This article is from the source 'nytimes' and was first published or seen on . It last changed over 40 days ago and won't be checked again for changes.

You can find the current article at its original source at http://www.nytimes.com/2013/03/25/business/global/no-matter-outcome-cyprus-crisis-is-blow-to-business.html

The article has changed 2 times. There is an RSS feed of changes available.

Version 0 Version 1
No Matter Outcome, Cyprus Crisis Is Blow to Business Foreign Businesses in Cyprus Grind to a Standstill
(about 9 hours later)
LIMASSOL, CYPRUS — It is not just about rich Russians and Cypriot retirees.LIMASSOL, CYPRUS — It is not just about rich Russians and Cypriot retirees.
Also vitally at stake in this island country’s banking crisis is Cyprus’s credibility as a place for international companies to continue doing business.Also vitally at stake in this island country’s banking crisis is Cyprus’s credibility as a place for international companies to continue doing business.
Take Avid Life Media, the Canadian-owned operator of some of the world’s biggest online dating sites. Only a few weeks ago it set up an office here as a base for its international operations, attracted to Cyprus — as hundreds of other foreign businesses have been — because of its reputation for financial stability, a low corporate tax rate, a friendly banking environment and most of all, a strong rule of law.Take Avid Life Media, the Canadian-owned operator of some of the world’s biggest online dating sites. Only a few weeks ago it set up an office here as a base for its international operations, attracted to Cyprus — as hundreds of other foreign businesses have been — because of its reputation for financial stability, a low corporate tax rate, a friendly banking environment and most of all, a strong rule of law.
Sure, the Avid Life Media executives were aware that a banking crisis was brewing, but they had ventured ahead. They were assured in part by a promise from President Nicos Anastasiades when he was elected in February that he would soon arrange an equitable bailout with the international organizations that have guided the euro zone through four previous bailouts while keeping bank depositors whole.Sure, the Avid Life Media executives were aware that a banking crisis was brewing, but they had ventured ahead. They were assured in part by a promise from President Nicos Anastasiades when he was elected in February that he would soon arrange an equitable bailout with the international organizations that have guided the euro zone through four previous bailouts while keeping bank depositors whole.
“We went from paradise to hell in a minute,” said Keith Lalonde, Avid Life Media’s top executive here. He recounted the cellphone call he got from his financial adviser a week ago Saturday while strolling under a bright sun on Limassol’s fine white beach.“We went from paradise to hell in a minute,” said Keith Lalonde, Avid Life Media’s top executive here. He recounted the cellphone call he got from his financial adviser a week ago Saturday while strolling under a bright sun on Limassol’s fine white beach.
“We have a problem,” the adviser told him. The Cypriot government had just declared it would seize nearly 10 percent of the €2 million, or $2.6 million, the company had on deposit in Cyprus — and about 7 percent of Mr. Lalonde’s personal funds — to help secure its bailout.“We have a problem,” the adviser told him. The Cypriot government had just declared it would seize nearly 10 percent of the €2 million, or $2.6 million, the company had on deposit in Cyprus — and about 7 percent of Mr. Lalonde’s personal funds — to help secure its bailout.
As haggling over the bailout terms continued since, the company’s bank accounts — and all others on the island — have been frozen, making it nearly impossible to do business. Hundreds of other foreign-owned companies in Cyprus are in similar straits, whether new arrivals like Avid Life Media or long-timers like KPMG, PricewaterhouseCoopers and Lukoil.As haggling over the bailout terms continued since, the company’s bank accounts — and all others on the island — have been frozen, making it nearly impossible to do business. Hundreds of other foreign-owned companies in Cyprus are in similar straits, whether new arrivals like Avid Life Media or long-timers like KPMG, PricewaterhouseCoopers and Lukoil.
As soon as Mr. Lalonde got the call, he punched the speed dial to Avid Life Media’s chief executive in Toronto, Noel Biderman, to relay the news.As soon as Mr. Lalonde got the call, he punched the speed dial to Avid Life Media’s chief executive in Toronto, Noel Biderman, to relay the news.
“We jumped into panic mode,” Mr. Biderman recalled the other day in a telephone interview.“We jumped into panic mode,” Mr. Biderman recalled the other day in a telephone interview.
Although Avid Life Media’s business model has stoked controversy, and the occasional lawsuit, for Web sites like CougarLife.com and AshleyMadison.com that critics say promote promiscuity, the company has seen its European and global traffic grow rapidly. About a quarter of the sites’ 18 million members are outside North America, almost 4 million of them in Europe, according to the company. Mr. Biderman says he chose Cyprus for the same business-friendly, tax-attractive reasons that have drawn so many other foreign companies.Although Avid Life Media’s business model has stoked controversy, and the occasional lawsuit, for Web sites like CougarLife.com and AshleyMadison.com that critics say promote promiscuity, the company has seen its European and global traffic grow rapidly. About a quarter of the sites’ 18 million members are outside North America, almost 4 million of them in Europe, according to the company. Mr. Biderman says he chose Cyprus for the same business-friendly, tax-attractive reasons that have drawn so many other foreign companies.
