Russia’s Cyprus Reaction Smacks of Hypocrisy

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website
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For a country whose government and banks reneged on tens of billions of dollars in foreign obligations during its own financial crisis in 1998, Russia has responded with incongruous fury to the prospect of a similar event in Cyprus.

Russians have a peculiar vested interest in the European Union’s efforts to rescue the island nation’s banking system. To pay its share of the bailout, the Cypriot government is planning to impose a tax on depositors, many of which are Russian entities that have long used Cyprus as an offshore haven. The levy could wipe out about 10 percent of the estimated $19 billion in deposits of Russian companies, and possibly more.

A 10 percent haircut would be mild compared with the 51 percent Russia took from investors after it defaulted on its domestic bonds back in 1998 and the even larger losses suffered by depositors in some Russian banks. Still, Russian politicians, from President Vladimir Putin on down, have harshly denounced the Cypriot plan.

Putin called it “unfair, unprofessional and dangerous,” according to the RIA Novosti news service. Prime Minister Dmitri Medvedev termed it “confiscatory.” Parliament speaker Sergei Naryshkin said the proposed levy was tantamount to nationalization: “The Cypriot authorities consider the money deposited by people in banks as their own.” Finance Minister Anton Siluanov issued a veiled threat that Russia, which has loaned Cyprus $2.5 billion, might not take part in further rescue packages if the deposit levy is approved.

Ultra-nationalist deputy Vladimir Zhirinovsky, for his part, came to parliament dressed for a funeral. “I put on a black suit because this is a day of mourning for the Republic of Cyprus, for the euro area, for private property, for the European Union,” he said, according to RIA Novosti. “We do not gloat about it because it’s mainly our depositors and it’s our nation’s money regardless of how they made it here.”

Wealthy Russian individuals do not, as a rule, keep their private fortunes in Cypriot banks. They prefer stronger financial institutions or less transparent jurisdictions. Yet Russian corporations have used Cyprus extensively since the 1990s. The island uses English law, convenient for settling disputes. The corporate tax, at 10 percent, is among Europe’s lowest. Nonresidents’ dividends are exempt from withholding tax. The authorities have always been pro-business and, according to people conducting their affairs in Cyprus, willing to turn a blind eye when necessary.

As a result, in the third quarter of 2012 (the last period for which data from the Russian Central Bank are available), Cyprus was Russia’s second biggest source of foreign direct investment after Luxembourg. Since 2007, more than $114 billion has flowed into Russia from the small Mediterranean nation, practically all of it Russian money paid as dividends by Cyprus-registered holding companies and reinvested into Russian production assets. Much of that money comes into Russia in the form of loans, an approach that minimizes corporate taxes. All of Russia’s big metals exporters and its biggest independent natural gas producer, Novatek, have corporate structures and bank accounts in Cyprus.

Billionaire Mikhail Prokhorov, who has used Cyprus extensively throughout his business career, called the proposed tax “a true financial landmine under the so-far-united Europe,” according to the Kommersant newspaper. Saying he will not be affected personally, Prokhorov claimed the moral high ground: “This assaults the foundations of Western civilization, the sanctity of private property. We have gone through these kinds of things in Soviet times, when the authorities conducted confiscatory monetary reforms. It is well known where that led.”

Sergei Dubinin, chairman of VTB, the state-owned Russian bank that has a large subsidiary on Cyprus, struck a similar tone, saying the shareholders of the Cyprus banks that caused the financial crisis had to shoulder responsibility, rather than pass it on to all depositors.

Cypriot lawyers running the special purpose vehicles for Russian companies have been trying to provide what comfort they can to their clients. A businessman forwarded to me a letter he had received from his solicitor, Stelios Americanos.

“Most of Cyprus political parties have expressed their disapproval of the particular measure,” Americanos wrote. “The main concern are the foreign depositors as the impact of such levy, if imposed, shall need to be minimized. The discussions are ongoing with all the political parties, the government, the Eurogroup, under the watchful eye of the Russian Federation.”

Some senior Russian experts, notably former finance minister Alexei Kudrin, doubt that the measure will pass.

Yet there are those in Russia who would welcome the Cypriot tax despite the obvious damage to the nation’s corporations. Yevgeny Savchenko, governor of the Southern region of Belgorod and a Putin ally, suggested that Cyprus confiscate 70 percent of Russians’ deposits on the island. “That would help separate patriots from Cypriots,” he quipped, according to the RBC news service.

Many Russian bloggers are certain that the tax proposal is specifically aimed at corrupt Russian bureaucrats and capitalists. “Germany, France and Great Britain have decided to resolve Cyprus’s, and some of the EU’s, debt problem at the expense of Russian criminals and corrupt bureaucrats,” wrote Valery Morozov, a businessman who fled Russia after accusing Kremlin officials of corruption, in his LiveJournal blog. “The policies of Putin and his inner circle, based on criminal ethics and not laws or citizens’ interests, had one day to clash with the political and economic interests of the rest of the world.”

Other bloggers have taken a more light-hearted approach. One joke making the rounds: “The Russian government is worried about the behavior of Cyprus, where members of the Russian government have been hiding money from the Russian government.”

As the Cyprus situation unfolds, Russians will need to make up their minds whether they should protest against a European attack on their country’s national interests, gloat at the plight of unscrupulous capitalists and corrupt officials, or bemoan the trampling of sacred property rights. In any case, Cyprus is likely finished as a haven for Russian capital. Tax consultants in Cyprus are already suggesting their clients take a closer look at Switzerland and Liechtenstein.

(Leonid Bershidsky, an editor and novelist, is Moscow correspondent for World View. Opinions expressed are his own.)

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

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