Nicholas Watson in Prague -
The EU may be under attack from all sides, but one thing from the bloc that is still highly prized are its passports. And in a sign of these straightened times, selling citizenship has become a big potential source of revenue for cash-strapped European governments.
Case in point is Cyprus. A member of both the EU and the single currency, Cyprus is "exhibit A" for all that's gone wrong with many countries in Europe. Its flailing economy is back in recession. For too long, it tried to borrow its way out of trouble, and now its debts are predicted to reach 140% of GDP by 2016, an unsustainable level. Its banks were too closely tied to the country's main sponsor Greece, whose meltdown meant that about 75% of their investments went down the drain, and it lent rashly. Facing bankruptcy, the government has requested an international bailout to the tune of €17.5bn.
A bailout has been agreed in principle, but the European authorities want major changes before they agree to stump up the cash, particularly with the banks. Greedy and complacent, Cypriot banks have long been a haven for shady money, especially from Russia, and Mario Draghi, the European Central Bank chief, said February 19 that any final deal must include "close monitoring" of anti-money laundering mechanisms on the island.
The scale of the problem can be see in data from Russia's central bank, which showed that in 2011 Cyprus was the number-one destination for Russian money going abroad, with independent estimates of Russian deposits there ranging from €8bn to €35bn.
Taking a leaf out of the banks' book, the Cypriot government is looking to monetize its attractiveness to outside depositors by offering residency to those who invest in the island, which will in turn provide EU-wide visa free travel and access to precious things like European schools.
Since August 2012, the Cypriot government has set out the terms and conditions needed for investors from outside the EU to gain permanent residence, which involves having to spend at least €300,000 on a property, prove they have no criminal record and are in good financial standing, and agree to deposit €30,000 for a minimum of three years in a local bank account. Their permit will normally arrive in about 45 days, according to The Guardian.
The wave of property ads in Chinese points to where Cypriots see a big potential market. The Land Registry claims that 2013 is on course to register an all-time low for property sales after January's figures showed a 53% drop from the year before, but Cyprus had received 590 applications from Chinese developers to build houses at the end of 2012, in a clear sign that such firms predict big demand from Chinese people looking for a holiday home and the accompanying residency permit that goes with it.
As for Russia itself, it is moving in the opposite direction, where if anything it is getting harder to obtain a residency permit, let alone a passport, if you were not born Russian - or mates with the president.
Since the job of handing out visas was transferred from the foreign ministry to the interior ministry, getting a visa has become more difficult than ever. While the duration of business visas was increased from one to three years, you can only stay in the country a total of 180 days a year even with the long-term visa. If you actually want to live in, say Moscow, then you need to get a hard-to-come-by work permit and also check in and out with the police every time you leave the city - even if you just go to Sochi for the weekend.
There is even talk of ending the unrestricted entry rights for anyone holding the passport of one of the 15 former Soviet vassal states: Azeris and Tajiks are to Russia what Poles are to Brits in terms of a cheap source of labour.
However, all this red tape can be avoided if you have the right friends. In January, French actor Gerard Depardieu was granted Russian citizenship by a fiat of Russian President Vladimir Putin. Questions marks over what qualified the notorious actor to become Russian (other than escaping France's high taxes), were quickly dispelled when he arrived in traditional Mordovian attire to pick up his new passport in a ceremony in the Mordovian town of Saransk in the Volga basin. "The Russian opposition has no programme, nothing," Depardieu railed in an interview broadcast on the state television channel Rossia 1 just after turning down an offer to become the republic's culture minister.
He went on to lambast the jailed punk rock group Pussy Riot, claiming that if band members had performed in a mosque, "they would not have come out alive," and that their behaviour would have caused outrage even in the Catholic world. Similar arguments have been made by Putin in the past. "If I say such things in France, I'm labeled an idiot," he concluded.
While the EU sets visa policy for the bloc as a whole, it leaves the question of residency to national governments. This has left Europe's governments free to compete to attract new, rich non-EU residents.
Hungary, another bailed-out EU member stuck in recession with a government desperate to find alternative sources of funds, has a new law that took effect at the end of December which enables buyers of at least €250,000 worth of government residency bonds to obtain a permanent residency permit. Interest rates on the bonds will be lower than market rates to account for the residency advantage.
Janos Tamas Varga, managing partner at the Budapest law firm VJT & Partners, says the proposed regulation is attractive for non-EU investors, because it provides for permanent residency at a significantly lower cost than other European countries offer, and without requiring prior continuous physical residence in Hungary. "There is an increasing number of enquiries from foreign nationals in relation to investment-based permanent residence permits, in particular from China, the Middle East and Russia," says Varga.
