Current Sanctions on Russia – Possible Impact on Cyprus

The impact on the economy of Cyprus of the current sanctions on Russia, introduced by the EU, the USA and some other countries, can be expected to remain on a moderate level in general, while some industries will be more exposed than others.

While there is much uncertainty about the impact of current sanctions as well as possible near future sanctions, the currents sanctions are expected to reduce the estimated 2022 GDP growth rate of Cyprus from 4,5% to 4.0%.

The value-added of Russian-related business transactions accounts for estimated 5.8% of GDP in 2022, stemming from an estimated value of €2.5bn of total transactions. The breakdown of expected total transactions of Russian-related business in 2022 yield as following (rounded): professional services: 40%, property sales: 22%, tourism: 21%, banking services: 9%, administrative services: 8%.

The important factor for the economy of Cyprus is the value added by Russian-related business, not the volume of transactions. Due to poor statistical services in Cyprus, value-added figures cannot be obtained.

The exposure of the banking sector to Russian-related business has decreased substantially since the crisis in 2013 and also as a result of increased tax transparency measures as well as changes of Russia’s tax legislation.

Based on the financial statements of 2021, the income generated by the two largest lenders from Russian-related business through their International Business Centres yielded €6.3mn for Bank of Cyprus and €2.1mn for Hellenic Bank, being 3% and 2% respectively of their overall operative income 2021.

Income generated by the same banks from Russian-related business from Global Corporate Banking yielded €2.1mn for Bank of Cyprus and €0.7mn for Hellenic Bank, being 1% of their overall operative income 2021.

As far as the two banks’ income from the construction and real estate industry is concerned, Bank of Cyprus generated €1.8mn and Hellenic Bank €1.7 mn, representing 1% and 2% respectively of the overall operational income 2021. Please note that these figures are assumptions, based on real estate sales.

In a worst case scenario, which is unlikely to happen as not all Russian-related business is related to Russia or sanctioned Russian individuals, the total loss of Russian-related income would be €8.5mn for Bank of Cyprus and €1.8mn for Hellenic Bank, representing 4% of the overall operational income 2021 of the former and 2% of overall operational income 2021 of the latter, and 28% of the 2021 profit of Bank of Cyprus and 6% of Hellenic Bank’s 2021 profit.

Both banks maintain high liquidity rates, while deposits related to Russians are at the lower end of single-digit percentages.

There is no significant impact expected on the construction and real estate sectors, as sales to Russians already slowed down substantially since the Citizenship by Investment programme had been cancelled.

The industry most affected is likely the tourism sector. During pre-COVID years, Russian arrivals in Cyprus made 33% of the total arrivals; these arrivals are not only Russian tourists though, but include traveling business people and private visitors as well.

Based on for how long the flight bans will continue, Russian tourists are hardly to be expected in significant numbers this year. Ukrainian tourists are not expected, except a small number, as Ukrainians will be busy with repairing the vast damage in the country, once the Russian invasion did come to an end.

Overall, at a national level, the impact of the current Sanctions on Russia seems to remain on a moderate level. This might change though, if more sanctions would be introduced.

Sources of figures in this article: Cyprus Ministry of Finance, Financial Statements of Bank of Cyprus and Hellenic Banl, Sapienta Economics Ltd.