Now, Mr. Biderman and Mr. Lalonde are wondering whether to pull up stakes. If that happened on a large scale, Cyprus, which has evolved into one of Europe’s most important financial centers in the past decade, would face a blow to the cornerstone of its economy. Other than mom-and-pop shops, most businesses in Cyprus have foreign owners.Now, Mr. Biderman and Mr. Lalonde are wondering whether to pull up stakes. If that happened on a large scale, Cyprus, which has evolved into one of Europe’s most important financial centers in the past decade, would face a blow to the cornerstone of its economy. Other than mom-and-pop shops, most businesses in Cyprus have foreign owners.
“Most of the money here comes from foreign investors and companies like us,” Mr. Lalonde said. But given the enormous uncertainty churned up, “Why would anyone come here?” he asked. “They have put the nails in their own coffin.”“Most of the money here comes from foreign investors and companies like us,” Mr. Lalonde said. But given the enormous uncertainty churned up, “Why would anyone come here?” he asked. “They have put the nails in their own coffin.”
On Sunday, President Anastasiades and finance ministers from the 17-member euro zone were meeting in Brussels, hoping to find a resolution to the Cypriot financial crisis. Whatever they come up with, it may not be nearly enough to contain the damage.On Sunday, President Anastasiades and finance ministers from the 17-member euro zone were meeting in Brussels, hoping to find a resolution to the Cypriot financial crisis. Whatever they come up with, it may not be nearly enough to contain the damage.
Much of what has made Cyprus so alluring to businesses has blown up in the past week. Cyprus’s 10 percent corporate tax rate would rise to 12 percent under the tentative terms of the bailout. That would still be the lowest in the euro zone, still below Ireland’s 12.5 percent and well under the 29.5 percent rate in Germany and 33.3 percent in France. But to be a tax haven requires a stability that Cyprus has lost.Much of what has made Cyprus so alluring to businesses has blown up in the past week. Cyprus’s 10 percent corporate tax rate would rise to 12 percent under the tentative terms of the bailout. That would still be the lowest in the euro zone, still below Ireland’s 12.5 percent and well under the 29.5 percent rate in Germany and 33.3 percent in France. But to be a tax haven requires a stability that Cyprus has lost.
The worst damage, however, came when policy makers opened a Pandora’s box by proposing to alter a once-inviolable precept by skimming money from bank deposits to help make up the government’s shortfall. On Sunday, the government continued to press for seizing a portion of savers’ deposits above €100,000, even though it abandoned the previous proposal of hitting smaller deposits, too.The worst damage, however, came when policy makers opened a Pandora’s box by proposing to alter a once-inviolable precept by skimming money from bank deposits to help make up the government’s shortfall. On Sunday, the government continued to press for seizing a portion of savers’ deposits above €100,000, even though it abandoned the previous proposal of hitting smaller deposits, too.
Avid Life Media, which began doing business in Cyprus shortly before Mr. Lalonde set up the international headquarters here, does not typically keep a lot of cash in its Cyprus accounts, although executives were attracted by the outsized interest rates, averaging around 5 percent, that banks have paid to lure customers worldwide — including an estimated $31 billion held by Russians in Cypriot banks, according to a report by Moody’s, the rating agency.Avid Life Media, which began doing business in Cyprus shortly before Mr. Lalonde set up the international headquarters here, does not typically keep a lot of cash in its Cyprus accounts, although executives were attracted by the outsized interest rates, averaging around 5 percent, that banks have paid to lure customers worldwide — including an estimated $31 billion held by Russians in Cypriot banks, according to a report by Moody’s, the rating agency.
But Avid Life transfers a pile of euros in at the beginning and the middle of each month in order to pay its affiliate partners in Europe, as well as other expenses.But Avid Life transfers a pile of euros in at the beginning and the middle of each month in order to pay its affiliate partners in Europe, as well as other expenses.
It was in the wee hours of March 16, shortly after some €2 million had just been sent to Avid Life’s corporate account at the Cypriot branch of the Greek bank Piraeus, that President Anastasiades agreed to take the unprecedented step of placing a one-time tax on private deposits in Cyprus. Although the president would later claim that Germany and Cyprus’s other European Union partners “blackmailed” him into the deal, European officials said the president himself chose to reach into bank accounts in a time of need.It was in the wee hours of March 16, shortly after some €2 million had just been sent to Avid Life’s corporate account at the Cypriot branch of the Greek bank Piraeus, that President Anastasiades agreed to take the unprecedented step of placing a one-time tax on private deposits in Cyprus. Although the president would later claim that Germany and Cyprus’s other European Union partners “blackmailed” him into the deal, European officials said the president himself chose to reach into bank accounts in a time of need.
