VoxEU Column International Finance

Cyprus, corruption, money laundering and Russian round-trip investment

Russian involvement in Cyprus was widely recognised during the acute phase of the most recent EZ crisis. This column argues that some of this is driven by corruption-linked money laundering. Using official Russian statistics, the authors estimate a standard model of FDI location to identify usual patterns related to nations with lax anti-money laundering measures such as Cyprus and the British Virgin Islands. Funds from such nations were biased towards locating investments in the most corrupt Russian regions compared to a group of genuine foreign investors.

The financial relationship between Cyprus and Russia has received a lot of attention as a result of the recent crisis in Cyprus (Wyplosz 2013). A large amount of Russian money has been invested in this small Mediterranean economy over the last two decades. It has been estimated that about one half to a third of all Cyprus bank deposits are of Russian origin. According to the ratings agency Moody`s, there is about $31 billion in Russian money in Cypriot bank accounts: $12 billion from banks and $19 billion from business and individuals (Young 2013).

A distinctive feature of foreign investment patterns for Russia is the correlation of inward and outward investment flows between Russia and Cyprus. The Russian State Statistical Agency, ROSSTAT, estimates that Cyprus has been the second largest destination for Russian outward foreign investment after the Netherlands in terms of accumulated capital by the end of 2011. On the other hand, according to ROSSTAT Cyprus has been the third largest foreign investor into the Russian economy (after the UK and Switzerland) in the period 2005-2011.

Obviously, the dominance of Russian money in Cyprus bank deposits and in foreign investment from and into Russia is evidence for 'round-tripping', i.e. the transfer of funds abroad in order to bring some or all of the investment back as foreign investment (Kalotay 2005). But what are the reasons for Russian round-trip investment via Cyprus?

Corruption-linked money laundering

We argue in a recent paper that a large part of it is corruption-linked money laundering (Ledyaeva et al. 2013). Corruption has an obvious connection with money laundering as the stolen assets of a corrupt public official are useless unless they are placed, layered and integrated into the global financial network in a manner that does not raise suspicion. The proceeds of corruption may be laundered in jurisdictions which have not enacted strict anti-money laundering measures and in countries which uphold very strict bank-secretary laws or regulations (Rossidou-Papakyriacou 1999). Offshore financial centres like Cyprus are widely recognised as such jurisdictions.

In our study we use a unique firm-level database to empirically test the relationship between corruption and Russian round-trip investment via offshore jurisdictions in particular, Cyprus and the British Virgin Islands.

We make use of a ROSSTAT database, which provides information on the locational choice of 20165 firms with foreign capital registered in Russia in the period between 1997 and 2011. From this dataset we extract information on two types of firms. The first group consists of firms for which foreign ownership is represented by offshore owners (in particular Cyprus (38% of the sample) and the British Virgin Islands (11% of the sample). The second group (a benchmark group for comparison in our study) consists of firms for which foreign ownership is represented by genuine foreign owners (51% of the sample; main investors are Germany, the US, Finland, China, Turkey, France and Sweden).

Industrial distribution: Round-trip versus genuine foreign investors

In Figure 1 we present the distributions of firms across main industrial sectors (which are most popular with foreign investors including round-trip ones) and by the origin of the foreign investor.

Figure 1. The structure (in %) of firms (by number) by origin of foreign investor within sectors of economy (as cumulative in the period of 1997-2011)

Note: The numbers in the chart denote the number of established firms by type of investor in each group.

Source: Rosstat and authors’ calculations.

Around 70% of firms in manufacturing industries and around 67% in the trade and repair sector are established by genuine foreign investors. On the other hand around 70% of firms in the real-estate sector and around 80% of firms in the financial sector are established by round-trip investors. This evidence already reflects a corruption component of round-trip investment as the real-estate and financial sectors are commonly associated with corruption money laundering.

Round-trip investment and traditional factors behind international investment

We then estimate the knowledge-capital model of the multinational enterprise suggested by Carr et al. (2001) using this data, adding offshore dummies to it. We find that the coefficient of the dummy variable for Cyprus and British Virgin Islands investors is positive and highly statistically significant. This result indicates that foreign investment into Russia from Cyprus and the British Virgin Islands cannot be explained by traditional theories of international investment movement and, hence, corruption money laundering might be one of the most relevant explanations of this phenomenon.

Corruption and round-trip investment from Cyprus and British Virgin Islands in Russia

We next analyse corruption in Russian regions as a factor behind the location of foreign investors across Russia. We find evidence that investors from Cyprus and the British Virgin Islands locate in more corrupt Russian regions when compared to the benchmark group of genuine foreign investors.

We also study the factors behind the fraction of round-trip investment in total foreign investment (measured by cumulative annual revenues of firms with foreign ownership) in Russian regions and find that the relationship between the level of corruption and the fraction of round-trip investment across Russian regions is positive and statistically significant. This result holds when we separately estimate our model for manufacturing, trade and combined real estate and financial sectors. The positive and highly statistically significant relationship between the level of corruption and the fraction of round-trip investment in the real estate and financial activities points to the corruption money laundering hypothesis of Russian round-trip investment.


Our study is the first one which provides empirical evidence on the link between corruption money laundering and Russian round-trip investment via Cyprus and the British Virgin Islands which has been widely discussed in recent months due to the critical financial situation in Cyprus and huge interest of Russian political and business elites in it. Our findings highlight the negative role of offshore jurisdictions in the development of the world economy since they facilitate corruption. In particular, the existence of such jurisdictions makes the process of laundering of money earned in dishonest activities (corruption or criminal) considerably easier.


Carr D L, J R Markusen and K E Maskus (2001), "Estimating the Knowledge-Capital Model of the Multinational Enterprise", The American Economic Review91(3), p. 693-708.

Kalotay, K (2005), "Outward Foreign Direct Investment from Russia in a Global Context" Journal of East-West Business, 11: 3/4, 9-33.

Ledyaeva S, P Karhunen and J Whalley (2013), "Offshore jurisdictions (including Cyprus), corruption money laundering and Russian round-trip investment", NBER Working Paper 19019.

Rossidou-Papakyriacou, E (1999), "International Co-operation in the Fight against Corruption from the point of view of an Offshore Centre”, paper presented at the 4th European Conference of Specialised Services in the Fight against Corruption, Limassol (Cyprus), 20-22 October.

Young, E (2013) "Russian money in Cyprus: Why is there so much?" BBC News, 18 March.

Wyplosz, C (2013), “Cyprus: The next blunder”, VoxEU.org, 18 March.

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