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Russian businesses not to avoid major losses in Cyprus

March 26, 2013, 10:52 UTC+3
Russian customers of the two largest banks in Cyprus, despite Russia’s already promised support worth 250 million euros, will pay for the crisis in full
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Russian newspapers have widely commented on the European Union and Cyprus’ coordinated plan of aid to the island state and calculated Russia’s possible losses.

Russian President Vladimir Putin on Monday instructed the RF Finance Ministry to consider the restructuring of the state loan extended to Cyprus (2.5 billion euros). According to Russian Finance Minister Anton Siluanov, the country will save about 250 million euros on this operation, the Kommersant daily writes. Russian customers of the two largest banks in Cyprus, Bank of Cyprus (BoC) and the Cyprus Popular Bank (CPB), despite Russia’s already promised support worth 250 million euros, will pay for the crisis in full. CPB will go bankrupt, and the prospects for the return of finances from it are extremely vague. BoC will be restructured by overtaking part of the CPB business, and about one-third of its financial resources can be considered lost. The losses of Russian businesses from the two-week stop of payments in Cyprus with high probability will affect Russia’s GDP and will be comparable with losses on deposits.

Any precise calculations of the Russian losses in the course of this operation, which for Russian companies is significantly worse than the “Plan A” (9.9 percent tax on large deposits), proposed to Moscow by Cypriot Finance Minister Michael Sarris are impossible: Russian companies control part of the 19-billion euro deposit mass of the banking system of Cyprus that is controlled by non-residents of Cyprus (mainly from Russia, Ukraine and Lebanon), part of some 40 billion euros belonging to residents of the country (Cyprus companies that are obviously and not obviously of Russian origin), as well as part of an unknown sum in the country’s banking system on demand accounts current accounts.

In essence, the Cyprus crisis for such structures as EvrAz, Norilsk Nickel, for other metallurgical companies, some trading companies and all those who used Cyprus’ holding companies, will be an extreme stress test of the quality of financial management in groups, the newspaper emphasises.

The measures to which Cyprus agreed, the Vedomosti newspaper writes, repeat the plan of German Chancellor Angela Merkel, with two exceptions: small investors have been spared (initially they faced the threat of a single seizure of 6.75 percent of funds); the Bank of Cyprus has been preserved (Merkel proposed to reorganise it like Laiki Bank).

So, British and Cypriot pensioners are now mostly spared, says an audit company partner, quoted by the newspaper. In practice, the decision above all will affect Russian businesses, however, it cannot be said that the law was targeted against Russian businesses, he pointed out. Also, many Russian groups opened accounts in the Russian Commercial Bank – the Cyprus subsidiary of VTB Bank (third in the size of assets in Cyprus, 14 billion euros), according to the Vedomosti source, and the law does not apply to the bank.

“Cyprus has demonstrated its inability to manage the situation. In the medium and long term, the country will not be trusted,” says Chairman of the Board of UniCredit Bank Mikhail Alexeyev, quoted by the RBC Daily. “Investors will try to transfer their savings to other organisations and assets,” a source in a Russian state-owned bank confirmed. “At the same time, as an offshore jurisdiction with preferential tax treatment, Cyprus will retain its positions. The tax rate there is about 10-12 percent the lowest in Europe.”

Despite the fact that Cyprus will receive the money, experts believe that as a financial centre this state is doomed – the effected deal has for long undermined the credibility of the local banks. “Indeed, Cyprus will have to say goodbye to its ‘money haven’ status,” analyst Anna Bodrova told the Novye Izvestiya daily. “Investor confidence is a very fragile thing, and it cannot withstand this pressure. As soon as it becomes possible, capital will begin to flow in different directions from the country. Russian state-owned companies will also withdraw their money. Despite all the cries in the country that the funds should return home, they are unlikely to return here. Probably, they will be invested in offshores with higher guarantees, possibly Gibraltar or the Cayman Islands.” As for Cyprus, according to the analyst, it will live “simply and within its means.” In particular, it will focus on the restructuring of its financial sector – this operation will take about 7 billion euros from the extended loan.

 

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