There is some poetic justice in the bailout deal that Cyprus has struck with the European Union (EU) and the International Monetary Fund to avert total financial collapse and allow it to remain within the 17-member single currency bloc. The €10 billion package is conditional upon Cyprus raising €5.8 billion, which is to primarily come from ‘freezing’ all deposits above €100,000 held in the Mediterranean island nation’s two largest banks. This money will, then, be used to recapitalise one of them (through a deposit-to-equity conversion), while the other is to be simply wound up. In short, the deal penalises rich savers, particularly Russian oligarchs who found Cyprus banks a safe avenue to park their funds without too many questions raised about the sources, dubious or otherwise. Russian nationals alone are estimated to account for almost a third of the €68 billion deposits held in the banks of a country with not even a million people.
Cyprus, in that sense, offers lessons to those who believe wealth stashed away in offshore tax havens will not only escape the prying eyes of revenue authorities back home, but is also immune from destruction. The Cypriot banking industry, in fact, grew with the break-up of the Soviet Union that created a new business class prospering from Russia’s chaotic privatisation in the nineties and wanting a safe harbour for its ill-gotten gains. Lax banking regulations apart, low corporate tax rates, too, made Cyprus attractive for both Russian and other firms to route much of their investments into Russia, a la Mauritius vis-à-vis India. One reason why the EU was not as liberal with Cyprus, compared with the rescue packages for Greece, Ireland or Portugal, is precisely because it would have eventually amounted to saving Russian moneybags. Moreover, the Cyprus economy is hardly a tenth the size of Greece, which means even its exit from the euro wouldn’t have had the same contagion risks as from others leaving.
But what is interesting is that neither did Russia show much interest in bailing out a country where its elites have such huge stakes. Russian President, Vladimir Putin even welcomed the latest deal, while his Deputy Prime Minister, Igor Shuvalov, went a step further, claiming it sends out a “good signal to those who are ready to return their money under Russian jurisdiction, into Russian banks”. In other words, Putin’s administration apparently has been less concerned over the collapse of Cypriot banks, than the fact of their being vehicles for money-laundering and ‘round-tripping’ of Russian investments. Either way, it reinforces the view that businessmen – including those from India – may be better off staying invested in their own countries, where at least they have a vote! On the other hand, little can be done about money in tax havens even liable for expropriation, as in Cyprus.