The Western Media’s War Against Cyprus And Russia

If you ever manage to get a troupe as diverse as Latynina, Mark Adomanis, the Cypriot Communist Party, virtually every financial analyst, Prokhorov, and Putin united in condemning your crass stupidity and cack-handedness, it’s probably time to stop and ponder. But it’s safe to say that’s not what the Troika – the European Commission, European Central Bank, and IMF – tasked with managing the European sovereign debt crisis is going to be doing any time soon. They seem to be living in la la land.

Here is the low-down. Contrary to German/ECB propaganda, Cypriot public finances, while nothing to write home about, are not in a catastrophic state. The debt to GDP ratio, far from ballooning out of control like Greece’s, was actually lower than Germany’s as late as 2011! This was despite Cyprus being steadily hammered by the global financial crisis and the massive explosion at a naval base in 2011 that cost it about 10% of its GDP.

cyprus-debt-dynamics The main problem was in its financial sector. Although it should have been safe on paper, Cypriot banks had the bad fortune to have had many operations in Greece – which hemorrhaged money as Greek debts were restructured under EU guidance. These involved painful austerity, but the principle that bank deposits would be inviolable held across the PIIGS. But for Cyprus, the Eurocrats – egged on by Schäuble in particular – decided to make an exception, demanding a “bail-in” as part of any financial rescue package. For the ultimately trifling sum of $6 billion, they were prepared to erode basic principles such as sanctity of property that the EU is founded on.

According to Edward Scicluna, the Maltese Finance Minister, his Cypriot counterpart Michalis Sarris was for all intents and purposes brow-beaten into accepting the deal – a 6.75% levy on deposits of less than 100,000 Euros, and 9.9% on everything above that – that the country’s parliament would later decisively reject. The Europeans, according to him, were dead-set on “downsizing” Cyprus’ supposedly overgrown financial sector and in particular its status as a tax haven and alleged center of Russian money laundering. After 10 grueling hours of discussions, Sarris finally conceded, and as soon as that happened, “Schäuble demanded that all wire transfers to and from the Cypriot banks would cease forthwith.”

In other words, they wished to destroy Cyprus’ financial system, and it seems certain that they have succeeded in this. As soon as the banks reopen (now delayed until at least May 26th), who exactly will continue to keep their deposits in a Cypriot bank?

This wanton destruction however seems to have been based not so much on any sense of pan-European fairness or social justice as misconceptions about the nature of the Cypriot banking system, or even more mercenary motives such as a desire to help Merkel win the upcoming elections or encourage capital flight from the PIIGS to German banks (the latter possibility was raised, only half in jest, by Craig Willy). As we see above, Cyprus’ sovereign debt situation was manageable. While it is true that it had a huge financial sector relative to its GDP, this is not atypical for a nation of its small size and location (consider Luxembourg, or London were it independent from the UK), and this sector did not experience any critical difficulties until the EU-spearheaded restructurings of Greek debt into which Cypriot banks were heavily invested, as a natural result of their geographic and cultural position.

How Cypriots see the Cyprus crisis.

How many ordinary Cypriots see the Cyprus crisis.

Nor is it even true that the Cypriot banking system mainly serviced dodgy offshore aristocrat types. Of the €68 billion in deposits as of end-January 2013, some 63% were held by Cypriots, and 7% were held by citizens of Eurozone countries, while 30% were held by nationals of other countries*. Although according to honored representatives of the Eurocrat class like Jean Pisani-Ferry, it is the Cypriots’ own fault for banking in their own damn country as opposed to Germany:

And of that 30%, not all was held by Russians, as Cyprus is popular among Chinese and Iranians too (indeed, an acquaintance who was there recently saw far more signs in Chinese than in Cyrrilic). As for the notion that all or even the majority of Russians with money are “oligarchs”, “mafiosi”, and “Chekists” (interchangeable terms, to many of the people who engage in this kind of rhetoric)… well, no way to statistically prove it one way or another, so anecdotes will have to suffice. Ironically enough, the only Russian I know with a bank account in Cyprus is actually a fairly anti-Putin liberal, and as far as I know not an oligarch or a mafiosi – unless you consider journalists to be such. The commentator JLo also reports a liberal acquaintance with money in Cyprus. No doubt those two will be thrilled to hear from former Economist Russia journalist Edward Lucas, whose Russophobia is frankly pathological, that as Russians with money in Cyprus they should be automatically expropriated.

This is not of course to argue that having such a large segment of the Russian economy “offshore” is a good thing. Many Russians really do have accounts in Cyprus because of its perceived benefits such as the local (English-based) legal system, greater financial security, greater ease of capital movement around the world, and yes, tax evasion or “tax optimization” as it is euphemistically called – and productively utilized by entirely respectable Westerners like Mitt Romney. It would undoubtedly be a good thing if there was less of that and ironically the Troika’s ham-fistedness will have only helped Russia in its struggles to de-offshore its economy. But what is entirely mendacious is to start throwing around terms like “money laundering” as if they were synonymous with offshore banking, or “the Russian mob” as if it was synonymous with “oligarchs”, “Russian politicians”, “Russian bureaucrats”, and all Russians in Cyprus in general for that matter. There is of course some overlap between all these categories but to conflate them all as the Lucas types insist on doing is pathologically Russophobic, and frankly driven by the very same Bolshevik spirit that they profess to despise but actually embody.

Many Western papers even went so far as to hint that the reason Russia was so “concerned” about Cyprus was because Putin and other members of his inner circle had money in Cyprus. This was echoed by the (viciously anti-Putin) Russian business newspaper Vedomosti, which alleged that “it is hard to believe, but it appears as if European politicians are ready to risk a lot in order to pressure a certain influential politician secretly hiding money in Cypriot banks.” They did not have the courage of their convictions to say it outright, but the hidden subtext is obvious to all. We call these conspiracy theories. Were this true, in fact, it would be indicative of severe schizophrenia on Putin’s part – that is, if he actually DID have quadrillions parked in Nicosia – considering that previous discussions on Russian loans to Cyprus had been linked to Cyprus becoming more proactive about revealing the identities of Russians with bank accounts there to the Russian tax authorities.

How the Western media/political class see the Cyprus crisis.

How the Western media/political class see the Cyprus crisis.

At this point it hardly bears mentioning that, as an institution that so regularly and pompously lectures Russia about things like rule of law and sanctity of property rights, it is quite hilarious that the Troika would “demonstrate” those concepts by doing things like retroactively abrogating European-wide deposit insurance of 100,000 Euros and freezing and confiscating the savings accounts of the very Russians whom they expect to listen to their pontifications.