Whatever the truth, Mr. Biderman said, “when I heard that, my reaction was, ‘Wow, the government sees this as their money and they’ll do what they please.”’Whatever the truth, Mr. Biderman said, “when I heard that, my reaction was, ‘Wow, the government sees this as their money and they’ll do what they please.”’
Back in Limassol, Mr. Lalonde jumped into a car with one of his colleagues and headed straight to an automated teller machine to withdraw the €500 daily limit from their personal accounts.Back in Limassol, Mr. Lalonde jumped into a car with one of his colleagues and headed straight to an automated teller machine to withdraw the €500 daily limit from their personal accounts.
“When you hear about a bailout, you think about the government and other countries helping,” said that colleague, Yanka Clementi, 28, a manager of operations. Like Mr. Lalonde, he moved to Cyprus from Toronto only three weeks ago.“When you hear about a bailout, you think about the government and other countries helping,” said that colleague, Yanka Clementi, 28, a manager of operations. Like Mr. Lalonde, he moved to Cyprus from Toronto only three weeks ago.
“You don’t think the government’s going to take your money,” Mr. Clementi said. “But here, they’re pretty much stealing from people.”“You don’t think the government’s going to take your money,” Mr. Clementi said. “But here, they’re pretty much stealing from people.”
Now, Mr. Biderman is trying to stanch the bleeding. Having invested a half-million euros to set up shop in Cyprus, he stands to lose tens or even hundreds of thousands of euros, depending on the final bailout deal. “We weren’t a party to their bubble or to any of the high interest rates yet,” he said.Now, Mr. Biderman is trying to stanch the bleeding. Having invested a half-million euros to set up shop in Cyprus, he stands to lose tens or even hundreds of thousands of euros, depending on the final bailout deal. “We weren’t a party to their bubble or to any of the high interest rates yet,” he said.
“I’m really concerned because I think I’m on the cusp of building a billion-dollar business,” Mr. Biderman said, referring to Avid Life Media’s global operations.“I’m really concerned because I think I’m on the cusp of building a billion-dollar business,” Mr. Biderman said, referring to Avid Life Media’s global operations.
As for Cyprus, he said, “Now I’m just trying to figure out whether to cut my loss.”As for Cyprus, he said, “Now I’m just trying to figure out whether to cut my loss.”
Nor is he convinced it will be safer to bank in any other euro zone country. “They have created a domino effect of uncertainty,” Mr. Biderman said. “I don’t see why this wouldn’t happen in Malta, Ireland, Spain,” or anywhere else where a government decides it needs money for an emergency.Nor is he convinced it will be safer to bank in any other euro zone country. “They have created a domino effect of uncertainty,” Mr. Biderman said. “I don’t see why this wouldn’t happen in Malta, Ireland, Spain,” or anywhere else where a government decides it needs money for an emergency.
“These one-time measures can be very addictive to governments,” he added. “And this doesn’t solve any of the euro zone’s deeper problems.”“These one-time measures can be very addictive to governments,” he added. “And this doesn’t solve any of the euro zone’s deeper problems.”
Late last week, as crowds of anxious Cypriots lined up at automated teller machines around Limassol, Mr. Lalonde swept his eyes around Avid Life Media’s cavernous new wood-paneled offices. There were only two computers — he had planned to order others before the company’s accounts were frozen. He gestured to a clump of empty desks meant to accommodate 12 new employees by next year.Late last week, as crowds of anxious Cypriots lined up at automated teller machines around Limassol, Mr. Lalonde swept his eyes around Avid Life Media’s cavernous new wood-paneled offices. There were only two computers — he had planned to order others before the company’s accounts were frozen. He gestured to a clump of empty desks meant to accommodate 12 new employees by next year.
Three new staff members, including Ms. Clementi, were just hired. Whether more will come aboard is now an open question. When things settle, the company is likely to stay, Mr. Lalonde said. But just in case, he is signing only six-month contracts for cable, Internet and all other services.Three new staff members, including Ms. Clementi, were just hired. Whether more will come aboard is now an open question. When things settle, the company is likely to stay, Mr. Lalonde said. But just in case, he is signing only six-month contracts for cable, Internet and all other services.
If banks do reopen on Tuesday, under the latest plan, he will move all the company’s accounts to London or to North America — as well as his personal funds. But now that the government has imposed capital controls to prevent a run on banks, how long those transfers might take is hard to say.If banks do reopen on Tuesday, under the latest plan, he will move all the company’s accounts to London or to North America — as well as his personal funds. But now that the government has imposed capital controls to prevent a run on banks, how long those transfers might take is hard to say.
“Will we be able to continue in Cyprus? We think we can,” Mr. Lalonde said. “But we’re worried about the stability of everything. They have really undermined their own foundations. And there’s no way of turning it back.”“Will we be able to continue in Cyprus? We think we can,” Mr. Lalonde said. “But we’re worried about the stability of everything. They have really undermined their own foundations. And there’s no way of turning it back.”