In the wake of the banking crisis, the Cypriot Central Bank, Cypriot Government and European institutions introduced a number of restrictive measures that couldn't help but provoke a riposte from the global market. Cyprus' longstanding reputation as a tax friendly jurisdiction has been severely damaged. As a result, large Russian companies incorporated in Cyprus were arguably among the most aggrieved. This is a hot topic for Russian businesses because involvement in Cyprus has become a game of stick or twist. Stick by Cyprus and hope that enduring economic relationships, tax treaties and economic recovery hold firm. Or twist and challenge the restrictive measures imposed by the Cypriot Central Bank, Cypriot Government and European institutions. The other appealing alternative might be regarded as a protest action: to look for an alternative jurisdiction to allocate their funds on the basis that these restrictive measures could change the investment climate in Cyprus for Russian business. Having spoken to a number of the delegates attending the American Bar Association's 5th Annual Conference on the resolution of CIS related business, held in Moscow this year, our CIS team started wondering what Russian businesses based in Cyprus would prefer. In the meantime, let's have a look at how the things stand now.


On 22 March 2013, the Cypriot Government passed The Resolution of Credit and Other Institutions Law ("Law 17(I)/2013") and The Enforcement of Restrictive Measures on Transactions in Case of Emergency Law of 2013 ("Law 12(I)/2013"). Broadly speaking, these imposed restrictive measures on transactions, such as the prohibition of cashing cheques, and the prohibition of certain payments/transfers inside and outside the jurisdiction.

On 25 March 2013, the Eurogroup, IMF and Cyprus entered into an agreement which sought, amongst other things, to re-organise Laiki Bank and the Bank of Cyprus, increase the corporate tax regime from 10% to 12.5%, and impose a 9.9% levy on deposits in excess of €100.000.

Judicial Remedies

Claims by depositors in Laiki Bank and the Bank of Cyprus (the "Depositors")

Following the imposition of these restrictive measures, a vast number of administrative actions were brought against the Central Bank of Cyprus. These actions primarily challenged the validity of Law 17(I)/2013 and Law 12(I)/2013 in light of Article 63 of the Treaty on the Functioning of the European Union – free movement of capital and payment.

On 7 June 2013 the Supreme Court of Cyprus held that there was no contractual link between the Central Bank of Cyprus and the Depositors, and that the correct forum for these disputes was the civil courts, not the administrative courts. This was clearly a matter of public policy and, despite the dissenting judgments of Judge Papadopoulou and Judge Erotokritou, it is no surprise that the Court did not find in favour of the Depositors in this action. However, the judgment did provide some positives for the potential claimants. In its conclusion the Court held that the law as it stands in Cyprus enables potential claimants to file claims in the civil courts, and not the administrative courts, for breach of contract. However, such proceedings would undoubtedly take longer time and not everyone is willing to take the risk. So far there have been no claims brought to civil courts.

How does this impact Russian Depositors?

With strong ties between the Cypriot legal system and English legal system, Russian holding companies incorporated in Cyprus have frequently elected to have their agreements governed by English law with English dispute resolution clauses. As a consequence, the English Courts may be faced with a flood of disputes in the wake of the Cypriot banking crisis.

As it stands, there are three potential grounds to be litigated:

  1. Breach of contractual duty

The first ground that Russian Depositors may consider is whether the 9.9% levy on deposits over €100.000 amounts to a breach of contractual duty by the Cypriot Central Bank, Cypriot Government or European institutions.

With a wealth of potential interim remedies at their disposal under English law, such as freezing orders and interim injunctions, there are a number of avenues for Russian Depositors to explore in the English Courts.

However, issuing proceedings for breach of contract in the English Courts this gives rise to two possible defences:

  1. The doctrine of frustration

The overriding principle of the doctrine of frustration under English law is that a contract will be frustrated because performance would now be ‘radically different' from what was set out in the original contract.

Whilst a defence under the doctrine of frustration seems plausible, in our experience it is only applied in strict and limited circumstances. As such, the measures imposed by the Cypriot Government are unlikely to amount to frustration of a contract. These measures may make a contract more difficult to perform, but in general they will not render the contract impossible or illegal, nor are they likely to defeat the common purpose of the contract.

  1. Force majeure – express contractual provision

The legal concept of ‘force majeure' provides that where events make the performance of a contract impossible, the obligations of the contract will be suspended or terminated. The legal concept of force majeure is not recognised under English law unless it is expressly provided for in the contract.

