IX. The Russian Connection (ii)
The position of Russia in all this is puzzling. In Cyprus there is a view, demonstrated by recent Russian flag waving protestors outside the Cyprus parliament, that Russia is Cyprus’s ‘friend’.
Yes, there are up to 40,000 Russians and Pontic Greeks living in Cyprus, concentrated in Limassol. Yes, Russia and the Ukraine and Balkans are important sources of Cyprus’s vital tourist industry. And yes, tiny Cyprus is the biggest source of Foreign Direct Investment into Russia (see my Russian Connection page.)
And yes Bank transfers between Russia and Cyprus last year totalled more than $250bn. (FT Hope 22nd March 2013). And yes, Russia did put in place a €2.5bn loan to Cyprus.
But if anyone thinks this was charity or friendship or solidarity they are surely mistaken.
Whilst Prime Minister Medvedev was complaining to the press that the EU was acting like a ‘bull in a china shop’ other members of his administration were in back-channel and secret talks and communication with the European Commision informing it that they had no intention of extending further loans to Cyprus or ‘helping’ one of its ailing banks(FT Spiegel, Hope, Peel, 22nd March 2013).
(Although a Russian fund is the largest shareholder of Piraeus Bank (FT Hope 22 March 2013) which bought up the Greek operations of Cyprus Popular Bank (Laiki), Bank of Cyprus and Hellenic Bank, as well as the Investment Bank of Greece (IBG), a Laiki subsidiary – in all 312 branches for €524m (Ekathimerini 27 March 2013) Piraeus expects to close half of its expanded network of 1,600 branches (FT Chaffin 26 March 2013).
Reuters reported, ‘Perhaps the most disastrous episode in a week of blunders and miscalculation was the Cypriot attempt to persuade Russia to provide alternative finance’.
Finance Minister, Michalis Sarris, was given a frosty reception on the day he arrived in Moscow, Wednesday March 20th, and was then left to wait for a full day
on Thursday until a meeting at 9.00pm by which time he knew the game was up.
This expedition to the ‘Russian friends’ wasted time and burnt up what remained of Cyprus’s political capital in Brussels and Berlin. Even then, according to the Reuters article above,
‘Anastasiades and his team seemed not to comprehend when they arrived in Brussels on Sunday the magnitude of the collapse they were facing’.
As an aside, Russian’s leader of the opposition, Alexei Navalny, joked that if Cyprus were to nationalize its banks it would own the entire Russian Federation (FT February 6th 2013).And they have been some rating agency concerns on the potential knock-on impact of Russian depositor losses in Cyprus on Russian banks (FT 19/3/13).
At the end of the day, Russian/EU relations will always take precedence over any ‘fraternal feelings’ between Russia and Cyprus. This was perhaps evidenced in the rapid make-up between Prime Minister Dmitry Medvedev and Jose Manuel Barroso after the ‘bull in the china shop’ outburst that was presumably choreographed for a particular domestic audience and for foreign policy posturing.
It is true that Cyprus has a geo-political importance for Russia, particularly were Russia to lose its only Mediterranean naval base at Tartus in Syria, and the contested and as yet unquantified gas reserves (some put the figure at $80bn) might be of interest to Gazprom. But as Tony Barber said in his impressive tour d’horizon of the geo-strategic interests at play in the Eastern Mediterranean, Cyprus lies at the heart of,
‘a combustible region where the military, diplomatic, energy and financial interests of at least half a dozen powers collide.’ (FT Barber March 22nd 2013).
Fools go where angels fear to tread. And Russia is not that kind of fool. It will, like China, wait for asset prices to fall before making its move (FT Bremner, 26 March 2013).
The bank bailout resulted in the closure of Laiki bank and its division into a good and bad bank. The good bank operations are being transferred to Bank of Cyprus. BoC depositors with over €100,000 face ahircuts of up to 60%.
The Cyprus government estimates 19,000 depositors at Bank of Cyprus will be affected, many of whom analysts believe are Russian individuals and small and mmedium businesses. The Wall Street Journal (Bouras, 1 April 2013) reported that 'Most major Russian companies have said they had limited exposure to the situation in Cyprus'.
