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Moscow angry at EU’s wish to solve its problems with Russian money in Cyprus

March 19, 2013, 15:44 UTC+3 Alexandrova Lyudmila

Russia’s reaction to the Cypriot authorities decision (made under pressure from the Eurogroup) to impose taxes on bank deposits has been very painful, as follows from statements by the country’s top officials. Analysts believe this is so mostly because for the past few years Russia has kept its stake on an economic rapprochement with Europe, keeping a large share of its foreign exchange reserves in the euro. Often to its detriment.

On Saturday, the European Union made a decision to give Cyprus 10 billion euros in anti-crisis aid, whereas Cyprus had originally asked for 17.5 billion. The European Union advised Cyprus to compensate for the shortfall with a new tax on bank deposits. The Cypriot authorities agreed to impose a one-time tax on all deposits in all local banks – 6.75 percent on deposits under 100,000 euros, and 9.9 percent on all deposits over 100,000 euros. In the meantime, the parliament has not made a decision on this score yet. There have been reports of an agreement with the Eurogroup on reducing the tax to 3 percent on deposits under 100,000 euros and raising it to 12.5 percent for deposits above 100,000 euros, which would hit major clients still harder.

Should the law on deposits be adopted in any form, Russia will be one of the main losers in any case. Moody’s says that at the end of last year Russian banks kept about 12 billion dollars in Cyprus’s banks. Another 19 billion were deposited in Cyprus by Russia’s corporate clients. The likely losses of Russia’s businesses and individuals, whose deposits are usually above 100,000 euros, may exceed two billion euros.

On Monday morning many experts in Moscow were still saying that the Russian authorities would not be very active in protecting the rights of harmed Russian investors, because they have long called on businesses to avoid exporting capital and to invest it in the domestic economy. The Russian government in 2011-2013 talked a great deal about the de-offshorization of the national economy.

But Russian businesses turned a deaf ear to those calls. They kept complaining about high taxes at home and preferred to go offshore. Besides, as Bank of Russia President Sergei Ignatiev, who is about to resign, said the other day, senior civil servants use offshore deposits to launder bribes. Also, offshore bank accounts are very popular with drug traffickers.

Moscow’s reaction was very harsh. Russian President Vladimir Putin said that the decision to impose an extra tax on bank deposits, should it be made, would be “unfair, unprofessional and dangerous.”

The proposed imposition of the tax on bank deposits in Cyprus looks like “plain confiscation of somebody else’s money,” Russian Prime Minister Dmitry Medvedev said. He added that Russia would have to make adjustments to its relations with Cyprus, should the latter impose the bank deposits tax.

The Russian Finance Ministry’s response to the news from Cyprus was no less painful. “We had an agreement with our colleagues in the Eurogroup to the effect we shall be able to take coordinated action. Our role is confined to the possible easing of the terms of getting back the earlier extended loan. It turns out that the Eurogroup’s action in favor of the deposits tax in Cyprus was made without prior discussions with Russia. For that reason we shall consider separately our participation from the standpoint of rescheduling the earlier extended loan,” Finance Minister Anton Siluanov complained.

In 2011, Moscow extended a 2.5-billion-euro loan to Cyprus for a term of four and a half years. At a certain point Cyprus asked for prolonging the repayment period. Siluanov and his Cypriot counterpart Michalis Sarris will be discussing the possibility of rescheduling the five-year 2.5 billion euro loan in Moscow on Wednesday.

The annoyance and dismay of Russian officials are easy to understand. Over the past few years the Kremlin has relied on an economic rapprochement with Europe – even at the cost of financial losses for the state budget. “We keep 40% percent of our gold and foreign exchange reserves in the euros. Part of these reserves is invested in government securities of European countries. We do not change anything, we believe in the fundamental opportunities of the European economy,” Putin said last year.

During the crisis this position cost Moscow tremendous losses, as the euro was heavily present in the gold and foreign exchange reserves. According to Nazavisimaya Gazeta, from 2011 to 2012 Russia lost more than 30 billion of its gold and foreign exchange reserves, far more than the other countries. The share of the euro in the overall world reserves is no bigger than 25 percent, and in the industrialized countries, according to the IMF, it is no greater than 23 percent.

The intention to tax bank deposits in Cyprus shocked clients and experts.

“That’s expropriation of private property. Although partial, expropriation will be expropriation. I believe that after that Cyprus will lose the role of a financial center it has played so far. To my mind the investors’ trust towards banks and Cyprus as a state will be undermined for years to come. After all, the country has long lived and still lives on incomes from providing financial services,” the president of the KIT Finance bank’s board, Andrei Degtyaryov, is quoted by the RBC Daily as saying.

“Obviously, when the EU made its proposal for Cyprus, it bore in mind the presence of Russian money on the bank accounts. There have been no such confiscations of deposits in any other crisis-stricken country of Europe,” says the chief of a department at the Solid company, Mikhail Korolyuk. “As a matter of fact, the European Union deliberately changed its policy of settling debt crises at home with the aim to confiscate Russians’ property.”

“The European Union has opened Pandora’s Box by creating a dangerous precedent for addressing the problems of banking system capitalization in problem countries,” says multi-billionaire Mikhail Prokhorov, leader of the Civic Platform party in the daily Kommersant. “It is dangerous at least because it encroaches on the basis of Western civilization: the inviolability of private property. We saw things like that many a time in the Soviet era, when the authorities carried out confiscatory cash reforms. Everybody knows the outcome.”

Prokhorov believes the main problem is the modern world is balancing on the edge of trust. Forcible expropriation of private property will certainly cause a chain reaction. Capital flight all over the European Union, a crash of the whole banking system, the financial collapse, the stoppage of industries and mass unemployment,” he warns.

“That decision by the Eurozone countries will force Russian companies to seek similar offshore zones elsewhere. Of the new ones Belize is the most promising ones,” says the co-chairman of the Business Russia association, Danilov-Danilyan.