Cyprus Bailout To Dip Into Russian Loot

Cyprus Bailout To Dip Into Russian Loot

Why so much Russian off-shore money is stacked in the EU’s Mediterranean outpost of Cyprus, rather than in traditional havens like Switzerland is a bit of a mystery. Is it really the “Trojan Donkey” for the Russians in the 17 member EU? Between straight deposits and Russian companies registered and operating out of Cyprus, the exposure is in the region of $60 billion.

Of course, higher returns on investment due to Cyprus’ soft laws, low taxes and offshore haven ways, have something to do with it. Switzerland offers security and stability but not very many of the other bells and whistles.

But there may be quite a few Russian oligarchs getting ready for a haircut and shave on its Cypriot exposure. After the recent Cypriot parliamentary resolution refusing to tax their bank depositors, Cyprus will be looking for a bailout from the Russians instead.

This could work for both. Vladimir Putin has already expressed anger and outrage at the unprecedented demand for Cyprus to pay part of its own bailout requested from Brussels, about half the money needed. And Russia has helped Cyprus in the past and might do so again particularly if Cyprus offers a stake in the development of its offshore oil and gas fields.

The spotlight on Nicosia reveals that of the $27 billion foreign money stacked in Cypriot banks, largely seeking to be laundered on a no- awkward- questions- asked- basis, $19 million is Russian. The laundering does draw India into its ambit because of a treaty with Cyprus, India imposes a low withholding tax on profits in Indian debt and securities, and Cyprus takes no capital gains tax at all. Most FII money into stocks however comes to India via Mauritius.

   

The EU is offering $ 13 billion (Euro 10 billion), to keep the key Nicosia banks from collapsing after they became the 5^th country in the Eurozone to ask for a bailout. But instead of footing the bill in its entirety, Brussels has asked Nicosia to come up with 5.8 billion Euros on its own.

This initiative may be emanating from EU’s leading economy, Germany, getting a bit sick of bailing out country after country, albeit after asking for painful austerity measures.

Meanwhile, Cyprus banks are closed while the negotiations continue, but there is already an ATM- based- run. This could get very much worse once they open, later this week or early next week, irrespective of the deal hammered out.

This is quite a dangerous prospect, as copycat bank runs could materialise all over the weaker sections of the EU as depositors try to get their money out of the Government’s reach.

The idea to tax the deposits is not Cypriot.  But this manoeuvre is setting a precedent that is making the rest of the EU jittery too. It is unsettling as an idea because sovereign debt is meant to be sacrosanct. It is traditionally backed by s guarantees and is not meant to be liable to being deleveraged by unilaterally grabbing a slice of the deposited money.

Depositors are, after all, lenders to the banks and the Government. They are actually the White Knights, the bedrock savers that underpin every economy. And they are not the ones who ran up the bill and liabilities at all. They are not usually the borrowers, and not the ones who actually owe the money. 

Since bank and sovereign liabilities all over the EU are at a frightening overhang of 320% of GDP  it is not just the depositors who need to worry.

In the US, the debt liability burden accounts for 83% of the entire economy. This US debt too is a very large sum, amounting to trillions of US dollars, almost in a 1:1 ratio, meaning some 13 trillion dollars in a 15 trillion dollar economy. But at least the debt doesn’t lap the economy three and a quarter times!

However this plays out at this time, the problem is so severe that neither the US nor the Eurozone are going to be in the clear any time soon.

Having said that, the admirable thing is that the economies of the West have been kept afloat ever since 2008, despite such massive challenges. There are, over five years later, signs of economic revival all around, at least on the current account, and in terms of a mild employment revival.

The management of the humungous debt however is the legacy of the past, and will cast a shadow far into the future.

And it is this fact that will shift the balance of power relentlessly to BRICS. And more particularly witness the establishment of China, which is highly solvent, and possibly India, if it changes its deficit financing ways; achieve global economic leadership.

(788 words)

March 20^th, 2013

Gautam Mukherjee