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Russian reactions to Cyprus

Roman Goncharenko / sstMarch 19, 2013

Russian elites are dismayed at the EU's newest condition for Cypriot bailout funds: taxes on standard bank accounts. Like regular Cypriots, oligarchs with billions invested in the island might have to pay.

Money in a suitcase (Photo: imago/imagebroker/begsteiger)
Symbolbild GeldwäscheImage: imago/imagebroker/begsteiger

Russia's elite are angry. Cyprus's plan to seize deposits is "unfair, unprofessional and dangerous," said Russian President Vladimir Putin's spokesperson Monday (18.03.2013). Russian Prime Minister Dmitry Medvedev added fuel to the fire. "This simply looks like the confiscation of other people's money," he said.

Events in Cyprus also affected Moscow's stock exchange, as shares from two major Russian banks - VTB and Sberbank - dropped roughly five percent when trading started. According to media reports, both banks are said to have more than $10 billion (7.7 billion euros) stashed in deposits in Cyprus.

Sberbank bank (Photo: Mitya Aleshkovsky)
Russian banks like Sberbank in Moscow have a firm foothold in the Cypriot economyImage: picture-alliance/dpa

Cyprus's parliament is scheduled to vote on the controversial measures on Tuesday (19.03.2013). The new law is expected to save the crippled EU country from going bankrupt.

At the end of last week, EU finance ministers voted in favor of these measures. The bailout package of about 10 billion euros includes a one-off tax on all bank deposits in Cyprus. The exact sums are still being negotiated.

Russian haven

Figures help to explain Russia's swift reaction: According to Russian state statistics agency Rosstat, Cyprus businesses invested $78.2 billion (60.4 billion euros) in Russia in 2011 alone. That is almost three times as much as Cyprus's investments in Germany. The small EU country is by far the largest investor in Russia and accounts for almost half of all foreign investments.

"That is by no means Cypriot money," said Heinrich Steinhauer, who heads the German regional bank Helaba in Moscow. The invested funds were "Russian money that gets re-invested via Cyprus," he told DW.

According to Hans-Henning Schröder of the Berlin-based German Institute for International and Security Affairs (SWP), Cyprus, with its low tax rates, is considered "an important station for Russian cash flows." He told DW that Cyprus is where Russians transfer money in order to "protect it against the grip of the Russian state."

Schröder is referring to wealthy individuals, to the oligarchs of post-Soviet states. One of them is Alisher Usmanov. In 2012, Forbes business magazine and the Bloomberg news agency listed Usmanov as the richest man in Russia. His fortune is estimated at $17.5 to $20 billion. Usmanov makes money from metals, mining and technology. He is considered a "king" of iron ore in the post-Soviet era.

Alisher Usmanov (Photo: ANATOLY MALTSEV/EPA)
Russian billionaire Alisher Usmanov's USM Steel & Mining Group Ltd. is based in CyprusImage: picture-alliance/dpa

Cyprus's especially simple legal infrastructure makes the island country especially attractive for Russians, Helaba's Steinhauer said.

"One can found companies, investment trusts or holdings [in Cyprus], which then carry out investment plans in Russia."

Ukraine in Cyprus

But it's not just Russia that is affected by the proposed bank account tax in Cyprus. Oligarchs in Ukraine also like to transfer money to Cyprus and then re-invest it back home. Just like in Russia, Cyprus has been the largest foreign investor in Ukraine. In 2011, the country invested more than $10 billion, according to Ukraine's statistics agency Derzhkomstat. That represents one-fifth of the total foreign investments in the former Soviet republic.

More than 90 percent of all Ukrainian foreign investments in 2012 went to Cyprus. If ownership changes in the Ukraine, a company with a postal address in Cyprus simply gets replaced by another one in Cyprus.

There is another reason why Russia has been observing the situation in Cyprus attentively. In 2012, the Russian government lent $2.5 billion to Cyprus with a term of four years. Cyprus would like to extend the repayment period for that loan. According to Russian media reports, Cyprus's Finance Minister Michalis Sarris wanted to talk about that in Moscow on Monday, but his visit was postponed to Wednesday (20.03.2013).

Hans-Henning Schröder (Photo: delivered to DW by Melanie Wetzel)
Professor Hans-Henning Schröder believes that banks can dodge taxes elsewhereImage: Marc Darchinger

The decision about extending the loan will now be made in the light of Cyprus's bank deposit scheme. "We will watch this situation closely," Russia's Finance Minister Anton Siluanov told the news agency Interfax on Monday.

Other havens

German banker Steinhauer believes Cyprus will remain an attractive haven for oligarchs from Eastern Europe - despite the controversial bailout package. "Unless they gradually want to go against it," Steinhauer added. "But I don't think that this will be the case at the moment."

Schröder, the Berlin-based Russia expert, is even more skeptical. "If Cyprus is put under stricter financial supervision in the future, and is no longer considered the 'safe haven' that it used to be, it might very well be that Russian and other investors switch to other banking centers," he said.

Instead of Cyprus, the expert added, Russian funds could then be transferred to the Netherlands, Austria or other tax havens such as the British Virgin Islands in the future.