisation after they have pumped at least 1.5 mln in other investments. The same sources told the Financial Mirror that the cabinet’s decision consciously aimed at turning foreign investors towards the real estate sector.
Meanwhile, as the retail bonds programme appears to be nearing the end of its first cycle, there are no plans to abolish it, Ministry sources said, despite not attracting enough cash to secure a possible rollover of the debt created from previous editions. Money drawn in as of November 2016 is only from Cypriot investors, with 2017 seeing a monthly average of EUR 6 mln, whereas the monthly average for the first ten months of 2016 had been EUR 27.5 mln.
Shadows have also been cast over whether there will be enough liquidity to cover the payments of the retail bonds expiring in 2020 as income has been slashed. Concerns are heightened by the fact that bonds sold in the first two years of the programme, carried an interest rate of 5.5%.
The officials from the Public Debt Management Office of the Ministry of Finance, told the Financial Mirror, that there is no reason for concern as the state has enough liquidity to cover the payback of bonds reaching maturity over the next few years.
Meanwhile, Marios Tanousis, a senior officer at the Cyprus Investment Promotion Agency (CIPA), said that there was a negative image created surrounding Cyprus’ efforts to attract investments in return for citizenship.
“We are put off from images portraying the Cypriot passport next to the EU flag and piles of cash,” commented Tanousis. However, he continued, Cyprus may be targeted by various circles as we are not the only ones with such a scheme. He explained that other EU member states also have similar ‘investment-for-citizenship’ programmes, with Malta asking for EUR 1.15 mln per investment, and the UK for GBP 1 mln.
“Of course, one could speak of money laundering during the previous years, but nowadays there is auditing from almost all parties involved with the Cyprus economy, from the EU to the Troika,” said the CIPA official, pointing out that the Financial Times recently wrote about the scheme in a favourable manner.
Tanousis said that the Agency, however, would rather see investors placing their money in the real economy, rather than just bonds.
“Cyprus is full of investment opportunities. Due to its ideal geographical position at the crossroads of three continents – Europe, Africa and Asia — Cyprus is an ideal investment gateway to the European Union, as well as a portal for investment outside the EU, particularly into the Middle East, India and China,” he explained.
“Our concern is not to kill the product by degrading it to a passport-for-cash programme,” concluded Tanousis.
Cyprus has provided citizenship to 1,685 foreign investors since 2008 – mostly from the former Soviet Union, and the rest mainly from China, Iran and Saudi Arabia – and a further 1,651 to members of their families.
Cyprus is said to have raised more than EUR 4 bln since 2013 by providing citizenship to the super rich, granting them the right to live and work throughout Europe in exchange for cash investment. More than 400 passports are understood to have been issued through this scheme last year alone.
Along with Malta, Cyprus is one of the countries under scrutiny.
“Cyprus is the biggest European investor in Russia and a great number of Russian nationals acquired Cypriot passports. The point is that Cyprus, like other countries, is not just selling its passport. It is marketing European citizenship,” stated Portuguese MEP Ana Gomes at an EU Parliament meeting last year.
