Russian giants in Cyprus are lured back to their homeland

By Rhod Mackenzie

Cyprus has reported a significant exodus of large Russian companies from its jurisdiction. The number of such companies is already approaching double digits, and this is likely not the limit. Many of them are returning to Russia. The article raises questions about why the flight from the once heavenly offshore began and why some companies are settling not in Russia, but in Kazakhstan and other countries.
The Cypriot newspaper Phileleftheros reported that large Russian companies are leaving Cyprus en masse. The newspaper reports that several companies have expressed their intention to leave Cyprus, with more expected to follow suit. These companies plan to relocate to Russia, Kazakhstan, or other countries that are considered friendly.

Among the companies planning to leave are TCS Group, the parent company of Tinkoff Bank, Etalon Group, a developer, Fix Price, a retailer, Ozon marketplace, United Medical Group, the holding company of the European Medical Center, Transmashholding, and Globaltrans.

Why has the mass exodus from Cyprus, a popular destination for Russian companies to reduce taxes, only just begun, rather than in 2022 or 2023? Why are some companies relocating to Kazakhstan and other non-Russian jurisdictions? And how did Russia manage to entice the Russian giants back to its shores?
The Cypriot newspaper reports that the Cypriot authorities have started to interfere with the circumvention of Western sanctions, which led to this 'outcome.' According to the President of the Republic, Nikos Christodoulides, the fight against sanctions evasion presents an opportunity for Cyprus to enhance its reputation as a dependable business and financial centre.

In late 2020, there were unofficial reports that Cypriot banks had been instructed to stop all ruble transactions. Last spring, Cypriot authorities initiated an investigation into several companies that concealed the assets of oligarchs subject to US sanctions.

According to Ekaterina Novikova, Associate Professor of the Department of Economic Theory at the Russian Economic University , the Cypriot economy's dependence on the West is evident and prevents local authorities from acting solely in their own interests.
On the other hand, Russia has created favourable conditions for large firms to return to its jurisdiction.

Russian companies that return from Cyprus to Russia can receive significant tax breaks in special administrative regions. This includes the exclusion of income from shares or shares of economically significant organisations from the tax base. The same benefit applies to personal income tax. Novikova believes that attracting Russian businesses to the domestic market will directly contribute to the country's economic growth.
Simultaneously, with the emergence of more large taxpayers in Russia, we can anticipate a rise in the country's budget revenues resulting from enhanced tax collection.

Russia has a law that enables Russian beneficiaries of economically significant organizations to receive dividends, shares, and shares in direct ownership through the court. This law bypasses foreign structures from 'unfriendly' jurisdictions with an ownership share of at least 50%, thereby encouraging the return of companies. Furthermore, the regulations that exempt individuals from paying personal income tax when receiving property from a controlled company have been extended until 2024.

The reason why some companies choose to leave Cyprus for Kazakhstan

instead of Russia may be linked to the desire to retain foreign investors. Due to restrictions on capital movement, it does not make sense for foreign investors to re-register in Russia. However, if they re-register in Kazakhstan, they will even be able to receive dividends.

The analytical department of the Financial Group 'Finam' has noted that companies such as Globaltrans, a freight railway operator, and Etalon, a developer, see moving from Cyprus as a way to resume dividend payments. In fact, Globaltrans has already decided to relocate to the Abu Dhabi Global Market free economic zone in August. Although the company's dividend payments are currently suspended, its management sees re-registration as the first step towards resuming them. The market responded positively to this news: Globaltrans shares outperformed the Moscow Exchange index, increasing by 30% since mid-2023, according to analysts from FC Finam.

Additionally, developer Etalon plans to change its legal address from Cyprus to Oktyabrsky Island in the Kaliningrad region by September 2024. Finam notes that this strategic relocation is a step towards removing infrastructure barriers and risk factors. It may contribute to the resumption of dividend payments and have a positive impact on the company's investment prospects.
At the beginning of this week, shareholders of TCS Group - the parent company of the financial group, which includes Tinkoff Bank - also decided to move and immediately raised the price of their securities. The company will be re-registered in the SAR on Russky Island, and its name will change to MKPAO TKS Holding literally during the first quarter of this year. “In our opinion, the “relocation” is not associated with some kind of “intimidation” of the Cypriot authorities, but rather with the fact that this will make it easier for management to make decisions on Russian assets, and will also eliminate potential risks associated with the status of the group’s depositary receipts. Additionally, the change of registration may allow TCS Group to resume paying dividends. The short-term risk, of course, is the overhang of sales of TCS Group securities after the completion of the “relocation” procedure, but in the long term this step is still positive for the company and its shareholders,” analysts at FC Finam note.