In the spirit of competition for wealthy new residents, the Bulgaria parliament on February 13 amended parts of a new law offering citizenship to foreign investors, significantly lowering the investment sums for several different categories of applicants.
Instead of the initially intended BGN1m (€520,000) that a prospective new citizen of Bulgaria needed to pour into the country's ailing economy, permanent residency will now be granted to anyone who invests BGN600,000 in Bulgarian property, BGN500,000 in a company that creates at least 10 jobs, or BGN250,000 in a firm that creates five jobs in an economically depressed region.
Offering to sell citizenship, even with a hefty price tag, would be more difficult in Latvia than in most EU countries. After all, this EU member state still contains around 100,000 people classed as "non-citizens." As the descendants of migrants who moved here in during the Soviet era, they are left in a legal limbo despite many being born and raised in the country, and repeated calls from international organisations such as the UN to resolve their status.
So passports are a prickly issue, but that hasn't stopped Latvia's entrepreneurial spirit and the country has found several alternative ways to make a fast buck out of getting foreigners to live here - in theory at least.
The most popular method involves buying real estate worth LVL100,000 (€142,000) in Riga and its surrounding region (including the popular resort town of Jurmala), or a mere LVL50,000 elsewhere in the country. With the property comes the right to apply for a Latvian residence permit. That may not sound like a huge prize for an international oligarch on the move, but with Latvia a member of the EU's border-free Schengen Zone, the right to reside in the country comes with the right to move freely around the rest of Europe - and includes family members.
Sun yourself on the beaches of southern Spain or dine with investment bankers in Paris - it's all on tap to holders of Latvian residence permits, which makes buying a modest country house or flat seem like quite a bargain. Indeed, bne has even been told by estate agents that foreigners are willing to pay over the odds for property in order to get the right to apply for residence - so a country house worth LVL40k might actually sell for LVL50k.
And since April 2012 instead of an old-fashioned passport insert, residence permit holders have been issued with a separate "EU national ID card".
That's not all - alternative methods of getting a permit also exist and include investing LVL100,000 in a Latvian business or investing LVL200,000 in a five-year term deposit or bonds at a Latvian bank. Speaking of which, despite a population of just 2m, Latvia boasts 29 banks, the majority of them operating on a boutique basis primarily servicing well-heeled foreigners who may or may not have resident status.
The slickest provider of such services has been Rietumu banka (Western bank), whose homepage contains an enticing video titled, "Welcome to Latvia! Welcome to Europe!", along with the promise to "provide full advisory services and other support."
According to official data from the Office of Citizenship and Migration Affairs, since the legislation came into force on July 1, 2010, a total of 4,744 foreign nationals have used it to obtain residence permits, bringing with them an investment of LVL318m to the economy. With 5,171 applications made in total, the rejection rate is so low that dubious characters - like those with lots of illicit money to launder - will hardly be discouraged from applying.
Wannabe in my gang
It's not just EU states that are trying to tempt wealthy residents; European countries that are still trying to join the bloc are also opening their doors to foreign investors looking for the chance to enjoy EU-wide travel, with the promise of an upgrade to an EU passport once they have successfully acceded to the union.
Driving down the Montenegrin coast, it is immediately apparent which international investors this tiny country is courting. The roads are lined with billboards advertising glitzy-looking properties - almost all in Russian and English. Montenegro is Europe's latest hotspot for holiday real estate, from summer homes to luxury resorts.
Many people who have visited this beautiful country have considered - or at least dreamed of - buying a place in the sun, particularly those from frigid northern climes. But how many would seek to become Montenegrin?
In 2010, Montenegro caused a stir when the government announced that it would grant citizenship to foreigners who invested €500,000 or more in the country. The move came under the 2008 "Montenegrin Citizenship Act", which already provided for citizenship to be offered to foreign nationals in some cases, if there was a compelling economic, scientific, cultural or sporting case. Other criteria also applied - including employing a certain number of local staff - but the figure of half a million euros for a passport made the headlines.
Months before, Montenegro had controversially provided a passport to Thaksin Shinawatra, a self-exiled former prime minister of Thailand who was deposed in a coup and faced criminal charges relating to corruption in his home country. Pictures of a beaming Thaksin with his new passport brought citizenship policies in Montenegro - which had become independent from Serbia less than five years before - to international attention.
