Cyprus bailout - the Russian angle: Vladimir Putin hits out at 'unjust and dangerous' bank levy

Easy visa access and lax banking regulations have made Cyprus a favoured tax haven for Russian businessmen

Shaun Walker
Monday 18 March 2013 17:03

Russia expressed dismay at plans to levy a one-off tax on bank deposits, which could be implemented by Cyprus as part of an EU bailout package.

Strong words came from Moscow throughout the day, with President Vladimir Putin’s spokesperson saying the Russian leader thought the move to be “unfair, unprofessional and dangerous”. The Prime Minister, Dmitry Medvedev, described the move as “confiscating other people’s money”, while oligarch Mikhail Prokhorov, one of Russia’s richest men, said that the levy could open up a “Pandora’s box” with disastrous consequences for Cyprus, Russia and the EU.

The importance of Cyprus to the Russian economy is hard to overstate – the island is the largest foreign direct investor in Russia, almost entirely due to the huge Russian deposits in the country’s banks. Easy visa access and lax banking regulations have made Cyprus a favoured tax haven for Russian businessmen nervous about keeping their cash inside Russia ever since the 1990s. Almost half of the €70 billion (£59 billion) in Cypriot banks is believed to be Russian money, much of it waiting for reinvestment in Russia, and 40,000 Russians live on the island.

The Cypriot Finance Minister, Michael Sarris was due to travel to Moscow for talks on Monday, but will now travel on Wednesday. Rumours swirled today about backroom negotiations, with reports in Cyprus suggesting that Gazprom, Russia’s state gas monopoly had offered to bail out the island in exchange for gas exploration contracts. A spokesperson for Gazprom categorically denied the reports, and analysts said that it was unlikely that Russia would offer Cyprus a deal that would remove the need for the EU bailout.

The Russian Deputy Finance Minister Anton Shatalov said that Russia would even support a levy if it was amended to tax only interest earned on deposits. “If that were to happen, that would not be that horrible and it would be absolutely fair,” he said. He added that he “did not pity” Russian businessmen who kept their money in Cyprus.

Mr Putin has in recent months called for “deoffshorisation” of Russian funds, criticising businessmen who do not keep their money in Russia, but in this case he has focused on Cypriot policies rather than lambasting Russians for having the offshore accounts in the first place. Mr Medvedev said it was “on the whole desirable that money is kept in Russian banks,” but nevertheless criticised the Cypriot decision to impose the levy without consulting Russia first. The Kremlin gave a €2.5bn loan to Cyprus in 2011 and is considering extending and refinancing it.

“We will continue consultations, but we’ll be forced to change our position somewhat,” said Mr Medvedev. The EU has said it expects Russia to extend the loan by five years.

Join our new commenting forum

Join thought-provoking conversations, follow other Independent readers and see their replies

View comments