NICOSIA — After backing out of talks over dual taxation, Russia will resume negotiations with Cyprus, where officials said they were surprised at the unilateral decision that could deprive the island of Russian depositors.

“Cypriot colleagues will once again be asked to agree to revise the withholding tax rates on interest and dividend payments to 15%, subject to certain exemptions for institutional investments,” Deputy Finance Minister Alexei Sazanov said in a statement.

It what would be a shock to Cyprus' economy already reeling over the COVID-19 pandemic and tourists shying away, Russia scuttled a deal aimed at avoiding some double taxation rates, which could see Russian businesses registered there leave.

The decision surprised Cypriot officials, the news agency Reuters said in a report on the unexpected development, the talks falling apart and then ending after discussions to make modifications didn't succeed.

Cyprus, with a laissez faire attitude toward regulation, use of English law and double taxation treaty with Russia has been a key destination for Russian entrepreneurs and companies to register there.

Russia's economy has been hit hard by COVID-19 and low oil prices, leading President Vladimir Putin to propose a 15% tax on all interest and dividend payments leaving Russia to combat capital outflows, starting Jan. 1, 2021.

He also warned that Russia would unilaterally withdraw from agreements with foreign partners who did not accept its suggestions, with Cyprus having huge deposits in its banks from Russians, and an influx of revenues from Russian businesses there.

Russia's Deputy Finance Minister Alexei Sazanov said talks with Cyprus on changing the agreement to meet Putin's demand had failed and the process of withdrawing from the double taxation deal would begin.

“Restructuring one’s holding structures through Cyprus will of course become disadvantageous. It will be more advantageous to transfer everything back to Russia,” Sazanov said in a statement, the news agency reported.

A senior Cypriot official earlier told Reuters the move had caught the government offguard, believing the provisions Putin insisted upon were still in the talking stages.

Cyprus had expected any conclusion to be finalized in early September, when Russian Foreign Minister Sergei Lavrov is due to visit, the official said, without being named.