The classic formulation of such a clause will refer to such circumstances as: abnormal weather conditions; acts of terrorism; war; acts of God; and any law or any action taken by a Government or public authority.

Clearly, Law 17(I)/2013, Law 12(I)/2013 and the 9.9% levy on deposits in excess of €100.000 could amount to ‘any law or any action taken by a Government or public authority'.

However, the counter argument is that these measures relate to economic or market circumstances. Under English law, it is an established principle that a change in economic or market circumstances, affecting the profitability of a contract or the ease with which the parties' obligations can be performed, is not regarded as being a force majeure event.

Having dealt with the nuances of force majeure clauses on a regular basis we think that is a better argument that the events arising as a consequence of the Cypriot banking crisis are both economic and actions taken by a Government or public authority. In these circumstances, it is possible that such a force majeure clause could be relied upon by a defendant.

  1. Negligence

The second ground that Russian Depositors may consider is whether there has been any negligence on the part of the banks, directors of the banks, auditors, or Cypriot Government officials which caused the Cypriot banking crisis.

In order to plead this case successfully, Russian Depositors will have to prove that the prospective defendant(s) owed them a duty of care.

The Russian Depositors will have to prove that they relied on the advice of the prospective defendant(s), and but for that advice, they would not have made such investments.

  1. Expropriation

The final ground that Russian Depositors may consider is for unlawful expropriation under private international law.

Expropriation is broadly defined as an act by a government entity that substantially deprives a foreign investor of its ownership, control, or economic benefit in an investment or property located in the governmental entity's jurisdiction.

The general rule is that expropriation will not be unlawful, provided it is:

  1. for some bona fide public purpose;
  2. not discriminatory; and
  3. accompanied by compensation.

Having worked on a number of private international law cases in the past, we believe that the strongest claim for expropriation will focus on breaches of Article 63 of the Treaty on the Functioning of the European Union – free movement of capital and payment. In this instance it is clear that the Cypriot Central Bank has expropriated ownership, control and economic benefit in Russian investment or property located in Cyprus. However, it is unclear whether the Cypriot Central Bank has done this unlawfully. Nevertheless, if such a claim were to succeed, it could extend to all EU institutions involved in imposing such restrictive measures.


The restrictive measures imposed by the Cypriot Central Bank, the Cypriot Government and the European institutions, in the wake of the Cypriot banking crisis, have given rise to three potential causes of action for Russian Depositors: (1) breach of contract; (2) negligence; and (3) expropriation. However, whether or not Russian Depositors choose to litigate these grounds is a different question. With a long-standing Russo-Cypriot relationship at stake, and question marks over jurisdiction, common law and statutory defences and public policy, litigation is a very risky option. However, that is not to say that these points of action cannot be used as a commercial bargaining chip between Russia and Cyprus for commercial transactions in 2014 and beyond.

Possible Change of Jurisdiction

Instead of or in addition to a litigation option, businesses will take a chance to look for an alternative jurisdiction that offers more stability and protection. At this date Russian is a party to double taxation treaties with 80 countries. At the same time the choice of suitable jurisdictions is not as wide as it seems and difficulties may arise at the very beginning of the way.

Most of the jurisdictions impose stringent requirements on those businesses that are willing to use tax benefits. For example, it is quite difficult to open an account in Hong Kong and Singapore, as applicants would have to pass personal interviews and prepare a business plan that covers work in the Asian region. 

For that or another reason, the most popular tax harbours for Russian businesses currently are the Netherlands, Switzerland, United Kingdom, Luxembourg, and the British Virgin Islands. It is necessary to consider that working in a new jurisdiction might cost more, especially in European countries. It could be advisable for large businesses to leave the island, however Cyprus is known as a place that offered harbourage to small and medium size companies, which means that most the funds might still be kept in the country.

Moreover, Cyprus remains to be seen as a beneficial jurisdiction from the perspective of international transactions planning. Since country of registration of the company is not tied up to the country where a bank account is opened, cash funds of Cypriot structures can be stored in any other jurisdiction. This would allow taking advantage of the tax system of Cyprus and mitigating financial risks associated with its banking sphere.

Cyprus crisis was a wake-up call for many and its long-term prospects are still hard to predict. Future of Cyprus business and economic environment depends on whether Cyprus is able to restore confidence in its banking system and stabilize economic situation in the country.

This article originally appeared in Corporate Lawyer Magazine, the leading legal publication in Russia.