As crisis-ridden Cyprus proceeds with a bank restructuring program that will take as much as 40 percent from large account holders, most of whom are Russian, the Kremlin has made an about-face and supported the plan.
Commentators wondered how Russia could go along with a restructuring that would cost its citizens an estimated four to six billion euros. The reason may be simple: The biggest Russian account holders already have gotten most of their money out of this island tax haven through a gaping loophole, according to some reports.
After a nearly two-week closure, Cyprus banks will reopen Thursday with limits of 300 euros ($383) per day on withdrawals. The European Union and the International Monetary Fund agreed with Cyprus on Monday on the conditions for a loan of $13 billion to the troubled country. The bank restructuring has sparked anti-austerity protests in Nicosia.
Under the terms of the loan, the island's second biggest bank, Laiki, will be closed down and accounts with less than 100,000 euros will be transferred to the larger Bank of Cyprus. A levy to raise billions of euros towards the bailout then will be placed on depositors with more than 100,000 euros, resulting in a an estimated seizure of 40 percent.
Most of the deposits of more than 100,000 euros at the Bank of Cyprus and Laiki Bank are ultimately owned by Russians, the Financial Times reported Monday. Russian account holders stand to lose a total of four to six billion euros in the deal and won't be able to remove their remaining holdings due to sharp limits on transactions, according to the Russian newspaper Vedomosti.
Cyprus traditionally has been a popular tax haven for Russian businesses thanks to lax rules on reporting the source of the money, which has led to accusations of money laundering. The ratings agency Moody's has estimated that Russian holdings in Cyprus banks have amounted to about $31 billion.
After some initial bluster, the Russian government has supported the Cyprus plan, albeit reluctantly. On Monday, even as Prime Minister Dmitry Medvedev said that Cyprus continues to "rob the loot," President Vladimir Putin ordered his government to restructure its 2.5 billion euro loan to Cyprus, according to an announcement on the official presidential website.
The announcement also said that Putin "considers it possible to support the president of Cyprus' and the European Commission's efforts to overcome the crisis in Cyprus' economy and financial and banking system."
The new, softer line on Cyprus puzzled some experts, who said that Russia easily could have bailed out the island nation, the Christian Science Monitor reported.
But the Kremlin's tacit approval may reflect a realization that Russian business will emerge from the Cyprus fiasco with less damage than previously thought: According to market watchers, the new tax on bank holdings won't impact the country's economy significantly, as sizeable Russian holdings there already have been removed, the BBC Russian Service reported.
The possibility of default in Cyprus has been looming for more than a year, and many Russian businesses registered there were prepared for such a turn of events, said Eduard Savulyak, director of the Moscow office of Tax Consulting UK. A majority of Russian businessmen worked through Cyprus-registered companies but kept their money in banks elsewhere, so the levy doesn't affect them, he added.
"I don't know one millionaire who would keep money in Cyprus," Savulyak said. "As far as private individuals, they have hundreds of thousands in accounts there, but not millions."
Furthermore, Russian oligarchs who still had large deposits in Cyprus likely withdrew most of it last week as Cyprus prepared to stop all unauthorized capital movements. On Monday, Reuters reported a major loophole that large Russian account holders may have used to jump ship while ordinary Cypriots lined up at ATMs to withdraw a few hundred euros: Uniastrum Bank, 80 percent of which is owned by Bank of Cyprus, did not place any restrictions on withdrawals in Russia in the week leading up to the restructuring decision.
Laiki Bank and Bank of Cyprus branches in London did not limit withdrawals that week, either. No one knows exactly how much money has been transferred out of Cyprus, Reuters reported.
A Cyprus subsidiary of state-controlled Russian bank VTB, where some Russian investors have accounts, also will not be affected by the restructuring.
An editorial in the Thursday edition of Vedomosti concluded that the Russian authorities' accepted the Cyprus restructuring after it became apparent that mainly medium-sized businesses would suffer losses, not the large investors that are the Kremlin's first priority.
Now an exodus of all remaining Russian business likely is beginning, some in Cyprus say.
"Knowing the temperament of Russian investors, I'm sure they'll leave," an unnamed Russian businessman living on the island told the BBC Russian Service. "Right away (Russian businessmen) said, 'This is obviously a money grab, this is robbery. Forget Cyprus, there are a lot of other jurisdictions, like Singapore or Dubai.'"
Russian savers in Cyprus reported that funds had been frozen in their accounts already in mid-March, according to the BBC Russian Service.
Besides the imminent seizure of bank deposits, new powers granted to the Cyprus central bank by the restructuring deal have worried Russian investors and businessmen. In particular, the central bank will be able to convert current accounts to time deposits that will then be subject to the bailout levy, which could hurt even those Russian companies that had avoided time deposits, Vedomosti reported.
For those who haven't already taken their money out, the only way to get around the tax is to file a case in the Supreme Court of Cyprus, the BBC Russian Service reported.
