For the second year in a row, Cyprus has remained a top investor into the Russian economy – but the consensus is that the investment is not really foreign at all.

Cyprus-based companies have retained their positions as some of the largest foreign investors into the Russian economy.

Cyprus, a tiny Mediterranean state known mainly for its all-season resort and tourism industry, has been investing billions of U.S. dollars into the Russian economy through to 2002, according to a recent report released by Goskomstat, the federal agency in charge of official statistics and information.

According to the agency, gross foreign investment into Russia at the end of last year stood at $42.92 billion, an increase of 20.5 percent over 2001’s data.

Broken down, this represented $20.4 billion in direct foreign investment, $1.5 billion in portfolio investment and $21.1 billion in other forms. Of this sum, Germany’s share accounted for 19 percent, or $1.63 billion, while Cyprus’ No. Two share stood at 13.1 percent, or $1.1 billion, in the first half of 2002, down from the over $2.33 billion it pumped into Russia when it headed the list in 2001.

Germany’s current position as the largest foreign investor on the list was not surprising to anyone in the investment community. German companies have taken the lead in industrial joint ventures and outsourcing from Russia. That Cyprus came in second, experts say, has different reasons lurking in the background.

"Most of Cyprus’ Russia-bound investments are nothing other than Russian oligarchs’ capital that was shipped overseas during the turbulent period of the ‘90s," said a Moscow-based bank analyst who requested anonymity. The analyst cited tax reform undertaken in Cyprus in which corporate taxes have been increased from 4.25 percent to 10 percent, as well as other tighter financial measures that the island nation is using to put its capital market in order ahead of EU membership later this year, as possible reasons for the cash outflow.

"It’s more than clear to everyone with a basic knowledge of capital movements and investment trends in the global economy that this is all Russian money that has been laundered in Cyprus-based financial institutions," he added. "Evidence of this is that Cyprus’ investments into other emerging economies are not as large as those pouring into Russia."

It is not known how much of these investments come from Russian-owned companies. Cypriot laws protect the identity of shareholders if they so desire.

Most experts, however, agree that at least 75 percent of these direct investments are controlled by Russian individuals or corporations that and the returning capital is seen as a positive. Until recently Russian tycoons would more often than not stash their riches offshore rather than reinvest them into the country.

Now the trend has reversed, as local businesses have growing confidence in the economy.