Tags: Cyprus | Russia | bank | depositor

Morgan Stanley: Russia Could Place Roadblocks on Cyprus Bailout

Monday, 18 Mar 2013 09:11 AM

By John Morgan

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Russia might prove a significant obstacle to a Cyprus debt bailout deal unless a way is found to blunt the impact on the shadowy Russian deposits that flow in and out of the tiny nation’s banking system.

Russian President Vladimir Putin has already called the depositor levy contemplated by the European Union on Cyprus as “unjust, unprofessional and dangerous.”

Morgan Stanley analysts said Russian’s bargaining chip is a $3.27 billion loan to Cyprus provided in 2011, according to Business Insider. Cyprus is hoping to extend the terms of the loan as part of the major restructuring of its banking system insisted on by the European Union.

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“The levy is probably a negative surprise in Russia, and Russia’s support may prove difficult to secure without further concessions,” Morgan Stanley predicted.

Cyprus is being pressured to give in to demands by EU finance ministers to raise $7.5 billion by taking a piece of every bank account in Cyprus, Bloomberg reported.

Russian banks and companies had about $12 billion in Cypriot banks at the end of 2012, a report from Moody’s Investors Services cited by CNBC estimated.

According to Bloomberg, a double-tax avoidance treaty and low tax rates have made Cyprus the conduit of choice for Russians moving money into and out of their country.

The Cyprus government is intent on making the depositor haircuts progressive, with the largest depositors paying heftier percentages.

“Naturally, this means that all of the wealthy Russian oligarchs hiding money in Cyprus will have to pay more, not less,” Business Insider reported.

Cyprus’ decision to impose the bank depositor levy was made without consulting Russia, Russia’s finance minister told Reuters.

“We had an agreement with colleagues from the eurozone that we’ll coordinate our actions,” Russian Finance Minister Anton Siluanov told Reuters.

In a highly fluid situation, the Cyprus parliament was meeting in an emergency session Monday to decide how the depositor levies should be allocated.

Sources told Dow Jones that under one scenario, depositors with less than 100,000 euros in their accounts would pay a one-time tax of 3 percent, CNBC reported. Those with deposits from 100,000 to 500,000 euros would pay 10 percent, and depositors with over 500,000 euros in their accounts would pay 15 percent.

Liza Ermolenko, emerging markets economist at Capital Economics, told CNBC that Russian depositors would suffer significantly under the progressive taxation scheme.

"The details of the Cypriot bailout are bad news for Russian depositors who hold around 20 percent of total deposits of the Cypriot banking system," she told CNBC.

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