Russia Denounces Deposit-Tax Plan



By Lucas I.Alpert

MOSCOW—Russia on Monday blasted a proposal for a bank-deposit tax that would hit Russian customers with a $2 billion bill to help finance Cyprus's bailout, with President Vladimir Putin calling the move "dangerous" and "unfair," and officials warning they may have to reconsider restructuring a $3.3 billion loan to the island nation.

The proposed move would impact Russian financial institutions, which hold more than $30 billion in accounts there, or roughly 30% of all Cypriot deposits. Russian officials said they weren't consulted on the proposal by euro-zone finance ministers and the International Monetary Fund, which Prime Minister Dmitry Medvedev likened to Soviet-era property seizures.

"Let's put it straight, it just looks like the confiscation of someone else's money," Mr. Medvedev said in remarks broadcast on Russian state television. "This practice, unfortunately, was very well known during the Soviet period."

The proposal hit markets hard, with Russia's primary trading floor, the Moscow Exchange, dropping 2.1%, and the dollar-denominated RTS exchange tumbling 2.8%.

Cyprus had become the main conduit for Russians doing business overseas over the past two decades because of its lower corporate-tax rate and the stronger legal protections offered by a European Union country.

"This has been a very convenient place to hold money, not only for Russian companies but for foreign companies doing business in Russia," said Andrey Goltsblat, a lawyer at Moscow's Goltsblat BLP.

That led most of Russia's financial institutions to open subsidiaries there. But the Cypriot banking system also developed a reputation as a haven for money laundering. A country with a GDP of less than $18 billion is now the largest source of foreign direct investment into Russia, sending $13.6 billion into the country in 2011 alone, just under 25% of all foreign investment. Most of it is believed to be money that originated in Russia but has been cycled there through Cyprus, according to Global Financial Integrity, an anti-money laundering think tank.

"The situation down there has honestly just gotten too wild," said a European diplomat familiar with the negotiations.

Cyprus has always said it abides by international banking laws. Russia's departing central bank chairman, Sergey Ignatiev, recently acknowledged that Russia saw illegal outflows of $49 billion in 2012.

Meanwhile, all financial transactions remain frozen until the matter is resolved, raising tensions among investors with money tied up there.

"Everyone is nervous. There are a lot of businesses that are in real trouble because they don't have access to their funds and they don't know when the banks will reopen," said Denis Sukhotin, chairman of FxPro, a U.K.-based foreign-exchange trading company with an office in Cyprus.
He said he had moved all his company's money off the island years earlier out of fear that the banking system would eventually collapse, and he suspected it wouldn't be a pretty sight when banks reopen.

"Everyone will rush in to withdraw and there will be a real question of liquidity. It will surely result in a technical default of Cyprus' banks," he said.

An official at one Cypriot bank that has about €5 billion in deposits mostly held by Russians, Ukrainians and citizens of Central Asian nations, said he expected sell orders for about half the deposits once the banks reopen, with much of it shifted to Switzerland or Liechtenstein.

While the Cypriot parliament postponed voting on the measure until Tuesday, and a central bank official said Cyprus's banks would remain closed until Thursday, Russian officials warned they might have to re-evaluate their position on a restructuring of Cyprus's loans.

Russian Finance Minister Anton Siluanov said Russia would take another look at discussions about a five-year extension on Cyprus's repayment of a €2.5 billion ($3.3 billion) loan from 2011, if the island accepted the proposal on how to raise funds.

Mr. Siluanov said Russia had an agreement with the euro-zone countries to coordinate action, part of which would include Russia possibly easing the conditions of Cyprus's existing loan payments. Because of this, he said he was surprised that the countries had moved ahead with such a proposal without consulting Russia.

"That is why we will reconsider our participation in terms of the restructuring of the existing loan," he said.

He said he was less concerned with the impact on Russian companies, but was more worried about the precedent it might set for other possible bailouts.

As has been currently discussed, the proposal would levy a one-time 6.75% tax on deposits of up to €100,000 and 9.9% above that, as part of a €10 million euro-zone bailout. The exact structure of the tax remains in flux.

Analysts said that while Russian companies would bear the brunt of the tax, overall it would have little impact on the Russian economy.

"This is a trivial amount from a Russian macro perspective," said Ivan Tchakarov, Renaissance Capital's chief economist. He said the estimated $2 billion cost would make up 0.15% of the country's gross domestic product.

But if Cyprus were to impose capital controls on the $40 billion of outstanding loans Russian banks have lent to Russian companies registered in Cyprus, costs could rise to "non-trivial levels," or about 2% of GDP, Mr. Tchakarov said.

A far-bigger worry for Russia would be if the passing of the proposed bailout structure led to a run on Cypriot banks that then spread to other southern European countries, said Peter Westin, chief strategist at the Aton brokerage firm.

"These things tend to never stay isolated events," he said. "When Greece happened, people said it was such a small economy it couldn't affect things too much, but we saw how that turned out. So contagion is the major risk."

Such insecurity led Moscow-based Renaissance Capital to issue a statement assuring customers that none of their money invested with Renaissance Securities (Cyprus) Ltd. are actually held in Cyprus and would therefore not be affected if the proposal is passed.

Russia's VTB Bank, the second-largest in the country and the one with the greatest exposure to Cyprus, said it was closely monitoring the situation, and would assess its possible impact after the final draft of the bailout parameters were made public.

—Matina Stevis and Andrey Ostroukh contributed to this article.


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