De facto citizenship deal for big foreign losers in Cyprus
Cypriot President Nicos Anastasiades has a new idea for winning frightened investors back to his country. He wants to offer Cypriot citizenship to foreigners who have lost more than €3 million
($3.91 million) as part of Cyprus' one-time forced levy on bank accounts. The president made the announcement in a speech to Russian businesspeople in Limassol on Sunday. Spiegel Online
15 April 2013
Hmmm.... According to the Haravghi communist daily a list companies controlled by Rinat Akhemtov, Ukraine’s wealthiest businessman, which are clients of President’s Anastasiades law firm, transferred €30m from Laiki Bank in the first two weeks of March. A spokesperson for the companies said that the money had been withdrawn due to the wide reporting of Cypurs’s financial crisis and as a prudent precaustion to limit the companies’ exposure in advance of the forthcoming debt restructuring (see FT Hope and Olearchyk April 2 2013).
Russian frozen deposits revealed
Two of Russia's biggest companies reveal the amounts of money they have frozen in Cypriot banks. OAO Sovcomflot, Russia's biggest shipping group (revenue $1.4bn) has $25.8 million frozen in Laiki Bank.
And Russian auto maker AvtoVAZ has $20.5 million) frozen in Cypriot banks—about 40% of the company's 2012 profit. (WSJ Paris and Alpert 15 April 2013)
Not specifically Russian but check this article
A very good detailed 4 March 2013 Forelle/Stevis Wall Street Journal article on possible money laundering in Cyprus
A Diplomatic Misdirection Play
I liked this phrase used in this Bloomberg report of the developing Cyprus crisis
At this point, Cyprus’s Communist President Demetris Christofias -- a Russian speaker and holder of a doctorate in history from the Institute of Social Sciences in Moscow -- made a diplomatic misdirection play.
Russian and other outflows pre-bail-in and ELA
I missed this article (via Ekathimeri) by the great Reuters' Cyprus investigative team that gives real (company-by-company) detail on the way Russian and other money was withdrawn from Cyprus in the months and days before the first bail-in. In January and February 2013 €2.6bn left Cyprus and in the first two weeks of March a further €3.6bn flew the coop.
I was particularly struck by this comment:
Deposits that did flow out of the country had to be funded by emergency liquidity assistance from the European Central Bank, according to analysts. In effect, the ECB was paying for depositors, many of them Russian, to remove money from Cyprus before those depositors could be compelled to contribute to the international rescue of the island.
This isn't strictly the case as ELA is a national central bank liability and the cost was born by Cyprus's commercial banks - particularly Laiki - through higher interest charges on ELA than other ECB-backed refinancing tools.
In the cold light of day its hardly a stunning conclusion but it is a reminder of how fickle money in smart hands left Cyprus in the lurch and piled up the bail-in costs on those uninsured deposits with either no-where else to go or without the nous to get out.
(It's worth remembering Laiki and Bank of Cyprus accounted for the vast majority of accounts in Cyprus and retail bank customers are notoriously slow to change accounts - even in the UK where there is more choice Brits switch accounts on average every 26 years).
It is surprising that some big domestic and international players didn't get out despite the very clear warning signs.
For example, two of Russia's biggest companies revealed in April the amounts of money they had frozen in Cypriot banks.
OAO Sovcomflot, Russia's biggest shipping group (revenue $1.4bn) has $25.8 million frozen in Laiki Bank.
And Russian auto maker AvtoVAZ has $20.5 million frozen in Cypriot banks—about 40% of the company's 2012 profit.
( WSJ Paris and Alpert 15 April 2013)
Of course, it was not only 'bad' Russians shipping their money out.
The FT (2 April 2013) reported that a company controlled by the Loutsios family emptied two Laiki accounts containing €21m on March 12 and 13 and that two personal accounts in the family containing €6m were ‘cleaned out’ on March 3 and 4.
The daughter of the President of Cyprus, Nicos Anastasiades, Elsa, a partner in the family law firm, is married to Yannos Loutsios, Antis and Katia Loutsios’s son. The Loutsios family denies wrongdoing. A company statement said money was transferred to Bank of Cyprus (€10.5m) and to Barclays Bank in London (€10.5m to buy real estate).
According to the Communist daily, Haravghi, a list companies controlled by Rinat Akhemtov, Ukraine’s wealthiest businessman, which are clients of President’s Anastasiades law firm, transferred €30m from Laiki Bank in the first two weeks of March.
Another individual named in the Haravghi list is Andrei Akimov, president of Gazprombank. According to the FT Mr Akimov transferred €2m from his Laiki account on March 6 2013.
The President has urged judges investigating the the banking disaster to examine transactions handled by his family law firm as “a priority.”