But as these recriminations and general debility went gone back and forth, Nicosia burned. The initially proposed “medicine”, it seems, will turn out to be the deadly pill that kills the Cypriot financial system. It is hard to imagine anyone, be they foreigner or even Cypriot, now willingly leaving their money in Cypriot banks; trust has been destroyed, and short of capital controls, massive bank runs and capital outflow seem to be all but inevitable whenever the banks open again. The original $15 billion that could have nipped this problem in the bud is probably no longer sufficient. I don’t pretend to have any precise idea of how things will develop now – Will Cyprus hurtle out of the Eurozone? Will contagion spread to Spain and Portugal? Will Gazprom get exploration rights to the recently discovered oil fields in return for loans? Will China get involved? – but a few things I think we can be pretty sure of: (1) The ECB/Eurocrat class are either utterly, frightfully oblivious, or have altogether darker ulterior motives; (2) The Cypriot banking system is finished; (3) It will be a reality check for Russians who firmly believe their assets are automatically safe abroad and will help the de-offshoring process, though I don’t expect any sudden radical changes because there are still plenty of alternatives like Latvia which I hear is getting pretty hot with Russian money nowadays.

PS. For further reading (and people who influenced my perception of this) consult Mercouris, Dmitry Afanasiev (Russian version at Vedomosti), and Craig Willy’s Twitter.

*UPDATE: The commentator Temesta links to an article by Paul Krugman in which he points out that “Cypriot residents” very likely directly include foreigners:

I’ve done some asking around, and cleared up something that was puzzling me. Officially, only about 40 percent of the deposits in Cypriot banks are from nonresidents, which would imply resident deposits of almost 500 percent of GDP, which is crazy. But the answer is that I do not think that word “resident” means what you think it means. Some of the money is from wealthy expats living in Cyprus; much of it is from rich people who have resident status without, you know, actually living there. So we should think of Cypriot deposits as mainly coming from non-Cypriots, attracted by that business model.

That said, speculation is one thing, concrete numbers are another: “Cyprus Central Bank Gov. Panicos Demetriades, in an interview published Thursday in Russian newspaper Vedomosti, offered more specifics. “The deposits of Russians range from €4.943 billion to €10.225 billion, depending on how you count them,” he said.” Even if the highest estimates of $20 billion are correct, it would still mean that the total value of Russian deposits there account for less than 25% of the total.


  1. This is a good post and a fascinating issue with, I think, many long term ramifications and unintended consequences. So much has been exposed now in raw form, from European duplicity and double standards to misplaced stereotypes, among both Russians and foreigners. This could even be more of an eye opener than the Russo-Georgian War of 2008.

    The important thing now is for the Russian government to behave shrewdly and capitalize on the situation so as not to lose the information war like it did in 2008. Hope springs up eternal, I know, but there seems to be some signs that they’re catching on. For example, in a press conference today DAM apparently didn’t rule out the placing of a Russian naval base on Cyprus in exchange for financial assistance. More of this, please.

    Watching anti-Putin liberal individuals and institutions squirm and try to twist this story also brings some satisfaction, along with entertainment. As was noted in this post, many of them aren’t even trying and this leads me to believe, again, that this is a watershed moment that could possibly lead to at least a little, sorely needed, patriotic solidarity. As for my liberal friend caught up in this I am trying to imagine the “I told you so” conversation without unnecessary gloating.

    Btw, Vedomosti is a joke, I refuse to read it on general principal and if there is something of interest in the paper I usually ask my wife to read the article and give me a summary. Part of this stems from being personally acquainted with several of its journalists and editorial staff. Indeed, I once managed to induce raging hysterics from a senior editor of the paper when she refused to believe that Russia has a lower Gini Coefficient than the USA and I offered to make a bet of $10,000 to prove my point. It just goes to show, opinions first and foremost, facts only if they suit.

  2. “Nor is it even true that the Cypriot banking system mainly serviced dodgy offshore aristocrat types. Of the $68 billion in deposits as of end-January 2013, some 63% were held by Cypriots, and 7% were held by citizens of Eurozone countries, while 30% were held by nationals of other countries.”

    About deposits owned by Cypriots Paul Krugman has this to say:

    “I’ve done some asking around, and cleared up something that was puzzling me. Officially, only about 40 percent of the deposits in Cypriot banks are from nonresidents, which would imply resident deposits of almost 500 percent of GDP, which is crazy. But the answer is that I do not think that word “resident” means what you think it means. Some of the money is from wealthy expats living in Cyprus; much of it is from rich people who have resident status without, you know, actually living there. So we should think of Cypriot deposits as mainly coming from non-Cypriots, attracted by that business model.”

  3. hattivat says:

    I second Temesta’s comment, given that the Cypriot banking sector is 8 times larger than the country’s GDP, if Cyprus citizens actually owned 63% of those deposits this would make them by far the most frugal nation on planet Earth.

    The levy of 10% is a lot and, especially in case of deposits under 100,000 euro, questionably legal, but you have to put that figure in perspective – without this aid the depositors will likely lose much more than 10% of their savings. At the moment the Cypriot banks are essentially insolvent, just looks at their stock price.

    • This is entirely irrelevant. Luxembourg’s banking sector is 25 times larger than its GDP, so what? Besides which, “the Cypriot banks are essentially insolvent” is incorrect. Probably two of them are, while there are many other perfectly solvent banks, many of which are subsidiaries of foreign banks. Why should the depositors in these banks be forced to pay for the irresponsibility of the others just because they are in the same domicile? Bankrupt banks should have their equity and bondholders wiped out, period. This depositor haircut is the absolutely stupidest possible solution and derived with the goal of hitting Russian interests. I’m not even getting into the cause of this whole mess, which can be put squarely on the troika in the first place for forcing Greek bondholders to accept a 50% haircut.

      • The size itself is not relevant. What is relevant is that no one pretends that the majority of deposits in Luxembourg’s banks actually belong to Luxembourgian citizens. Based on this infographic:
        I do simple math and arrive at a figure of 171% of GDP. That’s how much Cypriots supposedly have in savings, which would put them on the level of the notoriously frugal Japanese. Needless to say, I find that highly unlikely. In comparison, its 35% for Russia, 57% for Sweden, 86% for the USA and France, and 115% for Germany.

        • No one is pretending anything, this is simply a technicality. Who the accounts belong to is irrelevant. If a bank is solvent its depositors should not have their money seized according to basic property rights and rule of law. Period. But I imagine this is the beginning of the end. They’ll come for your money, and mine, and we’ll all be screaming bloody murder.

          • hattivat says:

            You seemingly failed to realize that I only pointed out that the majority of deposits in Cypriot banks are most likely not Cypriot-owned because Anatoly used this figure of 63% as an argument against the bailout scheme, seemingly believing that figure to be reliable. I was merely correcting a factual error, whether or not I support the bailout myself is irrelevant here since using bad arguments benefits neither side.

            As a side note, I agree that its a very questionable policy to ‘tax’ all the deposits, although I am far less shocked by it than most commentators, whose panicked reactions I find frankly quite amusing.

            As a further side note, I find your assessment of Cypriot banks’ health highly questionable. First of all, pretty much all of them currently enjoy emergency liquidity support from ECB, which is a privilege that will be cut off if agreement isn’t reached by Monday, leaving them in a worse position. Second, given the level of inter-bank dealings in modern finance I think it is safe to assume that if several major Cypriot banks were allowed to fail then others would soon follow. Most other European banks are also close to insolvency, so I don’t see their branches on Cyprus surviving much longer than the local banks.