The government made a strong case for its "economic citizenship programme," saying that it would encourage businesspeople to set up shop in the country and that it demonstrated Montenegro's open-doors position on investment. As a country of just over 600,000 people without much in the way of natural resources, Montenegro's leaders felt that it needed a policy to stand out.
However, economic citizenship was not universally popular. An opposition MP said that the law would "only attract tycoons and corrupt politicians on the run." He was doubtless thinking of Thaksin; others mentioned Oleg Deripaska, the Russian metals magnate who has a taste for mooring his yacht on the Montenegrin coast.
Despite the government's protestations that it would vet all citizenship applicants, criticism grew internationally. The Christian Social Union, part of Germany's ruling coalition, even suggested that Montenegro's EU visa waiver could be reversed over the law. Given Germany's clout in the EU, criticism from this quarter is not positive to EU membership hopes (Montenegro began accession talks in June). Thus perhaps not coincidentally, a few months after it was announced, the economic citizenship programme was put on hold.
But while the scheme itself has been gathering dust, Montenegro has still been granting passports on a case-by-case basis, according to a November report by academic Jelena Dzankic for the EUDO Citizenship Observatory. And Petar Ivanovic, Montenegro's agriculture minister and the outgoing head of the Montenegrin Investment Promotion Agency, tells bne that the cabinet is discussing reinstating the scheme, albeit potentially with different conditions. "This was an excellent programme as far as the government was concerned," he says.
Other than being able to live year-round in a beautiful and relatively affordable country - something that is possible with temporary residency and thus does not necessarily entail taking up a new nationality - what does a Montenegrin passport offer? That visa-free entry to the EU, certainly; and a passport that does not attract unwanted attention in most parts of the world. The government also trumpets its low and flat income and corporate tax - just 9%, lower than anywhere in the EU.
There is also a suggestion - denied by the government of course - that the Montenegrin authorities are not as vigorous as they might be in tackling nefarious business activities. This perception partly explains why the economic citizenship programme came under such scrutiny.
Another EU-wannabe state that is risking the wrath of Brussels is Albania. Visa-free travel to the EU took effect for Albania in December 2010, allowing Albanian citizens to travel easily to Europe's borderless Schengen zone, but Tirana is putting that at risk with a draft law from the government that will grant citizenship to anyone who invests at least $200,000 in the country.
With Albania boasting Europe's last undeveloped coastline, that $200k should ensure any prospective investor a prime beachfront location. As for the other pros and cons, bne looks in more depth at them in the following section...
Black Sea coast
Hot, dry summers
Still one of cheapest EU countries
10% flat corporate and personal tax
Generally business-friendly environment
Not yet member of Schengen Zone
Cold, wet winters
Occasional gas cut-offs by Russia
EU member of Schengen Zone
Flat personal tax rate of 16%, corporate 10-19%
Great local wine and goulash
Excellent time to snap up low post-crisis property: average Budapest price/sqm in 2011 was HUF239,000, or $100 per square foot
VAT at 27%, highest in EU
Growing anti-Semitism, racism in general
Democratic norms receding
Capricious government policy
Lots of boutique banks with Russian-speaking staff
Will soon be in Eurozone
Residence permit with Schengen visa and ID card
Post-crash property prices still low: LVL50k (outside Riga region) or LVL100k
(Riga region, including Jurmala resort)
Quick links to Russia and CIS
Business tax 15%; "microbusinesses" with fewer than 5 employees less at 9% of turnover (rather than of income).
Relatively high personal income tax rate of 24%
Banks have a habit of going bust
Connections to the elite hard to make
Could be the new Cyprus
Good luck learning Latvian
10% personal and corporate flat tax
Europe's last undeveloped coastline
A short hop across to Corfu
Criminality on a grand scale
Political instability and corruption
EU membership a long way off
Decrepit or non-existent infrastructure, services
Lowest corporate/personal flat tax in Europe of 9%
Stunning mountain scenery and 295km Adriatic coastline
Venetian-influenced towns such as Kotor, Budva and Perast
Mediterranean climate: the temperature on coast rarely drops below freezing; Bar has 270 sunny days per year
Vranac wine and loza (grape brandy)
Property prices in coastal towns average less than €2000/sqm (CBRE) and have fallen in recent years.
New resorts such as Porto Montenegro attracting global glitterati
Uses the euro
Wet winter weather
Reputation for organised crime and corruption
Stagnant political scene dominated by one party for two decades (since WWII by some measures)
Income gap between coast and the mountainous interior
Flight connectivity could be better
Threat of overdevelopment along coast, potentially damaging natural beauty and property prices
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