For Cyprus, Rescue Might Require Pain for Russians

By Landon Thomas JR. | International Herald Tribune, January 11, 2013 | Go to article overview

For Cyprus, Rescue Might Require Pain for Russians


Landon Thomas JR., International Herald Tribune


Europe is under intense pressure to make private-sector investors, rather than European taxpayers, pay a bigger share of the bill for bailing out Cyprus than in past bailouts. But Cyprus has other priorities.

On their Web sites, the largest of Cyprus's failing banks brag that their client-service officers are fluent in Russian. No indication, though, whether strizhka -- Russian for haircut -- is part of their lexicon.

As drawn-out negotiations with Europe over a bailout for Cyprus near an end, the country's banks, flush with Russian deposits, hope they do not have to force haircuts, or losses, on some of their wealthiest depositors.

Europe, struggling to complete a potential EUR 17 billion, or $22.5 billion, rescue package for Cyprus, is under intense pressure to make private-sector investors, rather than European taxpayers, pay a bigger share of the bill than in past bailouts. Officials in Brussels and Berlin are said to be considering a controversial plan that could require depositors in Cypriot banks to accept losses on their savings. Russians, who hold about one-fifth of bank deposits in Cyprus, would take a big hit.

That step would be a radical departure from the bailouts of Greece, Portugal and Ireland. In those rescues, while investors holding Greek bonds were eventually forced to take haircuts, it was largely loans from European countries that financed the bailouts, with bank deposits held sacrosanct.

In a Europe where big banks hold outsize political and financial power -- Cypriot banks wield assets eight times the size of the country's economic output -- any move to punish depositors is certain to attract bitter opposition.

And though the plan may have some merit on paper, in practice it would be hard to carry out, given the ties that bind Cyprus to Russia.

Dimitris Christofias, the Cypriot president, is a declared communist who received his higher education in Russia and has a Russian wife. What is more, Russia provided Cyprus with EUR 2.5 billion in emergency financing last year. And the largest individual shareholder of the Bank of Cyprus is Dmitry Rybolovlev, a billionaire Russian businessman.

But European officials see Cyprus as a new opportunity to censure banks for their too-big-to-fail sense of entitlement, according to some people involved in the bailout discussions. Cyprus's loosely regulated and tax-friendly banking climate has long made it a favorite destination for Russians seeking to park their risky rubles in a euro zone bank that does not ask too many questions.

People in favor of forcing depositors to share the cost of the bailout make this argument: It was an unusually high, EUR 11 billion spike in Cypriot bank deposits in 2010 -- as much as half of it coming from Russia -- that prompted the banks to make the bad lending decisions that led to their collapse. The banks plowed much of the money into Greek government bonds, only to absorb big losses when those bonds were restructured last year.

Of the EUR 17 billion needed to keep Cyprus afloat, at least EUR 10 billion would need to be pumped into the country's banks.

European officials caution that while it may still be a long shot, a move to force large, uninsured depositors to share the pain with Europe's taxpayers would send a powerful message to the market that there are consequences for risky financial conduct.

"If it is just the official sector that does this, then what you end up doing is bailing out Russian oligarchs," said Alessandro Leipold, chief economist of the Lisbon Council, a research organization in Brussels, and a former top executive at the International Monetary Fund. "I would be very surprised if there is no private-sector involvement here."

German lawmakers have said they will reject any deal that has the effect of bailing out Russian depositors. And the German chancellor, Angela Merkel, who plans to visit Cyprus on Friday, said Wednesday that there would be "no special conditions" for the country. …

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