            • Sorry to come late to this discussion, but I have been very busy these last few days.

              Krugman by his own admission does not understand or know Cyprus very well. I strongly suspect that the great majory of “resident non residents” with accounts in Cyprus are Greeks. Many Greeks have accounts in Cyprus (including several I know) because until a short time ago the Cypriot banking system was considered much more sophisticated and solid than the Greek. Obviously the crisis in Greece has intensified the tendency of Greeks to open accounts in Cyprus. Many Greek shipping companies also prefer to run accounts from Cyprus. Needless to say it is not difficult for Greeks to get resident status in Cyprus given the very strong cultural links between the two countries. Cyprus is after all essentially just another Greek island. It did not want to be independent from Greece but only became so because the great powers in the 1950s insisted it should.

              • Krugman apparently doesn’t even understand that “total assets of the banking sector” does not equal “deposits”. In fact according to World Bank data less than half of those assets are deposits.

                It is certainly true that most of the resident depositors are normal, law-abiding people, probably not only Greeks but also British pensioners and Israeli businessmen. I’m not saying it is a good thing to “tax” them, I’m simply pointing out that claiming that this tax hits mostly “ordinary Cypriots” is a false argument, since it obviously doesn’t.

  4. Significant swathes of the UK/US political class not only think stealing from ‘rich Russians’ is ok — in Krugman’s case, perhaps as a precedent for Obama raiding 401ks and IRAs in the not so distant future (aka a Bolshevik or Argentine Fascist mentality of ‘rob the rich, as property is theft anyway’).

    They also deliberately leave out all the British pensioners and Israeli corporations who will also be subject to the ‘haircut’. In fact Walter Russell Mead, who has been ambivalent on Russia’s resurgence in many respects (loathing Putin but acknowledging that many Greeks and other Orthodox peoples of southeastern Europe are looking to Russia for answers rather than the EU) blames the Russians now for not throwing billions after bad to recapitalize a banking system that’s already been thrown into permanent jeopordy, so long as Cyprus stays in the eurozone! Why would any sane person much less government throw billions of euros into a banking system that the eurocrats can raid anytime they please?

    Once again it’s damned if Russia does nothing, and damned if it does something to ‘spend babushkas money to bail out wealthy oligarchs’! The Kremlin truly can’t win in this situation!

    Anatoly I plan to do a follow up post at my blog to your own exposing the execrable Michael Weiss, who is not a Syria jihadi fanboy but also seems to think stealing Russians accounts (per Jeremy Warner of the Telegraph) is just an awesome idea and is exactly what the Icelanders did (wrong). In fact I think it’s a globalist twofer, in the sense they want to promote the false idea that Icelanders just ripped off foreign depositors (they did NOT, they wiped out the bondholders, let the British and Dutch governments bailout their banks which had deposits in Iceland, and arrested the banksters’ Icelandic agents) to discredit Iceland’s approach while simulatenously advocating financial warfare against the hated Russians. If that isn’t fascist I don’t know what is.

    • “Significant swathes of the UK/US political class not only think stealing from ‘rich Russians’ is ok ”

      A lot of Russians think this way too – for good reason, as much of that wealth was looted from the Russian people.

      (I am not commenting on the Cyprus case, as I don’t know if most of the Russian victims are thieves or not, though I suspect that middle class or ordinary Russians aren’t sending a lot of money to Cyprus)

      • That is correct. This attitude is indeed quite prevalent and understandably so – I am on numerous occasions guilty of it myself – but ultimately extremely damaging to Russians (and Ukrainians) themselves. In demonizing their richer counterparts, they ultimately demonize themselves, as they are part of the society that creates and incubates such creatures. They might assume that Westerners are going to differentiate between their own (unfailingly) upstanding selves, and the thieving rich scum and mafiosi who keep their money in Cyprus. But these are overly high expectations, which bizarrely assume that Westerners have the divine ability to tell the goat from the sheep, or for that matter even have the incentive to do so. In reality, while it is easy to wallow in Schadenfreude when some businessman (mafiosi) has his assets expropriated in Cyprus or when some bureaucrat (казнокрад) is put on a visa blacklist, it also means that if and when it eventually happens to him – after all, stealing from and harassing moneyed Russians abroad is perfectly okay, as they are all stealing mafiosi – nobody will bother speaking out for his rights. Because he, too, is of course a thieving mafioso. We’ve already established that.

        • If the money has been stolen by Russian gangsters from Russia then it belongs to the Russian people and it is doubly wrong for the Europeans to help themselves to it. If the Europeans had wanted to help Russia staunch money laundering activities via Cyprus they should have supported the Russian government’s attempts to get from Cyprus details of Russian depositors.

          For what it is worth, and I do know and cannot know to what extent this is true, what I am hearing from Cyprus is that the amount of Russian money held in Cypriot banks has been wildly exaggerated by several times. It seems that some of the bigger sums for Russian money held on deposit in Cyprus that have been mentioned originate with a report made to the German government by the German intelligence agency the BND that apparently undertook some sort of investigation of the financial sector in Cyprus. As is now routinely the case where anything to do with Russia is concerned, the BND apparently did the calculation 2+2 and came up with the answer 10.

          What I am also told is that though there may be a large number of Russian owned accounts in Cyprus many of these accounts are actually relatively small. Some belong to the now fairly large Russian expatriate community there, most of whom are simply retirees. Ironically, such accounts will be covered by the EU’s deposit insurance scheme for deposits of less than 100,000 euros. The main importance of Cyprus for the Russian economy has been as a jurisdictional centre, with Russian companies registering themselves there and nominally making their contracts there but with the entire activity actually happening elsewhere (usually in Russia). Obviously Russian companies registered in Cyprus will have accounts there but these will again will be relatively small accounts to handle administrative costs and such things as tax payments not the companies’ major operations, which when they happen in Russia will be handled by accounts held in Russia.

          This incidentally corresponds with my experience of Switzerland with whose banking system I am very familiar and about which I in fact know more about than Cyprus. In the case of the infamous Swiss numbered accounts, the Swiss banks almost never hold the money within Switzerland itself but contrive to do so in other jurisdictions usually through intermediary bodies.

          If this is true (and I want to emphasise that I do not know for a fact that it is) then the actual economic impact on Russia and on Russian businesses of a Cypriot meltdown will be small, which is surely why the Russian markets have been reacting to the developments in Cyprus so calmly.

  5. As Reggie Middleton has exposed at ZeroHedge, Britain’s banking sector is also nine times GDP and also has billions in ‘dirty’ Russian money. Why don’t the banksters and eurocrats just start defecating in their own nest? Why doesn’t Jeremy Warner of the Torygraph just advocate the UK expropriating the ill gotten gains of ‘Londograd’ and Berezovsky/Abramovich in British banks to make British finances whole?

