According to the Cypriot Financial Mirror, the blacklist is part of an amendment to the Russian tax code which came into effect on January 1, introducing a tax exemption on the repatriation of dividends from foreign subsidiaries of Russian companies under certain circumstances. Subsidiaries based in territories and countries on the so-called blacklist were not included in the exemption.

Initially, this blacklist was said to contain 59 jurisdictions, and included offshore territories such as the Cayman Islands and the British Virgin Islands, which, according to Russia, had shown reluctance in agreeing to information exchange agreements with Moscow. The list also contained some European Union countries, but it has since shrunk to about 40 countries after many governments reportedly lobbied the Russian authorities to be excluded from the blacklist, including, among others, Ireland, Luxembourg and Switzerland.

Cyprus however, remains on the list, and given the fact that the Mediterranean island is one of the largest sources of investment into Russia, thanks in large part to a favourable bilateral tax treaty and Cyprus's own attractive tax regime, this has worried many concerned with the future of the island as a financial centre.

“We are concerned that the list will be used for wider and wider applications. This will be a huge blow, it will be a tragedy," a Finance Ministry insider told the Cyprus Mail.

In 2006, 21.6%, or USD28 billion, of the USD130 billion total accumulated investments in Russia came through Cyprus.

It seems from reports that the Cypriot government was caught napping when other governments sought the opportunity to remove themselves from the blacklist. However, tax experts have played down the impact of the amendment to Russian tax law, pointing out that it is designed to catch repatriation of dividend payments from foreign subsidiaries of Russian companies.

“In fact, most Cyprus companies are Cyprus holding companies that receive dividends from Russia as opposed to paying dividends to Russian companies, and therefore completely avoid taxation," Peter G. Economides, Chairman of the international tax consultants Totalserve Management was quoted by the Financial Mirror as observing.

Furthermore, the Russian amendment ensured that only relatively few Russian companies can avail of the tax exemption by placing a 500 million rouble (USD20 million) threshold on share capital to qualify.

Nonetheless, the Cypriot government, seemingly waking up to the fact that it is probably desirable for Cyprus not to be on the Russian blacklist, has begun to make overtures to Moscow regarding the issue, with the Finance Minister, the Cypriot Ambassador to Russia and the head of Inland Revenue all believed to have sounded out their Russian counterparts on the possibility of Cyprus's removal from the Russian 'blacklist'.