Russia tones down anger on Cyprus but questions remain

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-euro 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 ITS REACTION?

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 (RCB), 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 also be hit by the capital controls imposed by Cyprus. According to the Vedomosti daily, Putin’s initial fury was as much irritation at not being consulted by the EU about the first deal as concern about its economic consequences.

–HOW MUCH MONEY WILL RUSSIANS LOSE?

The precise value of Russian deposits in Cyprus is disputed with estimates ranging from 5-25 billion euros. Standard and Poor’s believes that the majority of the non-resident deposit base in Cyprus which totalled 21 billion euros 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 euros. 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. But there could be a more significant indirect effect, especially due to the imposition of capital controls, he emphasised in a note to clients.

–WHERE WILL RUSSIAN MONEY 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 substantial 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 reports have claimed Riga has already been warned by the European Central Bank that accepting Russian money from Cypriot offshores would harm its chances of joining the euro. But Latvia’s finance minister has said there is just a “very, very minor inflow” of Cyprus money.

–WHAT CAN RUSSIA GAIN IN CYPRUS?

When Putin started breathing fire over the first bailout plans, some analysts suggested that the Kremlin had ulterior motives and was eyeing bailing out Cyprus on its own in exchange for strategic interests. These could include a Mediterranean naval base – Russia risks losing its Tartus base in Syria if the Assad regime falls – and a share in Cyprus’ so far unexploited offshore gas reserves.

In the end though, all Nicosia got from Moscow was the possible restructuring of a loan that had looked ripe for restructuring before the current crisis even started. Cyprus’ 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.