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Putin pounds 'unfair, dangerous' Cyprus deposit tax

18 March 2013, 17:02 CET
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(MOSCOW) - Russian President Vladimir Putin on Monday hammered a proposed tax on bank deposits in Cyprus that could hit Moscow oligarchs especially hard as "unfair, unprofessional and dangerous."

"Putin said that this decision, in case of its adoption, will be unfair, unprofessional and dangerous," Russian news agencies quoted Kremlin spokesman Dmitry Peskov as saying.

Russian prime minister and former president Dmitry Medvedev for his part said the levy "simply looks like the confiscation of other people's money."

Terms of the 10-billion-euro ($13-billion) EU-IMF rescue package -- its adoption by the Cypriot parliament postponed on Monday -- would slap an unprecedented 9.9-percent fee on all bank deposits exceeding 100,000 euros.

Several analysts said the measure was meant to make sure that Brussels did not spend billions propping up occasionally ill-gotten gains of Russia's super-rich that are occasionally kept in Cypriot accounts.

"It is clear that (Cyprus) is under tremendous pressure from the European Union," Deputy Finance Minister Sergei Shatalov was quoted as saying by Interfax.

Estimates vary but the Moody's rating firm estimates that Russian companies and banks keep up to $31 billion in Cyprus. The figure accounts for between a third and half of all Cypriot deposits.

Russia's number two bank VTB -- a state-owned institution -- alone had $13.5 billion resting in Cyprus through a subsidiary and was due to lose a tenth of that amount.

"VTB Group is carefully monitoring the situation," the bank said in a statement. "We can only assess its repercussions after studying the text of the law."

Criticism resounded through Moscow amid warnings that a possible run on Cypriot banks could reverberate across Europe and set a bad precedent for future rescue packages for struggling states.

A frustrated-sounding tycoon and former presidential contender Mikhail Prokhorov said that Brussels "had set a real financial mine under the idea of a single Europe."

"The European Union essentially opened a Pandora's box," he stressed.

Some analysts believe that the Russians will now only compound Cyprus's problems by taking their cash out and parking it in other tax havens such as Luxembourg.

"The unhappiest of the Russians will simply look for other places to put their money," forecast Paragone Advisory Group analyst Alexander Zakharov.

Others noted that the Russian ruble was now likely to weaken in the face of growing investor risk aversion.

The Moscow market -- down nearly three percent on Monday evening -- may also suffer from the smaller volumes of available cash from which foreigners make direct investments in Russia.

Cyprus has consistently ranked as the largest single foreign direct investor in Russia because of the tycoons' desire to repatriate their cash into money-making enterprises at home.

The International Monetary Fund (IMF) has estimated that Cyprus sent $128.8 billion in foreign direct investments to Russia in 2011 alone.

Russia's respected former finance minister Alexei Kudrin said the European Union had simply "overlooked" a solution to Cyprus's banking meltdown.

"The primary responsibility for the situation in Cyprus rests with the European Union and its regulators," Kudrin tweeted.

Others noted that it was better for the Russians to take a one-off hit than to see the entire Cypriot banking sector collapse as it did in Russia during a 1998 financial crisis during which Moscow defaulted on its debts.

"Russians already has the experience of 1998 when instead of losing 10 percent, people lost it all," noted PNB Paribas economist Julia Tsepliaeva.

But perhaps most under threat is an agreement on the extension of 2.5-billion-euro loan that Moscow extended to Nicosia in 2011 at a rate of 4.5 percent.

Cypriot Finance Minister Michalis Sarris was tentatively scheduled to visit Moscow on Wednesday with the brief of lowering that rate and extending the loan's expiration date until 2020 from 2016.

Moscow was reported to be seeking in exchange details about Russian billionaires who held accounts on the island. Russia was also said to be interested in buying a majority stake in Cypriot lender Patriot Bank that is in need of rescue.

Yet top Moscow finance officials hinted on Monday that the bank deposit tax may scuttle negotiations.

"We are going to take a second look at whether to take part in a deal to restructure our earlier credit," Finance Minister Anton Siluanov was quoted as saying by Interfax.


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