Cyprus has become the Euro-zones most recent problem child. Over nine months ago Cyprus first requested a bailout. On March 16th Euro-zone ministers offered Cyprus a €10 billion ($13 billion) bailout; however there were multiple strings attached. The most important condition was that part of the bailout money would be generated by a one-time tax levied on individuals who had deposits in the Cypriot banks. There is a maximum limit on withdrawals and Cypriot banks have been on “holiday” since the crisis occurred to stop a rush on the banks. Three days after the bailout was proposed the Cypriot parliament rejected the deal.
Individuals that have money in Cypriot banks were not thrilled with this proposal. This is where new friend Russia comes into play. Many banks in Cyprus have large deposits from rich Russian citizens, estimated around $31 billion. Therefore Russia has a vested interest in the Cypriot banks. Vladimir Putin has spoken out against the bailout proposal He states, “such a decision, if it is adopted, will be unfair, unprofessional and dangerous.” Russia wasn’t nearly as concerned for Cyprus’s Greek neighbors. However, Russia didn’t have nearly as much money in Greece either.
The original bailout had potential to set precedent in the Euro-zone. Previously, there was an agreement that stated individual savings would not be hurt by the bailouts. However, the most recent deal to Cyprus would go back on those promises. Additionally, the money collected from depositors would only add up to around €5.8 billion. Previous bailouts have been larger than the proposed Cypriot bailout and not included taxes on private savings. This shift in financial policy could signal political intentions behind the bailout. Cyprus has the reputation for attracting less than reputable deposits, especially Russian deposits. Many individuals have money in Cyprus to avoid paying heavy taxes imposed by domestic banks. Is the Euro-zone punishing Cypriot banks for being a tax haven?
The Economist reports that the Cypriot government might be seeking assistance from Russia. Does the solution to Cyprus’s current financial problem include making a deal with the Russians? Although a deal with Russia is unlikely to tax private savings, Russian will want something in return. There is speculation that Russia will exchange bailout funds for a partial stake in Cypriot gas. The decision is ultimately up to the Cypriot parliament but their decision will have far-reaching consequences. What does it mean when the Euro-zone cannot save one of its own members? How much will the Russians actually take from Cyprus? Only time will tell.
Striking a deal with Russia may not be the best solution, with Cyprus already facing conditions from the European Central Bank. Russia's involvement would only further complicate the situation, and might take away from Cyprus's already small economic potential (especially if the deal involves Russia receiving a partial stake in Cypriot gas). This is a problem that must be solved by actors within the Eurozone.
ReplyDeleteWith the recent death of a prominent Russian oligarch named Boris Berezovsky, I thought it would be worth mentioning the role of Russian oligarchs in the Cyprus bailout. Throughout the years Russians have turned to Cyprus as a place they can funnel billions so they can "take advantage of the island’s low corporate tax rate". It is estimated that Russian oligarchs and companies have approximately $30 billion in Cypriot banks. Now with higher taxes and stricter controls on capital, it seems as if Cyprus will no longer be "Russia’s favorite offshore financial haven".
ReplyDeletehttp://www.businessweek.com/articles/2013-03-25/cyprus-bailout-may-spare-russias-oligarchs-but-hurt-russian-companies
It seems that the Russian-Cyprus deal has fallen through as Sarris, Cyprus finance minister, left empty handed after visiting Moscow. Cyprus has now taken a bailout deal from the EU and it would appear that Russia has made a huge blunder. "It seems inexplicable that Cyprus’ most heavily invested economic partner -- and the largest source of foreign deposits in the island’s banks -- would refuse a deal on such apparently favorable terms". However, a Foreign Affairs article outlines a couple reasons for why it is possible Russia didn't take the offer. One being that Russia has little interest in acquiring a bank that is going to be restructured as part of a eurozone bailout deal. Second, there was only a couple days in which Russia had the chance to agree and Sarris had come to Russia unprepared and without a specific deal in mind. "Facing a stark choice between losing a lucrative tax haven and throwing more money into a bottomless pit, Russia picked the strategy that it hopes will minimize its potential losses". Overall, Russia has bigger issues than that of Cyprus banks that it needs to address.
ReplyDeletehttp://www.foreignaffairs.com/articles/139090/yuri-m-zhukov/cyprus-and-russia-did-not-just-break-up?page=2