    • Because the money from the Londongrad Russians is not from mafia men you see. Because the Londongrad Russians are the “good Russians” in British media perception.

  6. Anatoly I plan to do a follow up post at my blog to your own exposing the execrable Michael Weiss, who is not [sic only] a Syria jihadi fanboy but also seems to think stealing Russians accounts (per Jeremy Warner of the Telegraph) is just an awesome idea and is exactly what the Icelanders did (wrong).

    Pathological Russophobes, fascists or Bolsheviks all. Once you no longer pretend to give a damn about private property due process (i.e. drone killings) what other words are there to describe these people? Even the ridiculous Professor Pirrong is distancing himself as fast as he can from these creeps on Twitter.

  7. Great piece. So much spite on poured on Russia in connection with Cyprus in the western press at the moment that I started suspecting Freudian projection on the part of western elites.
    The dirtiness or not of Russian money in Cyprus is a matter for banking regulators. It’s an EU, euro area country so banks and governments in the EU didn’t seem to have a big problem with Russian money.

  8. With regards to Cyprus’ future in the eurozone; there is now speculation in the British media (again) that a country could fall out of the eurozone. If AK is interested I could post all the reasons why this is essentially rubbish and why all the speculation last year about Greece was hogwash (the chances of Greece exiting the eurozone were essentially under 30% last year and not the ridiculous 50-70% advocated by pundits – the chance of Greece exiting is most likely directly related to the proportion of Greeks who actually WANT to exit the euro; i.e. under 30%). Cyprus maybe stands a higher chance of exiting (haven’t seen any poll figures on support for the euro in Cyprus) but this attempt at raiding deposits is very likely to have aa negative effect on the average Cypriot’s support for the euro and the EU. If public opinion turns against the euro and the EU this will make it far easier for a Cypriot government to re-introduce their own currency (which incidentally would have ZERO legal standing/basis and would essentially be scrip/I.O.U.s with regular denominations) and exit the EU (which is the ONLY legal way to exit the euro and reintroduce a national currency barring a change in the Treaty on European Union).

    Given the current withdrawal procedure for the EU, any withdrawal of Cyprus from the EU would probably have to occur following a messy collapse of the Cypriot financial system and the introduction by the government of an emergency “parallel currency” (which many in the media will incorrectly interpret as a Cypriot exit from the euro) followed by Cyprus announcing it’s intention to withdraw from the EU and starting negotiations on the same (as outlined in the Treaty). Whether or not negotiations go quickly (probably with Cyprus aiming to negotiate a relationship that leaves it in an EEA type relationship with the EU), the end result is that in 2 years (or less) Cyprus would be outside the EU (the Treaty provides that in the event that a country will legally exit the EU two years after announcing its intention to withdraw whether or not negotiations on the withdrawal have been concluded before then). So if the Eurogroup continues to play hardball with Cyprus then the timeframe for such a scenario (which still seems unlikely at the moment) would be 2013-2015.

  9. unDear Anatoly,

    May I add to the general chorus of praise that this is an entirely outstanding article that superbly summarises what has happened.

    Where Cyprus is concerned the damage has now been done and is irrepairable. The raid on depositors has shattered confidence in Cyprus’s banks and regardless of what is now done it is impossible to see how that can be undone. No one in their senses who has the option to take their money out of a Cypriot bank is going to keep their money in a Cypriot bank now.

    What shows how serious the situation now is, is the fact that there are apparently serious plans underway to impose capital controls in order to prevent a runaway banking collapse. Though more rules that were thought inviolate have been broken over the course of this affair then I can count, I cannot see how the imposition of capital controls can possibly be consistent with the EU’s single market, and I would have thought that if they are imposed and are maintained for any length of time then in spite of what Hunter says the country will crash out of the eurozone and possibly even the EU.

    Even if things don’t come to that, money is now going to pour out of Cyprus and I simply do not see any way to stop it. Given that this is what is going to happen the bailout plan is going to fail. Nothing illustrates the fantasy world the EU leadership inhabits then the purported justification for the deposit raid, which is that without it the debt burden of the bailout on Cyprus’s GDP would become unsustainable. Since the threat of a deposit raid has destroyed Cyprus’s banking system, which was the main prop of its GDP, Cyprus’s GDP is now bound to contract, which will of course make the debt burden of the bailout unsustainable.

    Much of the fault for this debacle must rest with the Cypriot government. When the Cypriot authorities were told last weekend of the proposed deposit raid, they should have absolutely refused to go along with it. It would have been much better to agree to the ECB’s threat to withdraw liquidity assistance to the two Cypriot banks that were actually insolvent. The two banks would then have closed but the small depositors with the deposits of less than 100,000 euros would have been protected by the EU deposit insurance scheme. The bigger depositors of more than 100,000 euros would of course have take a big hit. That however is how free market capitalism is supposed to work. If you put your money in a tax haven then along with the benefits you accept the risk that in the event of a crash the local government will not have the resources to bail you out. That was precisely what happened when the banks in another offshore island tax haven – Iceland – collapsed. To the extent that the sort of person who is able to put their money in a tax haven is rich (or a “high net worth individual” to use the current parlance) they tend to be able to absorb such hits and since they understand the rules and do not want to publicise the fact that they have money in tax havens, when things go wrong in this way they don’t tend to complain too much.

    By agreeing instead to the Troika’s lunatic scheme for a raid on deposits held in every Cypriot bank, including the vast majority that until last weekend were perfectly solvent, the Cypriot government has helped the Troika destroy confidence in its own financial system and has turned a containable problem of two banks into a systemic one.

    The result is that what was a historically successful financial system has been wantonly destroyed. Though two Cypriot banks got themselves into trouble by lending to Greece, contrary to what is being said in parts of the media, most Cypriot banks did not engage in a reckless lending binge and did not catastrophically over extend themselves in the way the Irish and Icelandic banks did.

    As for Cyprus having pursued an unsustainable model, what actual alternative did it have? The island is small, with a population that actually lives on the island of well under a million. It is far too small to become a manufacturing or agricultural centre. Its tourist industry is already highly developed and I for one cannot see how it can be developed further. Its only realistic option was to become an east Mediterranean financial hub, a kind of mini Singapore, which is what because of its location and history it did. Putting to one side the highly problematic possibility of future development of its natural gas resources, with that option taken away what future does it now have?

    • Just saw an interesting comment at the Guardian:

      You’ve fallen for the theme Merkel has been pushing. A recent report on compliance with EU and international Law and practice on money laundering shows Cyprus to be performing better than Germany and several eurogroup countries.
      Cyprus was a success story in terms of attracting capital. Frankfurt doesn’t like that. Cyrpus was exposed to Greek debt and forced by Merkel and the EU to accept a 70% hit on her assets as a result of the Greek bailout. Having imposed that “solution” to the Greek problem (itself created by the euro), Cyprus had ONE bank looking insolvent at which point (according to the FT and WSJ, and contrary to the article) Merkel and the ECB told Cyprus they would pull the plug and make the entire Cypriot banking sector sink unless they raided their citizens bank accounts in EVERY Cypriot bank, not just the one that was actually insolvent.
      Intended result? Russian wealth flees Cyprus, German electorate mollified, Frankfurt a safe haven for Russian wealth.
      The subversion of EU institutions and Law, undermining confidence in the euro and European banking institutions, all in pursuit of German national interests and Merkel’s domestic political standing.

