Cyprus Tax Prompts Funds to Cut Ties to Russian RenCap, AlfaJason Corcoran
European money managers including Valartis Asset Management and LGT Capital Management said they dropped Russian brokerages including Alfa Bank and Renaissance Capital as counterparties, citing the increased risk of doing business with non-state companies operating in Cyprus.
“I will stop trading with brokers using Cyprus trading hubs until the dust settles,” Tim McCarthy, who oversees more than $1 billion of assets in Russia and other emerging markets at Valartis in Geneva, said in e-mailed comments.
Finance ministers in the euro area reached an agreement on March 16 that will impose a tax 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 today called the proposal “unfair, unprofessional and dangerous.”
RenCap said accounts with its Cypriot unit are “entirely unaffected” by the plan because all client funds are held outside the country, according to an e-mailed statement. Leonid Ignat, a spokesman for Alfa, didn’t answer repeated calls to his mobile phone for comment. Both companies are based in Moscow.
Though the levy is aimed at savings accounts, Russian brokers operating in Cyprus are being affected by perceived contagion risk, according to Simon Knight, general manager of the Nicosia, Cyprus-based unit of Ukraine’s Dragon Capital.
“Some investors are looking at the sovereign risk and are concerned, even if the investment firms are not affected by the levy,” said Knight, who previously set up an offshore brokerage in Cyprus for Gazprombank.
He said some brokerages may shift money to London or move to another low-tax jurisdiction, such as Malta.
President Nicos Anastasiades is trying to persuade Cypriot lawmakers to back the tax on savings accounts as part of a 10 billion-euro ($13 billion) bailout aimed at preventing a financial collapse and a possible departure from the euro area. A vote on the bill was delayed for a second day today.
“Independent managers with significant footprint in Cyprus have been removed from our counterparty list, such as RenCap and Alfa,” Egon Vavrek, who helps manage $200 million at LGT Capital Management, said in e-mailed comments. LGT, which oversees about $40 billion, is owned by LGT Bank AG, which is based in Liechtenstein.
Sergey Dergachev, who helps manage $8.5 billion of emerging-market assets at Union Investment Privatfonds in Frankfurt, said he’s “temporarily” suspending dealing with Russian counterparties that have Cyprus-based operations.
“The big problem is reputational damage and change in investor perception for Russian brokers,” Dergachev said in e-mailed comments. “On that front, material aggravation has already occurred.”
State-controlled VTB Group, 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. Other Russian brokerages with Cypriot units include Sberbank Investment Banking and Gazprombank, both state-controlled, Otkritie Capital, part-owned by VTB, as well as Aton Capital and BCS Financial Group.
BCS Financial said on its website that it won’t be affected by the levy, as it doesn’t keep its own money or client money in Cypriot banks. VTB Capital’s press service in Moscow said it was “monitoring the situation in Cyprus.” Peter Westin, chief strategist at Aton in Moscow, said he hadn’t received any feedback from clients.
UralSib Financial Corp. said cash balances held on behalf of clients with its Cypriot unit, NKB Investments Ltd., are “entirely ring-fenced and will not be impacted in any way by the proposed deposit tax.”
“Trading with NKB as a counterparty will not be affected,” director John Lewin wrote in an emailed statement. “We will continue doing business as usual.”