EU fails to appreciate the Russian element of the Cyprus bankruptcy problem
21 March 2013
The ill fated plan, proposed by the EU, that all bank deposits in Cyprus should be taxed fails to understand the politics of Cyprus.
The EU loan proposal of 10 billion euros included a provision for Cyprus to raise 5.8 billion euros by taxing all bank deposits. Deposits under 100,000 euros would be taxed at 6.7% and deposits over 100,000 would be taxed at 9.9%. The taxes would be levied on all bank accounts, including those held by Greek Cypriots and not simply confined to foreign depositers.
The ‘troika' of the European Commission, the European Central Bank and the International Monetary Fund wrongly assumed that the new president of Cyprus, Nicos Anastasiades, would be similar to the centre right prime minister of Greece, Antonis Samaras, who forcibly pushed through tough austerity measures on his colleagues and the Greek electorate.
In reality, Nicos Anastasiades has significant Russian interests. He is a lawyer and his law firm has at least two Russian billionaires as clients. It is estimated that over 40% of the funds deposited in Cypriot banks are held by Russians.
As one anonymous German official stated ‘The challenge in Cyprus is not about small savers, but about people who travel in private Lear jets.'
These jets are regularly seen parked at Larnaca airport, and the owners' funds are parked in several Cypriot banks. As soon as the Cypriot banks re-open it is likely that most Russian deposits will be withdrawn and in cash, which will be flown away to a more secure location.
The Russian dimension is a factor that the EU has both failed to understand and has also failed to deal with in a sensible manner. Talk by EU officials of the need for Cyprus to rid itself of dirty money from Russian oligarchs was not well received in Moscow. The request by the EU that Russian businessmen buyout the main two Cyprus banks – Laiki Bank and the Bank of Cyprus, was greeted with incredulity and derision by the Kremlin.
A more reasonable proposal was put to the Russians by the Cypriot government, namely the Russians were offered a major stake in the gas fields that surround the island of Cyprus. The problem with this offer is firstly, that none of these gas fields are as yet operational and secondly, the rights of the Greek Cypriot government to these fields is disputed by Turkey who argues that they should be jointly developed by the Turkish Republic of North Cyprus.
The current situation is that Russia granted the Republic of Cyprus a loan of 2.5 billion euros in 2011. Cyprus has requested a new loan and deferred payments on the current loan. Russia has not agreed to either of these proposals. Both Russian and international commentators have expressed the opinion that any increase in Russian debt would be unwise as Cyprus would have difficulty in meeting the interest and capital repayments.