      • Dear Anatoly,

        This corresponds with what I am hearing.

        I am going to make one last comment on this affair, covering a number of points which have been made by various contributors:

        1. It has been pointed out that pretty much the entire Cypriot banking system now depends on liquidity assistance from the ECB, which is threatening to cut it off on Monday. This is however only because of the way in which the problems of one or possibly two banks have been made systemic for the entire banking system as a result of the actions which have been taken. Had a proper bailout plan been worked out over the last few weeks, which given what was then the solvency of most of the island’s banks, should not have been difficult, then the Cypriot banks would not be in this position. Needless to say such a bailout plan should have involved Russia as the country that is already a major creditor and which represents what are said to be the largest block of creditors of its banking system. The alternative, which was to let the one or possibly two insolvent banks fail, though it would undoubtedly have caused problems (especially as one of the banks is the country’s major retail bank), would still have been better (and more honest) than what was done.

        2. I would prefer if we do not refer to the confiscation of money from deposits as a “tax”. Calling it that or saying that deposit holders will in return be given shares they do not want in banks that have been made insolvent are simply euphemisms that are intended to disguise the essential illegality of the whole exercise. Similarly I am not happy with calling the seizing of money from deposits a creditors’ haircut for the obvious reason that the “creditors” (ie. the depositors) have not been consulted about it. In any normal debt restructuring situation it is the creditors who would be expected to agree the debt write off. That was what happened when Greece’s creditors agreed a hair cut or write off of Greece’s debts even if in practise they were pressured to do so. When serious people in the Troika and the Cypriot government try to cloak what they are doing behind words like “tax”, “levy” and “haircut” it merely shows that they know the essential illegality of what they are doing and it is better if the rest of us do not to collude with them in this. I would add that I feel that in some ways too much is being made of the fact that deposits up to 100,000 euros are covered by deposit insurance. The fact that amounts over 100,000 euros are not insured does not mean that the Cypriot authorities and the Troika are entitled to seize them.

        3. I have seen some debate about the extent to which Russia was or was not consulted about the deposit seizure with suggestions that Shuvalov and Siluanov despite their denials were consulted about it but weakly went along with it. It is now absolutely clear from comments made by Barroso in Moscow that this was not the case and that Shuvalov and Siluanov and Russia generally were not told of the plan for the deposit seizure in advance. Barroso’s comments are incidentally another illustration of the collapse of basic honesty within the EU on this and other subjects since he has sought to justify the failure to inform Russia by saying that the situation was so fast moving that no EU government was informed. This despite the fact that we know that the German Finance Minister played a key role in the negotiations.

        4. Lastly, it is ordinary Cypriots who are most affected by what has happened since it is Cyprus’s economy together with their jobs and livelihoods which is being destroyed. To imply (as Krugman does) that because by some calculations the majority of accounts in Cypriot banks are not held by actual Cypriots they will be less affected by what is happening is to completely misunderstand what has happened, which is bizarre coming from an economist. The big foreign depositors, to the extent that most of them are very rich people, can mostly afford to take the hit and walk away. It is the ordinary people in Cyprus who will have to live with the consequences.

        Having made all these points, I do want to end with one last thing, especially since I am writing on a blog about Russian matters. A number of Russians (not all of them rich) are going to lose money from this affair but the economic significance of this affair for Russia is being overstated. As someone who works with people with money in Cyprus (I have none) I am in the eye of the storm so to speak. However in terns if Russia one must keep a sense of proportion. Tthe most important thing for Russia about this affair is not the very small economic loss, but what it shows to Russians about what the Europeans really think of them and how when it comes to Russians all the rules go out of the window. Putin has understood this for a long time, which is why he has responded so calmly to what has happened. For Putin and I would suggest for Russia the really important thing that has happened this week is not the debacle in Cyprus but the visit to Moscow of Xi Jinping.

        • My understanding Alexander is that most of the ‘hot’ money deposited in Iceland banks by British or Dutch bankers was in fact bailed out by their respective governments.

          Even had the Icelanders allowed all deposits over the 100k euro threshold to fail (or fewer, since they were outside the EU and hence not subject to the now worthless EU ‘deposit insurance’ guarantee) that still would’ve been more market-based than what the Cypriot Vichy collaborators and the Teutons of the ECB did.

          In fact Jeremy Warner of the UK Telegraph I think is playing to his City bosses by trying to blur the lines between the criminal things the Cypriots did and the early 20th century approach of the Icelanders (i.e. 1920s/early 30s before ‘Too Big to Fail’ entered the lexicon). If you recall the British government tried to threaten the Icelanders at the time, saying they would be banned from visiting Britain etc. Those efforts of course failed spectacularly.

          The trouble now is indeed the damage is irreparable because it was designed by the Germans principally Schauble and Merkel’s aides to be thus. And the Russians will not throw good money after bad and reinject capital into banks that the ECB has already declared dead, while Cyprus remains in the EU. And since the exit from the Euro zone by treaty law takes two years (though the Cypriots can toss out the rascals and install a ‘patriotic’ or ‘national salvation’ government that will print Cypriot Pounds) in the meantime Cypriots either accept the new, near worthless currency, meekly take their euros out after the banks reopen and try to exchange their euros for dollars, swiss francs or rubles ASAP, or perhaps there is one final option: Putin should NOT agree to a bailout but should offer rubles to Cypriots at a favorable euro exchange rate once the banks reopen. That would be a counterstrike and a PR coup in that it would demonstrate that Cypriots would prefer to keep their money in rubles than euros and stick it to the Brussels bastards that way, as well as avoid a future confiscation by keeping said rubles under the mattress.

          • My understanding is that a euro is a euro is a euro, though there are ‘national stamps’ and euros printed in Germany for example bear a different small marking than those printed in Greece. Please correct me if I’m wrong in case there’s a reason Russia hasn’t tried for ruble-ization, perhaps the Euros would retaliate by declaring the Cypriot euros devalued or valueless somehow hence screwing Russia out of the conversion.

            • There are no national stamps on euro notes. The difference between euro notes printed in or for different countries is simply in some of the letters used in the serial numbers. And that plan for Russia to send rubles to Cyprus at a favourable rate for euros wouldn’t work.

