Cyprus has not yet been able to confiscate part of bank deposits

Over the past 24 hours, the situation around the deposit tax in Cyprus has not become more definite, but has become completely scandalous - the law on it has been rejected, and a new review is expected on Thursday. There is no longer any doubt that Russian structures will be the most affected in Cyprus. The 9.9% tax, which will make Russian structures major owners of Cyprus Popular Bank and Bank of Cyprus, is not the main threat - much more serious are possible restrictions by regulators on payments from Cyprus in the coming weeks, about which nothing has been said yet.

The situation around the “deposit tax” in the banking system of Cyprus has become somewhat clearer over the past 24 hours - but much more hopeless. The Government of Cyprus on the morning of March 19 submitted to Parliament a bill implementing the agreement reached with representatives of the European Commission, the ECB, the International Monetary Fund and the Eurogroup on the restructuring of the banking system of Cyprus. There was no increase in the tax on deposits over 100 thousand euros from the previously announced 9.9% to 12.5%. The project only provides for tax exemption for deposits of less than 20 thousand euros. They want to impose a “tax” of 6.75% on amounts of 20–100 thousand euros. According to the PwC Cyprus office, all bank accounts in Cyprus - current, time deposit, demand, notice accounts - will be subject to withdrawals. It is not yet known exactly whether funds in correspondent accounts in Cypriot banks will be subject to the law. But PrivatBank, which is the only Ukrainian bank with a branch in Cyprus, and the Bank of Cyprus told Kommersant on Monday that, according to their information, the tax will not be paid on correspondent accounts and loans.

The alleged write-off of amounts is not a tax as such. This is an analogue of the 1991 transactions with Soviet foreign debt, the forced conversion of funds in bank accounts, presumably into shares of a new issue of two Cypriot banks - Bank of Cyprus (BoC) and Cyprus Popular Bank (CPB).

These two banks already received support from the ECB in October 2012 in the amount of 730 million euros and 1.125 billion euros due to problems with capital adequacy caused by the presence of large volumes of Greek government bonds on their balance sheets. According to two Kommersant sources in the Cypriot business community, they link the emergency meetings of the Eurogroup on Cyprus and further developments with the problems of the BoC, which allegedly notified the Central Bank of Cyprus on March 12 about new problems that it is not able to solve. It was after this, according to this version, that the Ministry of Finance and the Central Bank of Cyprus notified the EU of the impending and almost inevitable banking collapse. In response, the Eurogroup, in which the role of French Finance Minister and IMF head Christine Lagarde is considered the most important in making this decision, allegedly recommended a decision on a tax on deposits to the President and Government of Cyprus. The ratings of BoC and CPB, as well as Hellenik Bank, were yesterday put under review by Fitch - but not the fourth major bank, Laiki.

At 20:10 Kyiv time, the Cypriot parliament rejected the bill. This, however, was an expected event - even the ruling party did not vote in favor; Speaker Yannakis Omiru called on parliamentarians to vote against the proposed package of measures, since “if the tax is introduced, then there will not be a single foreign investor left in Cyprus,” he said. The new version of the law and alternatives to it are expected to be considered on Thursday, March 21. According to state television channel CyBC, the Cypriot government has an “alternative plan”. According to the source, it is planned to nationalize social insurance funds and create a state fund that will provide guarantees to “affected sectors of the economy,” in turn, the European Stability Mechanism (ESM) and the Russian government should become fund investors.

Cyprus President Nicos Anastasiades is expected to hold further talks with German Chancellor Angela Merkel on this issue (two rounds of telephone conversations on this matter took place yesterday). In turn, Vladimir Putin said that he would discuss the situation with Mr. Anastasiadis by phone on March 19 - it is not yet known whether this conversation took place or not. Finance Minister of Cyprus Michalis Sarris flew to Moscow yesterday for negotiations under refuted rumors about his resignation, but the subject of the negotiations is now unclear: even a loan of 5 billion euros from Russia, which Cyprus was not given back in 2012, now clearly will not save the island.

Regardless of whether the decision on the tax on deposits is ultimately made or not, this will not change the forecast for the development of the situation in Cyprus. Officially, “bank holidays” were announced by the Central Bank of Cyprus for March 19–20. It is unofficially known that on March 18, the Cypriot regulator banned the management of Cypriot banks from any transactions on accounts for an indefinite period until further notice. The head of the Central Bank of Cyprus, Panicos Demetriades, said yesterday that after the removal of the tax and the opening of the banking system, about 10% of deposits could be withdrawn from accounts in Cypriot banks in the first days. Let us note that even this possibly underestimated estimate requires additional liquidity for the Central Bank of Cyprus in the amount of at least 10–15 billion euros in any case, which is higher than the 10 billion euros promised to Cyprus from the EU, IMF and ECB. If the tax is not adopted and the country’s banking system becomes open, the scale of capital flight from Cyprus will be several times higher in the first hours. Obviously, if the Central Bank of Cyprus decides to unfreeze the banking system in the coming days, it will most likely ban or severely limit the possibility of international payments from Cyprus.

Despite the fact that out of approximately 68 billion euros of deposit mass in the banking system of Cyprus, about 25–30 billion euros are of “Russian origin” (the consensus unofficial estimate used by most analysts of Russian structures is 27 billion euros as of February), within 24 hours a scandal Cyprus has already become almost completely “Russian”. Against the backdrop of an extremely moderate reaction to what is happening in the UK, whose “share” of Cypriot deposits is also quite large, the Russian reaction to what is happening is the harshest and most unequivocal.

The words of Vladimir Putin and Dmitry Medvedev, perceived in the EU as very harsh, about the unacceptability of the proposed method of resolving the “Cyprus issue,” look very mild in comparison with what was said in the Russian business community about what was happening. Chairman of the partner committee of the law firm “Egorov, Puginsky, Afanasyev and Partners” Dmitry Afanasyev recalls that on December 21, 2012, a representative of the Social Democratic Party of Germany, Schneider, said: “The money of German taxpayers will not support illegal Russian deposits in Cyprus.” Mr. Afanasyev calls on potentially affected depositors of Cypriot banks from Russia to join forces to collectively protect their interests in negotiations with the governments of Cyprus, Russia and the EU.

However, who exactly will suffer in Cyprus - whether from the tax, from a possible freezing of funds, or in combination - is unknown. Most tax consultants say that Cyprus is primarily a transit center; companies, as a rule, do not store money there, but only pay through Cyprus as part of holdings. Vladimir Gidirim, partner in the Russian office of Ernst & Young, states: the company’s clients are primarily interested in the possibility of further using Cyprus as a jurisdiction for holding structures. According to him, there is currently no direct answer to this question, but in any case, there is no urgent need to restructure corporate structures among clients, who for the most part do not keep money in Cyprus. At the same time, for holdings there is still no direct analogue to Cyprus as a jurisdiction - in the Netherlands and Luxembourg, which are closest in basic parameters, the tax conditions for holdings, as well as the rules of work in general, are much less comfortable.

The prospects for a possible collapse in property prices in Cyprus and a possible “second round” of the collapse are being discussed much more seriously. Another subject of debate is the origin of a significant part of the “Russian” deposits in the Cyprus banking system. “Companies do not keep money in Cyprus,” an interlocutor from a large company consulting the corporate sector categorically told Kommersant. “For the most part, this is at least “gray” money, and therefore the possibility of protecting this money in the courts in the event of Cyprus freezing funds is a big question . After all, it will be necessary to show their origin.”

Dmitry Butrin, Tatiana Edovina, Yulia Orlova

Cypriots are not given the ruble