Russia tones down anger but questions remain over bailout



When the terms of the first and now abandoned EU bailout deal for crisis-stricken Cyprus were announced, Russian President Vladimir Putin bared his fangs to describe the proposal as “unfair, unprofessional and dangerous.”

Russians have billions of euros deposited in Cyprus banks — some but by no means all in illegal tax evasion scams — and the 10 percent mooted levy on all bank deposits risked them losing chunks of their money.

But when a week later Cyprus and its EU partners agreed a different bailout deal that some analysts believe may prove just as costly for Russians, Putin did not make the slightest criticism and instead suggested Russia could ease the terms of a ?2.5 billion loan to Cyprus.

The Kremlin’s sudden change in tack raised a range of questions about the murky world of Russian money in Cyprus and the effect of the Cyprus bailout deal on the Russian economy.

Why did the Kremlin soften up?

The terms of the second deal were significantly different to the first. Rather than taking 10 percent from all deposits in all Cypriot banks, the levy was substantially increased but restricted to just two banks, Bank of Cyprus and Laiki. Crucially, this excluded Russian Commercial Bank, which is the Cypriot unit of Russian state-controlled bank VTB, as well as other Russian-owned entities where Russian funds are concentrated. “A key positive for us was that no Russian bank was part of the solution,” said Ivan Tchakarov, chief economist at Renaissance Capital. Standard and Poor’s said that in the end the terms of the bailout will have a “relatively marginal impact on the consolidated financials of rated Russian banks with a presence in Cyprus.”

Nevertheless, Russian depositors are sure to sustain losses and be hit by the capital controls. According to the Vedomosti daily, Putin’s initial fury was as much irritation at not being consulted by the EU about the deal as concern about its economic consequences.

How much do the Russians lose?

The precise value of Russian deposits in Cyprus is disputed with estimates ranging from ?5 billion to ?25 billion. Standard and Poor’s believes that the majority of the non-resident deposit base in Cyprus which totalled ?21 billion as of Jan. 31, 2013, came from Russia and other ex-Soviet states.

Neil Shearing at Capital Economics said that even under the new bailout, Russian investors could lose ?5 billion. But he said that even this is “fairly small in the grand scheme of things” and unlikely in itself to have a major impact on the wider Russian economy.

Where do they go now?

The Russian government would like it to come home. Deputy Prime Minister Igor Shuvalov said the crisis was proof of solidity of the Russian banking system compared to some of its partners and was a “good signal” to encourage Russians to invest more at home.

But a big reverse flight is hardly likely. “Russians keep part or all of their wealth abroad for a variety of reasons and while the Cyprus experience is not a good one . . . there are plenty of other hubs out there,” said Tchakarov.

Hong Kong and the Netherlands — which has a relaxed tax regime — have been cited as possible destinations for Russian deposits, as well as the Baltic states, in particular Latvia. Latvian media have claimed Riga has been warned by the European Central Bank that accepting Russian money from Cypriot offshores would harm its chances of joining the euro. But the finance minister said there is just a “very, very minor inflow” of Cyprus money.

What’s to be gained in Cyprus?

After a lot of speculation, all Nicosia got from Moscow was the possible restructuring of a loan that was ripe for restructuring before the crisis even started. Its gas reserves may look attractive but are problematic. “Russia theoretically could have bought out Cyprus but the assets like the offshore gas reserves are poorly explored and disputed by Turkey,” said Vedomosti.

  • Johnnie Flukie Redding

    Amazing what one smokin phone call from Gasput can accomplish, he probably threatened to turn of the gas supply to Germany for the rest of the month. Germany could of course fall back on its windmills and solar panels as a substitute for Russian heating gas.