Why has Moscow gone silent about Russian money in Cyprus?

A workable bailout program for troubled Cyprus banks has apparently been sealed and, despite much speculation last week, it has been accomplished with minimal Russian participation. 

Moscow has not only declined to get deeply involved in saving the enormous Russian-owned assets that are at risk in the Cyprus crisis, but the loud Russian protests that were heard around the world last week over the European Union-brokered plan to bail out the near bankrupt little country have largely died down. And it's not entirely clear why.

The new plan, which will restructure the island's two main banks – Bank of Cyprus and Laiki Bank – involves a much bigger "haircut" for wealthy depositors than the controversial first plan envisioned. That suggests that rich Russians, who reportedly hold about $31 billion, or almost a third of the total deposited in Cypriot banks, may take a whack of up to 30 percent on their holdings.

Yet the response in Moscow has been far more muted than it was last week, when President Vladimir Putin raged that the plan for a much smaller one-time levy on all bank accounts was "unprofessional and dangerous," while Prime Minister Dmitry Medvedev denounced it as "confiscation."

This time the Kremlin has, with apparent reluctance, thrown its backing behind the bailout deal that was hammered out Monday between Cypriot leaders and the European Union. Russia's finance ministry said it may ease terms of repayment, and even write down part of a $2.5-billion loan Moscow made to Cyprus in 2011, if the little country manages to stabilize its banking system.

"Taking into account the Euro Group’s decisions, Mr. Putin said he considers it possible to support the President of Cyprus’ and the European Commission’s efforts to overcome the crisis in Cyprus’ economy and financial and banking system," said a statement posted on the Kremlin's official website Monday. 

"We are watching how the situation develops. We are not indifferent to the decisions that are taken," Russian Finance Minister Anton Siluanov told journalists.

Change in tune

Experts in Moscow are scratching their heads over the Kremlin's change in tune. Some say they had fully expected Putin to put up a loan for the $7.5 billion – chump change for a government that's spending $51 billion just to hold the Winter Olympics in Sochi next year – that might have saved the Cyprus banking system, along with thousands of Russian depositors. The little country may also have retained its function as the main offshore zone where scores of big and powerful Russian companies not only do their banking, but also incorporate.

"I think it would have been easy for Russia to bail out Cyprus; it's really not a lot of money by Moscow's standards. Now Russians, and Russia, are going to lose a lot," not only through the expected hit on Russian depositors, but also as a result of the tough capital controls that are expected to be enacted before Cyprus banks open Thursday, says Alexei Vedev, a financial analyst with the Gaidar Institute for Economic Policy in Moscow. 

"Now, I'm afraid Cyprus is finished as an offshore financial center. Russian companies will remove their assets from the place as quickly as they can," he adds. Some analysts argue that Moscow backed off after the European Union made it clear that no Russian-backed solution for Cyprus would be acceptable.

"Europe kept Russia out of the loop, and demonstrated that it did not want Russian participation. German Chancellor Angela Merkel was very firm on this, saying that Cyprus is part of the eurozone and the problems will be solved between European countries," says Mikhail Delyagin, director of the independent Institute for Globalization Problems in Moscow.

"So, what can Russia do? This was not just Germany, but the united position of the EU. They have solved the problem at Russia's expense, with maximum cruelty. Europe betrayed Russia," he adds.

How much Russian money is exposed?

Some analysts argue that Moscow may have grown quieter upon realizing that less Russian money than once feared is exposed to the Cypriot levy.

No one knows for sure how much Russian money is actually in the two major Cypriot banks that are to be restructured, but there's one school of thought that estimates much of it is deposited in banks that are unaffected by the new plan. The current deal leaves several solvent commercial banks mostly untouched, including the Russian Commercial Bank of Cyprus, which is owned by the huge Russian state bank VTB.

That said, Mr. Vedev points out that "VTB has a very active private banking branch on Cyprus, but it only has a few clients.... Most Russian entrepreneurs prefer to keep their money in foreign-owned [non-Russian] banks when they go to offshore zones, for reasons we can well imagine."

Some Russians may also have been lured to the now-troubled banks by extremely high interest rates in euro-denominated accounts. "Banks in Cyprus had built a financial pyramid, with interest rates of around 10 percent," says Vassily Solodkov, a banking expert with the Higher School of Economics in Moscow.

Some of the magnets for Russian cash are now at the center of the crisis. According to a source quoted by the Financial Times "a majority of the deposits of more than €100,000 at the Bank of Cyprus and Laiki Bank are ultimately owned by Russian beneficiaries.... [W]hile Russian clients from other Cypriot lenders, such as Russian Commercial Bank, will no longer see their deposits taxed, they are still likely to incur losses under expected capital controls, which would halt most large-scale money transfers for months to come."

But even if a lot of Russian money once resided in the exposed banks, it may have since been withdrawn, argues the independent Center for Research on Globalization in Montreal, Canada. The wealthiest Russians – who would be those closest to the Kremlin – may have used the political chaos of last week to quietly spirit their money out of Cyprus through a major loophole: the Bank of Cyprus owns 80 percent of a Russian bank, Uniastrum Bank, which placed no restrictions last week on how much cash its Russian depositors could withdraw.

"In other words, by now any big Russian funds in Cyprus are long gone, and the only damage accrues to the locals," the report says.

A quiet punishment for tax dodging?

Another possibility is that Putin, who has launched a major anti-corruption drive at home, has decided to use the situation to end the practice of "round-tripping" by Russian companies, who incorporate their big Russian operations in Cyprus so that they can enjoy the little island's 10 percent profit tax, instead of the 20 percent they would pay in Russia.

"Putin has always been against offshoring," and this may be a chance to rein it in, says Vedov.

"But for Russian entrepreneurs, it's always been a question of taxation and property rights. Doing business in Russia is bad on both counts, and that's why they look elsewhere. Until some key reforms take place in Russia, the Russian rich will still try to take there cash offshore. And there are lots of candidate-countries that will be delighted to take the place of Cyprus, and hold their cash for them," he adds.