Big
Russian money out of Cyprus; crisis endangers flows
If
Russian oligarchs still have money in Cyprus, where a lot of them
base their businesses, they aren't letting on.
22
March, 2013
"You
must be out of your mind!" snapped tycoon Igor Zyuzin, main
owner of New York-listed coal-to-steel group Mechel , as he dismissed
a suggestion this week that the financial meltdown in Cyprus posed a
risk to his interests.
His
response is typical across the oligarch class of major corporations
and super-rich individuals, reflecting the assessment of officials
and bankers on the Mediterranean island who say the bulk of the
billions of euros of Russian money in Cyprus comes from smaller firms
and middle-class savers.
The
collapse of an economy 75 times smaller than its own may not have
much impact in Russia, though the crisis has strained relations with
the European Union, raised questions on Russian influence over
Cypriot politicians and highlighted geopolitical competition for new
offshore gas fields. But some would suffer.
As
much as losses likely to be sustained on deposits held in Cypriot
banks, pain for the Russian economy could come from a disruption in
money flows between Russians which pass through the island -
transfers that dwarf Cyprus's own national income.
Light
regulation and taxes, cultural ties through Orthodox Christianity and
the weather have long attracted the capital and savings of Russians -
many keen to keep their wealth out of the sight of often predatory
bureaucrats at home.
Yet
precisely because investors can hide their wealth behind nominee
structures - often held in the name of a local lawyer - it is
difficult to say just how much Russian money is tied up on the
Mediterranean island. Or how much has already left.
Where
it is going is also unclear, though a possible rise in Russian
deposits in fellow EU member Latvia, a former Soviet republic that
hopes to enter the euro zone next year, has raised concerns of
displacing instability northward.
BILLIONS
HELD
Russians
are believed to account for most of the 19 billion euros of non-EU,
non-bank money held in Cypriot banks at the last count by the central
bank in January, when total non-bank deposits were 70 billion, 60
percent of them classified as "domestic". Of 38 billion in
deposits from banks, 13 billion came from outside the European Union.
But
the ease with which Russians can establish residency and local
corporations in Cyprus muddy the data. One senior financial source in
Moscow said a total of 20 billion euros held by Russian firms in
Cyprus was a "significant underestimate".
Cypriot
central bank chief Panicos Demetriades was asked by Russia's
Vedomosti newspaper this week how much Russians held on the island.
He replied: "It depends how you count it."
Deposits
formally identified as Russian totaled 4.9 billion euros, he said.
Add the funds of shell companies believed to be linked to Russia and
the figure rose to 10.2 billion euros. But many Russian and other
analysts think the sums are much higher.
One
Cyprus-based lawyer reckons that $2 billion in Russian money fled in
the 10 days before banks were shut down this week while Nicosia
argued over an EU bailout. Phones are ringing from Malta to the Isle
of Man as that cash seeks a new safe haven.
Russian
business leaders criticized the EU bailout plan, and the "haircut"
it would impose on depositors. However, if Cyprus stands by its
rejection, heavier losses could result.
"There
will be a serious outflow of capital from Cyprus," said Vladimir
Potanin, the chief executive of Norilsk Nickel , the world's largest
nickel and palladium miner.
"It
won't affect me or my company. But they have put Cyprus to the knife
and what has happened is a disgrace."
Sources
in the wealth management, advisory and banking industry in Nicosia
say Russia depositors are typically smaller savers and entrepreneurs.
Fiona Mullen, a British economist in Cyprus, said Russians she
encounters tend to be buying 300,000-euro homes, not the palaces
favored by oligarchs in London.
"There
is a lot of Russian business done through Cyprus," she said.
"It's so difficult to do business in Russia, you've got to bribe
so many people, that it's easier to do it through Limassol. It's kind
of the back office for Russia."
A
business adviser said of his Russian customers: "Clients would
be well off, but not the private jet kind." Most did not use
Cypriot banks to keep money but as a conduit for funds.
Cyprus
charges foreigners no tax on dividend income and capital gains. A
double taxation treaty with Russia provides attractive incentives for
Russians to use Cypriot banks. Even on Thursday, with Nicosia in
crisis, one adviser said he had had two new requests from abroad to
set up Cyprus shell companies.
CAPITAL
CONTROLS
Given
the risk of disruption to its financial flows, Russia in particularly
concerned about any imposition of controls on capital movements;
Cyprus has already drafted such legislation as a precaution in case
the EU cuts off aid to its banks.
"If,
in any way, capital flows are restricted that would have a
significant impact on Russian businesses," said German Gref,
chief executive of state-controlled Sberbank , Russia's largest bank.
"I
hope the Cypriot government has the wisdom not to undertake such
measures, because if they do all investors will leave the country. It
would be a perfect case study in what not to do," the former
economy minister told Rossiya 24 television.
Morgan
Stanley has estimated that Cyprus, with a GDP of just $25 billion, is
both the source and destination of 25 percent of Russian inward and
outbound foreign direct investment - a result of Russians
"round-tripping" their own cash via the island.
Cyprus
was also the source of $203 billion in foreign loans to Russia
between 2007 and 2011, equivalent to 24 percent of the total, Morgan
Stanley economists wrote in a research report this week. Shrinking
the Cypriot banking sector could force Russian firms to borrow more
dearly elsewhere, they warned.
Russia's
central bank gave a public assurance on Friday that it did not see
Cyprus posing a meaningful danger for the Russian banking system: "I
don't see any systemic or individual threat here," First Deputy
Chairman Alexei Simanovsky told reporters.
State-controlled
VTB has the largest presence on Cyprus, through its subsidiary
Russian Commercial Bank. It has estimated potential losses in the
tens of millions of euros in a worst-case scenario.
Russian
banks have, meanwhile, shown no interest in a rescue deal through
which they could acquire stakes in Cypriot banks, Finance Minister
Anton Siluanov said on Friday after two days of talks with his
Cypriot counterpart ended without a deal.
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