          • Mr. X, the exit from the EU only takes two years IF there has been no successful negotiations towards an exit before the two year period is up. So if for instance the latest bail-out (I mean “bail-in”) plan were to fall apart somehow (perhaps with the parliament voting to dissolve itself and/or the president resigning followed by new elections for parliament and president with the new parliament and president being opposed to the plan and advocating withdrawal from the EU) then it is quite possible that a new government of Cyprus could announce its intention to withdraw from the EU and begin negotiations almost immediately. Should Cyprus and the rest of the EU successfully conclude negotiations on withdrawal (for example maybe the terms would be for Cyprus to simultaneously join the EFTA and EEA (one has to be a member of the EFTA or EU in order to be the in EEA) upon formal withdrawal to ensure Cyprus remains in the single market/internalmarket; redenomination of some debts into the new Cypriot currency but retention of other debts in euros; agreement concerning Cypriot liabilities to the ECB, etc) then Cyprus could exit the EU and the eurozone before two years have passed.

    • Alex,

      If I’m not mistaken the imposition of capital controls is actually not contrary to the Single Market provided it is supposed to be temporary (I believe it would have to be 6 months) and of an emergency nature (just as how Denmark was able to impose immigration controls in apparent violation of the Schengen Agreement).

      The imposition of capital controls itself won’t send Cyprus out of the EU or euro (there is no provision for expelling a member), but if prolonged it could see a Cypriot government that advocates EU withdrawal in order to make the capital controls permanent (or to be held in place long enough to begin rebuilding the sector).

      This is not such a far-fetched idea. A recent poll by Prime Consulting (though I have not seen the sample size, the poll was originally reported upon by a Greek newspaper; perhaps yourself or Anatoly might be able to find more info on the poll size) found that 91% of respondents were in agreement with the rejection of the original proposed raid on deposits and supposedly would prefer to leave the EU before agreeing to such a deposit levy and that 67.3% of respondents would prefer to bring back the Cypriot pound and forge closer relations with Russia (see the articles here: and😉

      However another poll by Insight Market (of 600 adult Cypriots) found that 62% remained in favour of staying in the eurozone (see here:–finance.html)

      If the Prime Consulting poll is more accurate or has a much larger sample size then it might just be that a majority (or at least a plurality) of Cypriots are now in favour of leaving the eurozone and the EU, which would make it relatively easy for any Cypriot government to go through the withdrawal process from the EU. And for the rest of the eurozone members, the withdrawal of Cyprus from the eurozone and the EU would definitely not have the major impact that a Greek withdrawal would have had (assuming the Greeks wanted to leave; which they don’t).

      • Dear Hunter,

        The point I was making (and I realise I may not have been clear) is that capital controls are simply not compatible with the existence of a currency union and a single market. This is so regardless of what the rules say. If it becomes more difficult to withdraw a euro from Cyprus then it is from Germany then the euro in Cyprus is worth less than the euro in Germany even if their nominal value is the same. That actually increases the incentive to take the euro out of Cyprus and to move it to say Germany where it can be freely traded and is worth more. Beyond a certain point the cycle runs the risk of becoming self reinforcing, with capital controls having to be tightened further as the pressure for capital flight grows. At the same time as the incentive to take euros out of Cyprus increases, the disincentive to bring them in grows as well. Given that the nature of membership of a single currency area is that the local government does not control money emission, it is not difficult to see how the longer such a situation goes on for the more likely it becomes that the local economy will run into increasing payment difficulties. At that point the pressure to print money locally increases beyond the point where it can be resisted regardless of what the local politicians and the authorities in Franfurt and Brussels may want.

        How long such a process could go on for before the point of no return is reached I have no idea. Much I suppose will depend on the nature of any capital controls that are imposed but if things become difficult I seriously doubt if it could go on for as long as 6 months. It seems to me that capital controls could any work if people were sure that they would be around for only a short time and that there would be a genuine return to normalcy once they are lifted. Cyprus is a very different society from Greece with historically a much higher level of public and private honesty, a far more efficient legal and administrative system and much greater stronger social cohesion. In crises (and Cyprus has known many) people tend to pull together and the trust they traditionally have in each other and in the authorities is high. Who however can be confident of anything now?

        • Alex,

          I understand the point you are trying to make and it is a sound point. I think we both more or less agree on this as I said that prolonged capital controls could see a Cypriot government that comes around to the idea of leaving the EU.

          As you rightly said though as long as capital controls are temporary and there is a sense of a genuine return to normalcy once they are lifted then they can be imposed in a currency union (this was done in the United States in 1933 by Roosevelt for 2 weeks following the effective collapse of the monetary union in the United States over the period 1932-1933).

          The problem for the EU now is that there is no confidence that things can return to normal in Cyprus once capital controls are lifted. So unless the Cypriot politicians manage a few magic tricks and restore such confidence, then the end result is a collapse of Cyprus’ financial system (and probably a default on debt) and/or Cyprus withdrawing from the EU.

          • Speaking of collapsing US Monetary union (and yes FDR did steal the American people’s gold, in effect devaluing the USD by 30% in a fortnight), did anybody see this story publicized by “Currency Wars” Jim Rickards and former RT America host Lauren Lyster about Texas wanting the UT System’s billion dollars in bulleon back from the New York City vaults?

            Of course the Fed recently announced that all the gold, including Germany’s which will take seven years to repatriate, is still there and in excellent condition. But it was not an external audit.


            If Utah, Texas, Montana and the other ‘Tea Party’ minded states start creating actual state-guaranteed gold vaults, where the state doesn’t issue the coinage but just guarantees that it’s not all tungsten inside, what will happen then? Will we see rich Russians putting their bulleon in Salt Lake City or Austin vaults?

  10. One final point I want to make on this thread is about Vedomosti. I do not know to what extent people are aware that Vedomosti is at least part owned by the Pearson group, which is also a major owner of the Economist and of the Financial Times. Though the precise ownership structure of these various journals is quite complicated and they are not usually considered a media family in the way that say the Murdoch media are, that is actually what they are. Not surprisingly therefore on Putin and Russia all three journals follow the same line.

    • They do cooperate closely. For instance, they frequently even reprint each other’s articles (including translations) on each other’s websites.

      And you are correct that to a very large extent Vedomosti’s editorial policy (and commenting audience) share the same economically right-wing, anti-Putin values.

      That said, this does not mean that it is a worthless paper. For instance, important Russian officials sometimes right there – for instance, the interview with the outgoing head of the Russian Central Bank, who alleged that half of Russia’s capital flight was due to a shadowy and high placed small group, was carried by Vedomosti. Prokhorov writes there sometimes.

      And it’s not all anti-Putin. For instance, Afanasiev’s excellent article on Cyprus (which appeared in shortened form at the Financial Times, which you’ve linked to) first appeared there too.

  11. As usual, Alexander Mercouris nails it.

    As for Vedomosti, yes they sometimes include content from their opposition, but this is nothing more than a token to maintain at least some appearance of balance and objectivity. For all intents and purposes it is a propaganda rag, best used for toilet paper at the squat and grunt toilets in Kursky Vokzal.

  12. Helmer wrote that Pearson keeps its profits banked in Luxembourg.

    The counterstrike may be slow in developing — ruble-ization is just one offbeat idea I spun off this weekend, not knowing whether it could actually work in practice. But there are many others out there.

  13. We have now the latest bailout plan and contrary to the spin in parts of the western media it is COMPLETELY DIFFERENT from the plan we saw last week.

