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New Cypriot levy hurts Russia

March 19, 2013, 11:28 UTC+3

Russia's reaction to the Cypriot authorities' proposal was very painful

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The Cypriot parliament was unable to pass the bill to introduce a levy on the country's bank deposits on Monday. The decision is expected on Tuesday. Russia's reaction to the Cypriot authorities' proposal was very painful. President Vladimir Putin said if the decision was passed it would be "unjust, unprofessional and dangerous." Prime Minister Dmitry Medvedev noted that Russia would have to make adjustments to its relations with Cyprus.

The Cypriot government is introducing a 6.75 percent tax on bank deposits of below 1000,000 euros and a 9.9 percent tax on those above that amount, the Novye Izvestia reminds. Not only Nicosia, but also Moscow has a very negative opinion of the tax. According to Russian president's spokesperson Dmitry Peskov, Vladimir Putin regards the decision to approve the tax "unjust, unprofessional and dangerous."

Experts believe the depositors will have to put up with the hard fact, especially because not everything is as tragic as they make it out to be. "In actual fact, it's a tempest in a teapot, director of the Banking Institute Vasily Solodkov told the newspaper, "in effect, they propose to write off 1 percent of annual interest. It's unpleasant, but what can you do about it?"

The RBK Daily believes that in case the law is passed, Russia will be one of the main losers regardless. Moody's estimates that by the end of last year, Russian banks kept 12 billion dollars on bank accounts in Cyprus. Another 19 billion dollars were deposited on the island by corporate clients from Russia. The potential losses of domestic business and private individuals, who mostly belong to the group with deposits worth over 100,000 euros, may exceed two billion euros.

The Russian authorities reacted to Cypriot problems as to their own, the Nezavisimaya Gazeta writes. Having learnt that Cyrus, under European pressure, was introducing a levy on bank deposits, the Russian leadership was not chary of giving sharp comments. The vexation and disappointment of Russian officials is understandable. The Kremlin had staked on economic rapprochement with Europe in the past few years. Russia kept an anomalously high share of the euro in its foreign exchange reserves which resulted in multi-billion losses. Now the Europeans actually resolve their problems at the expense of Russian assets.

Many experts underline that the panic might spread from Cypriots and foreign depositors to the southern flank of the euro zone Portugal, Italy and Spain, and reach other countries, the Moskovsky Komsomolets notes. Stock markets from Asia to Europe were panicky on Monday. The Russian MICEX index has posted a new low since December 2012. The euro was slipping but not as fast as had been expected. However, it will see the moment of truth on March 20, when Cypriot banks open.

The setup, by its non-transparency and entanglement of the interests of private business and the state very much resembles with story with Russia's talks over a 4-billion-dollar loan to Iceland, the Kommersant believes. Having entered these negotiations and discussion, from investments in local power engineering to sale of land for the construction of an air base, the country found itself in a situation of default and collapse of the local krona. This situation is likely to recur in the Cyprus case, with an adjustment for the euro zone and more serious consequences, in the first place for Russian companies: nobody can predict the sums that might be frozen or lost in Cyprus or for how long they might be frozen.

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