Nowhere else in Cyprus is the fear of financial implosion more acute than in Limassol, a city that hosts the biggest banking and financial-services centre in the Mediterranean.
Once suspected for being a money-laundering hub, the city of 200,000 features countless Russian businesses with local addresses – holding companies, trading companies, shipping firms and the like. Nicknamed Limassolgrad, the city has Russian schools and bars, and a Russian newspaper, magazine and radio station.
While firm statistics for Russians living here are hard to pin down because many don’t want to participate in census figures, the Russian community, and the lawyers, accountants, bankers, drivers and restaurateurs who attend to the few wealthy thousand, realize that their world could be turned upside down in the next few days, with the country’s banks facing collapse and an old-fashioned bank run, as investors try to take their money and flee.
For now, high-end restaurants, such as Neon Phaliron, are stuffed with Russian patrons. Occasionally, oligarchs roll into town, though none are known to live here year-round. Young Russian women stroll along the waterfront promenade and fill the designer shops such as Fendi’s and Tod’s (though the shops were empty this week, because of the bank shutdown). “We have a lot of mixed marriages that end in divorce,” says Andreas Neocleous, the chairman of a Limassol law firm that caters to foreign clients and whose business card lists a Moscow office and two in Ukraine. “Beautiful Russian girls marry Cypriots, then it falls apart.”
But with the island moving toward financial dissolution, marital strife is a luxury worry. There is a good chance this expat extravaganza – and much more – are sitting on a financial volcano: Monday is a make-or-break day for the island. If the Cypriots do not produce a credible rescue package for their shattered banks, the European Central Bank will yank their lifelines – the billions of euros of emergency liquidity injections that are keeping them alive, if only barely. (The banks have been shut for a week to prevent a bank run.)
By Friday evening, the new rescue proposal – the first version died in a parliamentary vote on Tuesday – was a dubious work in progress. The prospect of Cyprus becoming the first country to bolt from the euro zone, a recipe for economic destruction, has emerged as a real possibility.
Cyprus’s second-biggest lender, Popular Bank, was on its way to being dismantled by Friday – or emerge so shrunken that it will exist only in name, and Mr. Neocleous’s big fear is that the bloated banking system will collapse.“The financial-services industry is made up of banks, and the legal and accounting professions that surround them,” he says. “If you take out the banking system, you have two legs, not three, and you destroy Cyprus.”
Forty years ago, Limassol was a pleasant but dull seaside town kept alive by shipping and a few sunburned British tourists. A string of geopolitical crises would transform the city in a hurry, its 10-per-cent tax rate a magnet for displaced wealth.
In 1974, Turkey invaded northern Cyprus and the Greek Cypriots fled to the south; many of them landed in Limassol, about an hour’s drive southwest of the capital, Nicosia. Then came the Lebanese civil war in the 1980s, which drove its money men across the sea to Cyprus’s shores. In the 1990s, after the collapse of the Soviet Union, it was the Russians’ turn. They came in the tens of thousands.
“The Russians were coming with bags of cash and going right to the bank,” says Kyriacos Iacovides, managing director of the Cyprus Mail newspaper. “Limassol is now a truly cosmopolitan city.”
Anna Illyukhina, a 29-year-old designer, was one of the Russians who built a new life in Cyprus. Her parents, worried that the lawlessness of the new Russia would deprive their children of safety and good careers, shipped Ms. Illyukhina in 1996 to Limassol, where she went to an English boarding school. Her sister later joined her and they fell in love with the heat, the beauty and the sea. “One day in December, we’re swimming in the sea in Limassol and the next day we went home to the Urals for Christmas,” she says. “It was a five-hour flight, and when we got there it was 40 below.”
Today, she is head of design for Limassol’s IronFX, one of the world’s biggest foreign-exchange trading firms and one of the many that have set up shop in town, where they enjoy some of the lowest business taxes on the planet. (“This is the Silicon Valley of [foreign-exchange] trading,” says Marshall Glitter, the company’s global strategy head.)
Ms. Illyukhina knows Limassol’s Russian community well and says they are worried like never before about their futures.
How many will leave if the banking system collapses, or how much money they will zap to other international banking centres, are questions gripping the island. Both Ms. Illyukhina and others think it is inevitable that some Russians and a lot of their money will flee to other havens, such as Singapore and Switzerland. “A lot of Russians are very angry about [the bank closings] because it means they can’t do transactions,” she says. “I think they’ll look for other banking centres.”
But Limassol doesn’t have a monopoly on Cypriot anxiety. While the capital, Nicosia, is neither cosmopolitan nor a banking centre, its residents,, too, are terrified that they face years of hardship even if a bailout plan is hammered together by Monday. Businesses big and small have been under enormous stress since this time last year, when the Greek debt crisis finally overwhelmed Cyprus’s banks, spreading misery throughout the economy.
In its shabby historic centre, Loida Christou, the 54-year-old owner of a small general store, wonders whether the next 72 hours will wreck her business and her lifestyle. The Cypriot recession and the bank crisis have cut her daily sales by more than half, to about €45, she says.