When Cypriot Foreign Minister Ioannis Kassoulidhis visited Ukraine this week, he received a beaming welcome from Ukrainian officials. He met personally with President Leonid Kuchma, who declared Ukraine's determination to develop bilateral economic ties with Cyprus, and gladly accepted an invitation to visit the small, yet economically thriving island. Ukraine's Foreign Ministry proudly noted the 'positive dynamics of relations between Ukraine and Cyprus' and praised growing bilateral trade and a steady flow of investments from this tiny piece of real estate in the Mediterranean.
Indeed, one would have thought tiny Cyprus was one of the largest foreign investors into Ukraine. Wait a minute. It is.
Last year, Cyprus was the fourth largest investor in Ukraine after the United States, the Netherlands, and Germany, and it has been in the top ranks of foreign investors for the past several years. But how can it be that the United States – Ukraine's most generous foreign investor – has only pumped more than $500 million into Ukraine over the past eight years, while much smaller Cyprus has managed to come up with almost half that much – $200 million – at the same time?
The key is that, while all that money may have come from Cyprus, most of it wasn't exactly Cypriot money.
As Kassoulidhis was touring St. Sophia's Cathedral in Kyiv, Kuchma was delivering his State of the Nation address in parliament, in which he strongly encouraged lawmakers to grant amnesty for Ukrainian shadow capital stashed abroad. That would allow funds illegally shipped out of Ukraine to be legally brought back. The idea is that, with the international community cracking down on money laundered from the region, it would be harder to illegally export that dirty money the second time around.
Cyprus, an off-shore banking haven, is thought to be one of the places where some of that capital sought sanctuary from Ukraine's zealous tax inspectors.
Back in 1997, parliament, citing the necessity to prevent exported Ukrainian shadow capital from being reinvested in Ukraine under favorable terms, defied the government and cancelled tax breaks for foreign investors. Now that parliament's on its side, the government wants to tempt that shadow capital back into the country. Kuchma pressed the issue hard in his State of the Nation speech to parliament. Parliament is expected to comply with his wishes.
The issue of capital amnesty may or may not explain the enthusiasm with which the Cypriots were received. But they surely left happy, and why not? Little Cyprus could be poised to challenge the United States for the title of Ukraine's largest foreign investor.