    What was utterly outrageous about last week’s plan was its seizure of money from deposits held in every account in every bank across the entire island of Cyprus. This offends against every principle of banking, the rule of law and of private property I know of. By what logic, if solvent debtor A owes me money, am I required to lose money to bail out insolvent debtor B with whom I have no connection at all? The Cypriot government and the Troika compounded the outrage by extending it even to deposits that held less than 100,000 euros. This was blatantly illegal since it violated the EU’s own deposit insurance scheme. As I said, what all this managed to do was transform a problem of two Cypriot banks into a systemic problem of the entire Cypriot banking system.

    Though you would not know it from the way it is being reported by the western media this morning, the entire calamitous idea of a deposit raid has been entirely dropped. There will be no raid on deposits whether above or below 100,000 euros. What is happening instead is what should have happened last week. The two insolvent banks, Laiki and Bank of Cyprus, are being merged and restructured. Since they will not be bailed out and since Laiki is being effectively liquidated, the bondholders of Laiki (one of whom is a Russian businessman) will be completely wiped out. The big deposit holders in both Laiki and Bank of Cyprus will also take a big loss. This is not because their deposits in Laiki and Bank of Cyprus are being raided as was proposed last week. It is because they will suffer a commercial loss (or “haircut” if you prefer) as creditors of debtors who have become insolvent.

    What proves that the Cypriot authorities and the Troika were at all times aware of the blatant illegality of last week’s proposals, is that the statement setting out this week’s agreement that has been issued by the the eurogroup specifically says that deposits below 100,000 euros (including those in Laiki and Bank of Cyprus) will be fully protected in accordance with the EU’s deposit insurance scheme. What is that if not an admission that last week’s proposed raid on those deposits was illegal?

    We now therefore have a bailout agreement that at least conforms with the law. What are its further implications?

    The immediate losers are the bondholders of Laiki and the big depositors in Laiki and Bank of Cyprus. Whilst I do not have private information about who these depositors are, I am going to make an informed guess and say that I doubt that many of them are Russians.

    Laiki and Bank of Cyprus are the country’s two biggest retail banks. Historically Laiki has serviced the poorer people whilst Bank of Cyprus (which I believe is the country’s oldest banks) looked after the wealthier people and their businesses. I understand that Bank of Cyprus is the biggest lender to Cypriot businesses. It is likely therefore that the great bulk of the deposits in Laiki and in Bank of Cyprus (which are around half the bank deposits in the island) belong to local people. Since Laiki and Bank of Cyprus are essentially retail banks I doubt that many of the big Russian depositors have their money with them. They will have put their money in the newer private and commercial banks that have been set up in recent years on the island to service the trade with Russia. The most important of these is the Russian Commercial Bank of Cyprus though I suspect that VTB Cyprus is also a big player. I would guess further that the majority of foreigners who do have accounts in Laiki and Bank of Cyprus are Britons rather than Russians because of the long history of Britain’s connection to Cyprus and by extension to these two banks, both of which incidentally have several branches in Britain.

    If this is correct, then the horrible anti Russian gloating of some of the British newspapers this morning is completely misplaced. Russian economic interests in Cyprus have come out of this affair (comparatively) unscathed. In a meeting with Medvedev this morning Shuvalov pointedly said that the Russian Commercial Bank of Cyprus (which is where I suspect most of the really big Russian money is) is unaffected. Moreover the restructing of Laiki and Bank of Cyprus does not affect the entrepot arrangements between Russia and Cyprus, which retail banks like Laiki and Bank of Cyprus are not involved in .

    By contrast those who are going to be hammered are the Cypriot business community, who traditionally hold their accounts with the Bank of Cyprus and who take out their loans with it. They must now expect to lose between a third and a half of any money they have on deposit. Many of them are now going to go bust taking their businesses down with them. They form the core of Anastassiades’s political constituency and politically speaking he is now a dead man walking. This opens up the unattractive possibility that last week’s proposed deposit raid was an attempt to appropriate (steal if you prefer) Russian money to save the electoral base of a right wing pro European politician. If so then Russians doubly need to think through the implications of what happened.

    What of the future? Firstly, the Cypriot domestic economy is now going to go into a tailspin. Paradoxically, this means that Cyprus is going to become more, not less, depend on its connection to Russia. European politicians and economic commentators who burble on about how the Cypriot offshore model is unsustainable should understand that the bailout makes Cyprus more dependent on it not less.

    The question is however whether the model will now survive? Though the new bailout terms and the capital controls are probably enough to prevent an immediate stampede of foreign money out of the country when the banks reopen, the Russians have seen that the Cypriot government and the Troika egged on by Russophobic media commentators see no moral objection to helping themselves to their money. Despite the attempts to mollify them of the Archbishop of Cyprus (who has emerged as a towering figure in this crisis and just about the only person to talk sense) I cannot believe that they will want to keep their money in Cyprus or continue their trade with the island. I expect that over the next year or so they will quietly wind their businesses down and take their money with them. Shuvalov been talking this morning with Medvedev of the need to transfer Russian money in Cyprus back to Russian banks, presumably in Russia, and that is surely what will now happen. Since this fits in with Putin’s agenda of ending the Russian economy’s use of offshoring, contrary to the ugly jibberish and anti Russian gloating appearing in much of the western media this morning, he has come out the big winner from this affair.

    By contrast, for the people of Cypriot this has been a complete disaster. Not only is the island’s economy and the trust in its banking system and government destroyed, but its major trading partner and key political and diplomatic ally in its standoff with Turkey, has been alienated, probably forever. Moreover given the way Cyprus’s GDP is now going to collapse I cannot possibly see how this bailout is going to work. On the contrary I firmly expect it to fail. As I have said before, as a Russophile I can see the benefit to Russia from what has happened. As a Greek with a strong sense of sympathy and of ethnic solidarity with Cyprus and its honest and hardworking people I am deeply angered and upset by it.

    Lastly, what this ghastly shambles shows is the complete incompetence, economic illiteracy and rabid Russophobia of the people who run the eurozone. What they did last week was take a bad situation and turn it into a catastrophe. So blinded are they by their Russophobia that they were willing to agree to a scheme that broke every known law and principle of modern banking and which was bound to provoke a bank run. Behind all the Twittering and bluster of the last week they have now had to draw back in bewilderment as the Cypriot banks threatened to crash down around them. As it is confidence has been so badly shaken that we now have capital controls on a eurozone state, which has been landed with a bailout debt it can never repay.

    • here are some figures from Chicago tribune article:
      “Deposits: Just 10 percent of Bank of Cyprus’s 27.8 billion euros of deposits are in units outside the euro zone. The Russian and UK units of Bank of Cyprus hold a roughly equal amount, at 1.2 billion euros. Deposits in Cyprus account for 66 percent of the bank’s deposits, and deposits in Greece account for 23 percent. The figures are dated end-September 2012 and published in the bank’s third quarter accounts. (Similar figures for Laiki are not available).”

