Russia’s VTB Will Review Its Cyprus Business If Levy Enforced

VTB Group, the Russian bank with the most assets in Cyprus, said it will “re-examine” its business on the Mediterranean island if a tax on deposits is introduced.

The potential levy is “unprofessional, dangerous and could threaten the financial stability of the European and the global economy,” even though VTB may lose “only tens of millions of euros” in Cyprus, according to an e-mailed statement from the state-controlled bank’s press office.

European policy makers are weighing how far to push Cyprus after the nation’s lawmakers yesterday rejected a bailout deal that would have seen a tax imposed on depositors in Cypriot banks, which are estimated by Moody’s Investors Service to have held about $31 billion in Russian funds as of the end of last year. Russian President Vladimir Putin has called the proposal “unfair, unprofessional and dangerous.”

VTB, Russia’s second-biggest bank, appears to be the “most exposed” to risks in Cyprus because its local unit manages about $13.8 billion of assets, Moody’s said. VTB says its Cypriot unit, Russian Commercial Bank, accounts for about 3 percent of the company’s profit.

Luxembourg Finance Minister Luc Frieden today called for the 17 euro finance ministers to reconvene as soon as possible to forge a new bailout for Cyprus.

Cyprus History

In 1963, the Soviet lender Moscow Narodny set up a branch in Beirut when the Lebanese capital was a major Middle Eastern business hub, according to VTB’s website. The branch was later relocated to Cyprus as Middle East unrest grew, and ownership was transferred to VTB.

Moscow Narodny was originally drawn to Cyprus for political purposes, according to Tom Adshead, chief strategist at Moscow hedge fund Kazimir Partners. “Since then, we have seen many other Russian banks arrive in Cyprus for tax planning reasons and they have happily stayed until now,” he said by phone.

Other Russian lenders with Cypriot units include OAO Sberbank and OAO Gazprombank, both state-controlled, Otkritie Capital, part-owned by VTB, as well as Aton Capital, UralSib Financial Corp. OAO Promsvyazbank and BCS Financial Group.

VTB’s Moscow shares snapped six days of declines today, gaining 1 percent to 5.19 kopeks at 2:09 p.m. in Moscow.

To contact the reporter on this story: Jason Corcoran in Moscow at jcorcoran13@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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