Cyprus Boosts Moscow as City Sees Investor Cash Returning

Moscow is counting on changing perceptions of Cyprus as a haven for Russian companies and investors to help fulfill its goal of becoming a global financial center, according to a minister in the city’s government.

“It’s totally changed the perception of Cyprus and it’s a good thing for Russia,” Sergey Cheremin, head of Moscow’s department for economic and international relations, said in an interview at Bloomberg’s headquarters in New York yesterday. “It shows those Russians who keep their accounts in Cyprus that it’s not a heaven, it’s a hell. It will encourage a lot of Russian companies to concentrate their resources in Moscow.”

Cyprus’ discarded plan to rescue its economy through a tax on savings accounts sent Russian stocks to a three-month low this week as Moody’s Investors Service said it may affect $60 billion of loans and deposits from Russia, which has a double-tax avoidance treaty with the island nation.

Russia has been modernizing the Moscow Exchange, its main stock and fixed-income bourse, and hired Goldman Sachs Group Inc. last month to burnish the image of the nation, which ranked 112th on the World Bank’s Doing Business survey in October.

Prime Minister Dmitry Medvedev made turning Moscow into an international financial center a key goal when he was president in 2008. The city is holding its first international non-deal roadshow this month to lure foreign direct investment to a city that needs to spend $10 billion a year upgrading its transport infrastructure, Cheremin said.

Foreign Roadshow

The roadshow, targeted at foreign companies and investors that can help Russia’s biggest city solve its traffic problems and bolster sectors including health care and education, has already stopped in London, Frankfurt and Boston, and will be held in New York today.

The Cypriot parliament rejected the bank deposit levy in a vote yesterday after the proposal roiled global markets. Stock of VTB Group, a Russian state-backed lender with a unit in Cyprus, sank to the lowest level since November yesterday. VTB rallied 1.6 percent by 3:48 p.m. in Moscow today, after sliding over the past six days.

Luxembourg’s Finance Minister Luc Frieden called for the 17 euro area finance ministers to reconvene as soon as possible to forge a new bailout. Cypriot Finance Minister Michael Sarris met with Russian officials in Moscow today. Russia granted Cyprus a 2.5 billion-euro ($3.2 billion) loan in 2011.

‘Big Chunk’

The tax plan was aimed at securing European aid after Cypriot banks lost 4.5 billion euros on Greek sovereign debt. Russian President Vladimir Putin called it “unfair, unprofessional and dangerous.” Cyprus is the biggest direct investor into Russia and the chief recipient of Russian investment abroad because of the treaty and low tax rates, according to central bank data.

“Naturally a big chunk of this money pot would move back from Cyprus to Moscow,” Luis Saenz, head of equity sales at BCS Financial Group in London, said by e-mail yesterday. “Russia bled billions of dollars every year in lost income tax and value-added tax from money being funneled through Cyprus.”

Russia, which defaulted on $40 billion of domestic debt in 1998, “never dared” to impose anything like a savings tax, First Deputy Prime Minister Igor Shuvalov said to reporters in Kazan yesterday.

“It’s bad that someone’s going to lose something, but from the point of view of what Russia stands to gain, Russia is more likely to gain than lose” from the Cyprus situation, he said.

The Market Vectors Russia ETF, the biggest U.S.-traded exchange-traded fund of Russian shares, slipped 1.6 percent to $27.51 in New York yesterday, the lowest close since Nov. 28.

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