Thread: Russian money in Cyprus: Why is there so much?

18 March 2013 Last updated at 15:28 ET .

Russian money in Cyprus: Why is there so much?

By Emily Young
Business reporter, BBC News

One of the interesting aspects to emerge from the Cyprus bailout is the close financial relationship between Cyprus and Russia - and in particular the large amount of Russian money invested in the eurozone's smallest economy.

It is estimated that about one half to a third of all Cyprus bank deposits are of Russian origin.

The ratings agency Moody's estimates that there is about $31bn (£21bn) of Russian money in Cypriot bank accounts - $12bn from banks and $19bn from businesses and individuals.

Moody's also estimates that about $40bn has been loaned to Russian companies based in Cyprus.

The suspicion - particularly in Germany - is that a lot of the money is from ill-gotten gains.

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I don't know a single millionaire who has kept their money in Cyprus. As for private depositors, they have hundreds of thousands in their bank accounts, but not millions”
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Edward Savulyak
Moscow branch, Tax Consulting UK

A leaked report from the German foreign intelligence service, quoted by Der Spiegel, suggested that the main beneficiaries from a eurozone bailout of Cyprus would be Russian oligarchs, businessmen and mafiosi.

And that is believed to be one of the main reasons why savers with money in Cyprus are being forced to contribute to the bank bailout - an unprecedented event.

The close financial relationship between the two countries is said to date back to the early 1990s and the breakup of the Soviet Union when newly-rich oligarchs were looking for places to put their cash.

"It is safe to assume that these are richer Russians that have parked their money there, not with the purpose of getting higher returns in Cyprus, but to probably avoid close government attention," said Ivan Tchakarov, chief economist at Renaissance Capital.

Edward Savulyak director of the Moscow office at Tax Consulting UK told BBC Russian: "There were many Russians in Cyprus because they weren't asked many questions about the origins of the money.

"Other countries are more careful," he said.

AdvertisementRenaissance Capital's Ivan Tchakarov: "Russians are not happy about the bailout levy"

Cyprus refutes those claims, arguing that it has effective measures in place to combat money laundering.

There are also perfectly legitimate reasons for a Russian company to want to set up in Cyprus; the 10% corporate tax rate, as well as Russia's tax treaty with Cyprus which means a firm will not be taxed in both places.

"Russian business takes great advantage of the low corporate tax rate and favourable tax rates for profit and dividends in Cyprus. But that is also true of western companies wanting to set up in Russia," said Andrey Goltsblat from the Moscow-based law firm Goltsblat BLP.

Mr Goltsblat explained that there is a whole industry in Cyprus based on serving Russian clientele.

"You don't need to actually go there," he said. "A Cypriot-based financial advisor will offer you a full package and the customer gets an online password to access the account."

Loan at risk?
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The unhappiest of the Russians will simply look for other places to put their money”
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Alexander Zakharov

Paragone Advisory Group

As part of the bailout deal agreed over the weekend, bank customers face a one-off levy.

Those with less than 100,000 euros will have to pay 6.75%, while those with more than 100,000 euros will be expected to pay 9.9%. There was a deep unease and unhappiness at the move in Moscow.

Moscow lent Cyprus 2.5bn euros in 2011 and it recently asked for another 2bn-euro loan.

But the tax on savings may lead the Russian government to rethink whether to loan more money to the indebted Mediterranean state.

"It looks like the Eurogroup took this action without consulting Russia," Finance Minister Anton Siluanov was quoted as saying by Interfax.

"So, we are going to take a second look at whether to take part in a deal to restructure our earlier credit," Mr Siluanov said.

President Medvedev also said Russia would also "need to draw certain conclusions" before entering more loan talks with Cyprus.

Mass exodus?

There is now the fear that businesses will simply move their money elsewhere, exacerbating the already disastrous situation for Cyprus' banks.

The BBC's Ekaterina Drobinina spoke to one businessman who used to be based in Limassol, who said his friends and colleagues were immediately going to transfer their funds to Singapore or Dubai.

Analysts backed up that sentiment. "The unhappiest of the Russians will simply look for other places to put their money," said Paragone Advisory Group analyst Alexander Zakharov.

Measures are in placed to try to stop money from flowing out of the country. But one tax consultant said a lot of it had already been moved.

"I don't know a single millionaire who has kept their money in Cyprus. As for private depositors, they have hundreds of thousands in their bank accounts, but not millions," said Mr Savulyak.

He said they had moved it elsewhere more than a year ago when the safety of Cyprus' banking system was first looking questionable.