      • Dear SH,

        That is very interesting. It corresponds with what I would have guessed. Thank you for this.

        I very much doubt that Laiki has many big Russian depositors. It was never that sort of bank and its historic connections have anyway been with the Gulf and with Greece and not with Russia.

        I am going to make a guess that the total amount of Russian money that is in immediate jeopardy from this affair is in the hundreds of millions rather than the billions. The one big loser is the Russian businessman who foolishly bought a stake in Laiki. Fools will always be parted from their money. I gather his businesses in Russia are not doing too well either.

    • Very insightful commentary Alex,

      I wonder however….if this new deal makes Cyprus even more dependent on the offshore model but at the same time is likely to cause one of Cyprus’ most important offshore client bases (Russian customers) to begin moving their money out of Cyprus eventually, then what does this mean for Cyprus and the offshore model it will likely become more reliant upon?

      Thinking about it a little and doing a little background research I came up with a scenario for the future of Russo-Cypriot relations in light of what you have written and the questions that such implications pose:

      – As there are reportedly about 10,000 persons of Russian origin in Cyprus (forming about 1% of the population) then trade with Russia is likely to continue and Russian clients will remain an important customer base for banks in Cyprus, if no longer as important as before.

      – As the banks which Russians (both in Cyprus and in Russia) do business with are likely to be unaffected, they might stay open though the clients and the banks themselves might be encouraged by the recent events to begin a new practice of keeping deposits below €100,000 for individual accounts (the banks may make it a policy to keep deposits below that limit but allow customers to open or keep deposits above that limit after being warned that such deposits would not be insured above €100,000; and customers might be encouraged to break up deposits of more than €100,000 into multiple accounts of under 100,000 each).

      – With the ensuing recession (or in fact depression) following this deal and unattractiveness of Cyprus as a offshore centre in the future (despite near certain attempts by Cyprus to promote itself even more rigorously as such), Cyprus may find that the offers it made to Russia in exchange for a loan in place of the deposits raid (which now that I think about it might have been rejected by Russia as virtual blackmail on the part of the Eurogroup and the Cypriots who came up with the deposit raid idea – “give us a loan which will be ineffective (as our banking system will collapse anyway) in exchange for some gas and basing concessions (which you could get later anyway for a better deal) or else we will have to steal money from your citizens!”) could be tabled again in exchange for some Russian cash; but this time in terms of investments and not a loan – so Russian investment in the Cypriot offshore gas fields and Russian payments for naval and air access and basing rights at selected Cypriot military facilities (possibly at Limassol, Paphos and maybe Evangelos Florakis).

      – thus Russian ties with Cyprus might well increase over time but move away from being centred around offshore banking.

      • Dear Hunter,

        It’s interesting what you say because I have been meeting with a Russian businessman today who is basically of your view. Incidentally I am introducing him later this evening to a Cypriot businessman.

        What makes me rather less sanguine is the thought of what seems to have happened. The more I have thought about this the more it seems to me that the explanation for this debacle lies with the Bank of Cyprus. As I said, this is the big in which Cypriot businesses traditionally keep their deposits and from which take out their loans. What seems to be behind this saga is a desire in Cyprus to keep the Bank of Cyprus going under Cypriot control. This is not only because most Cypriot businesses have their deposits there. It is also because many Cypriot businesses have ovextended themselves by speculating in the island’s property boom. They do not want to see their main lender, the Bank of Cyprus, fall under foreign control, which might affect the historically cozy arrangements they have with it.

        The result was that when it became clear last week that the Germans would not allow EU bailout money to be used to bail out the Bank of Cyprus, Anastassiades, whose is politically dependent on the support of the Cypriot business community who are stakeholders in the Bank of Cyprus, with the support of the Troika tried to plug the gap by launching a raid on every bank deposit held in every bank across the island. In other words the money of Russians and of poor Cypriots was going to be seized to bail out rich Cypriots. When the Cypriot parliament did its democratic duty and voted down this immoral and illegal measure Anastassiades tried instead to find the money by bluffing the Russians into giving it to him in return for assets that were worthless and which they didn’t want. It was only when his bluff was called, which it was bound to be, that he finally accepted that Bank of Cyprus would have to be radically restructed.

        It seems to me that what this disastrous strategy (in which the Troika colluded) has done is tell any Russian businessman who has money or who does business in Cyprus that the Cypriot government is not to be trusted. I cannot speak for all of them but if I was a Russian businessman I am not sure I would want to continue to do business there.

    • That is quite a towering comment itself Alex! It deserves reposting, I think.

      Since this fits in with Putin’s agenda of ending the Russian economy’s use of offshoring, contrary to the ugly jibberish and anti Russian gloating appearing in much of the western media this morning, he has come out the big winner from this affair.

      Medvedev wants to create offshore zones in Russia itself. 🙂

      By contrast, for the people of Cypriot this has been a complete disaster. Not only is the island’s economy and the trust in its banking system and government destroyed, but its major trading partner and key political and diplomatic ally in its standoff with Turkey, has been alienated, probably forever.

      You think so? But Russian deposits emerged largely unscathed, as the tax on deposits over 100,000 Euros outside Laiki / Bank of Cyprus was only 4%. Besides, it’s not like Cyprus had any choice in the matter. Hemmed in by Schauble’s intransigence, this current deal seems to have been one of the better and fairer options on the table.

      • Dear Anatoly,

        Are you sure about the 4% levy? Here is the statement of the eurogroup which makes no reference to such a thing.

        The Cypriot businessman who I met seemed to know nothing about it either. I have been very busy today so I am not fully up to date with all the news and I may have missed this but as I understand iit no such levy is in the plan. If it was it would have to be put to the Cypriot Parliament, which quite properly rejected such a levy last week. My understanding is that the current plan will not be put to the Cypriot Parliament precisely because it does not envisage such a levy.

        For the rest, may I say

        (1) that I think the Russians have come out of this far better than anyone would have expected a week ago. I understand that Shuvalov has now said that the biggest Russian deposits are in fact in the Russian Commercial Bank of Cyprus (apparently wholly or largely owned by VTB) and not in the Bank of Cyprus. If this was a game of poker then the Russians have won;

        (2) viz a point you make, this is the best possible deal for Cyprus in the circumstances. If this deal had been proposed a week ago, I would have been very unhappy because of the hardship that Cyprus is going to endure, but I would not have objected to it. The simple fact is that Cyprus would have endured even greater hardship without this deal. This would have been true a week ago and it is even more true today. What was calamitous was the deal that was proposed a week ago, which has undermined the whole economic future of the island.

        For the rest, thank you as always for your kind words. Please take it as read that anything posted on your blog is for you to republish or not as you wish.

        PS: I made one mistake. I thought the foolish Russian investor had a bought a part of Laiki. It turns out that he bought part of the Bank of Cyprus, not Laiki, which was only slightly less foolish.

        • Rybolovlev has indeed made some foolish investments since he cashed out of Uralkaliy, but he can afford to. The guy is richer than God. He owns, for example, the single most expensive flat ever sold in NYC.