BBC News - Russian money in Cyprus: Why is there so much?

18 March 2013 Last updated at 09:44 ET

Russian anger at Cyprus bailout levy

Russian Prime Minister Dmitry Medvedev has said a levy that bank account holders in Cyprus must pay as part of bailout deal looks like "confiscation".

Russian President Vladimir Putin called it "unfair, unprofessional and dangerous", while the finance minister said Russia may reconsider the terms of a 2.5bn euro loan (£2.1bn) to Cyprus.

Russians are believed to hold some 20bn euros of deposits in Cypriot banks.

The terms of the EU and IMF bailout have caused widespread anger in Cyprus.

President Nicos Anastasiades has indicated he wants the terms of the 10bn-euro ($13bn; £8.6bn) bailout amended, while a parliamentary vote on the bailout has been delayed until Tuesday.

Under the currently agreed terms, depositors with less than 100,000 euros in Cyprus accounts would have to pay a one-time tax of 6.75%. Those with sums over that threshold would pay 9.9%.

Depositors will be compensated with the equivalent amount in shares in their banks, and Mr Anastasiades promised that those who kept deposits in Cypriot banks for the next two years would be given bonds linked to revenues from natural gas.

'Soviet practice'

Moody's ratings agency estimates that, at the end of 2012, Russian banks had placed $12bn (£8bn) in Cypriot banks, with corporate deposits at $19bn. So Russian corporate and individual investors could lose up to $2bn.

"This simply looks like confiscating money that doesn't belong to you," Mr Medvedev said on Monday.

"This practice was unfortunately quite well known and familiar from the Soviet period, when money was exchanged at certain ratios or not returned," Mr Medvedev said.

"But here we are talking about a country that's supposed to be a market economy and an EU member."

He added that Russia would have to "make some adjustments to [its] position" in Cyprus, without elaborating.

The Russian government gave Cyprus a 2.5bn euro loan in 2011.

Russian Finance Minister Anton Siluanov told the Interfax news agency on Monday that the levy targeting private depositors was "unfair".

"The actions of the Eurogroup as regards introducing a levy on bank deposits was taken without discussion with Russia, so we will additionally consider our involvement in restructuring a loan issued earlier," he was quoted as saying by Russia's Interfax news agency.

Meanwhile, Russian oil and gas giant Gazprom denied reports that it had offered financial aid to Cyprus's banks in return for licences to extract natural gas.

Cyprus announced the discovery of a field containing between 5 and 8 trillion cubic feet of natural gas under the Mediterranean Sea in 2011 but Turkey disputes its drilling rights.

People commenting on BBC Russian's social media pages referred to suspicions that some of the money deposited by Russians in Cypriot banks was from illicit gains.

One contribution on BBC Russian's Facebook page from Aleksei Konopliov said: "The president of Cyprus couldn't think of anything better than to promise the account holders bank shares as compensation for the tax. Suddenly all banks in Cyprus are about to become Russian!"

BBC News - Russian anger at Cyprus bailout levy

18 March 2013 Last updated at 12:28 ET

Cyprus told it can amend bailout, as key vote postponed

Cyprus can amend the terms of a bailout deal that has sparked huge public anger and led to heavy cash withdrawals, German and European bank officials say.

President Nicos Anastasiades has been meeting MPs to discuss the terms, with a crucial debate and vote in parliament postponed until Tuesday.

Cyprus banks are closed and will remain closed until Thursday amid the crisis.

The 10bn-euro ($13bn; £8.6bn) bailout agreed with the EU and IMF demands that all bank customers pay a one-off levy.

Stock markets in the US, Asia and Europe have fallen amid the uncertainty.

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If Cyprus' president wants to change something regarding the levy on bank deposits, that's in his hands”
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Joerg Asmussen

European Central Bank governing council

In pictures: Nicosia protests
Russian anger
Banks shut until Thursday
UK pension payments 'on hold'

Russian President Vladimir Putin called the proposed levy "unfair, unprofessional and dangerous", his spokesman said. Russian banks and businesses have large deposits in Cyprus.

'Robbing depositors'

The debate and vote in Cyprus' parliament has now been postponed until 18:00 local time (16:00 GMT) on Tuesday. It was to have been held on Sunday.

The president's Democratic Rally has 20 seats in the 56-member assembly and needs other parties' support to ratify the deal.

Eurozone finance ministers - the Eurogroup - are to discuss the situation in Cyprus in a conference call later on Monday, officials said.

But European Commission spokesman Simon O'Connor defended the group's actions, saying its decision on the bailout was "taken by unanimity, all the member states of the eurozone, including Cyprus".

Joerg Asmussen, a member of the European Central Bank's governing council, said there would be no objection to Cyprus altering the bailout terms.

He said: "It's the Cyprus government's adjustment programme. If Cyprus' president wants to change something regarding the levy on bank deposits, that's in his hands. He must just make sure that the financing is intact.

Reform of how to mend broken banks, which has been negotiated globally and in Europe since the crash of 2007-8, has been based on two central principles.

First, that the savings of ordinary people should be protected, up to a high threshold - or 100,000 euros in the European Union for example.

And that financial institutions which lend to banks by buying their bonds should incur losses when banks are bailed out: bondholders should, to use the jargon, be bailed in, as part of resolution plans.

So what is seen by many as profoundly shocking about the terms of the rescue of Cyprus by the rest of the eurozone and the International Monetary Fund is that both of these principles have been broken.

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"The important thing is that the financial contribution of 5.8bn euros remains."

He said that, as Cyprus's banking structure was different from others in the eurozone, with fewer private bondholders, there had to be a tax on ordinary savers.

At its midday briefing, the ECB said that it would make no official comment.

German government spokesman Steffen Seibert echoed Mr Asmussen, saying: "How the country makes its contribution, how it makes the payments, is up to the Cyprus government."

Protesters in Cyprus have held up banners blaming Germany for the controversial bailout deal.

However, German Finance Minister Wolfgang Schaeuble insisted he and the International Monetary Fund had been in favour of "respecting a deposit guarantee for accounts up to 100,000" euros.

He said it was the Cypriot government, the European Commission and the European Central Bank that had decided on the levy terms and that "they now must explain this to the Cypriot people".

President Anastasiades has been holding talks with ministers and lawmakers at the parliament building in Nicosia, which has been cordoned off to prevent protests.

The BBC's Mark Lowen, in Nicosia, says there are suggestions Mr Anastasiades is looking at lowering the cost to those with smaller savings.

Under the currently agreed terms, depositors with less than 100,000 euros in Cyprus accounts would have to pay a one-time tax of 6.75%. Those with sums over that threshold would pay 9.9%.

Our correspondent says the president may want to lower the former rate to 3%, while raising the levy on the larger depositors to 12.5%.

An EU source told Agence France-Presse there could be a three-way split on the level of levy, grouped into accounts holding less than 100,000 euros, between 100,000 and 500,000 and more than 500,000.

Another Cypriot source suggested that no levy were be payable on accounts under 20,000 euros, but there has been no official comment on the various options.

Mr Anastasiades insists that without the bailout Cyprus could face bankruptcy and a possible exit from the eurozone.

The banks are closed on Monday for a national holiday and officials said they would remain closed on Tuesday and Wednesday to avoid mass withdrawals.

Correspondents say the president faces a tough task getting the deal through parliament.

Speaker Yiannakis Omirou, of the EDEK party, said: "Parliament is called to legalise a decision to rob depositors blind, against every written and unwritten law. We refuse to subscribe to this."

Although Cyprus accounts for just 0.2% of European output, there are fears that savers in other weak European economies could become nervous and spark runs on banks.

'Confiscation'

Russia has strongly criticised the Cyprus bailout deal.

Presidential spokesman Dmitry Peskov said on Monday: "Assessing the possible decision of imposing additional tax by Cyprus on deposits, [President] Putin said that this decision, if taken, would be unfair, unprofessional and dangerous."

Prime Minister Dmitry Medvedev said: "It looks simply like the confiscation of other people's money."

The Russian government gave Cyprus a 2.5bn euro loan in 2011, and Russia had indicated it would consider extending the period of its loan to Cyprus and restructuring repayments.

But Finance Minister Anton Siluanov has expressed frustration that Russia was not included in European decision-making on Cyprus.

"We had an agreement with colleagues from the eurozone that we'd co-ordinate our actions [on Cyprus]," Mr Siluanov told Reuters news agency.

"So, we will consider the issue of restructuring of the loan taking into account our [future] participation in the co-ordinated actions with the European Union to help Cyprus."

Russia may now think twice about extending the loan, says the BBC's Steve Rosenberg in Moscow - and perhaps even more worrying for Nicosia, he says, some of those rich Russian depositors may now move their money elsewhere.

The Moody's ratings agency estimates that, at the end of 2012, Russian banks had placed $12bn in Cypriot banks, with corporate deposits at $19bn.

That means Russian corporate and individual investors could lose up to $2bn.

BBC News - Cyprus told it can amend bailout, as key vote postponed