12 Nov 2012

Broke Cyprus Brings In The Russians

By Charles McPhedran
The island nation of Cyprus may be broke, but it's also a tax haven for former communists and mobsters, and it's these tax evaders who will benefit most from a potential EU bailout writes Charles McPhedran
Cyprus is an island out of a Cold War James Bond movie. It's divided into Turkish and Greek mini-states. There are still British military bases there. Cyprus may soon import gas from Israel. But the government there has been careful not to antagonise any of the players in the Syrian conflict.

Cyprus also happens to be the current president of the European Council. That means it's currently setting the agenda at the most powerful regional bloc on earth.

Plus, the Mediterranean island, currently leading the stalled negotiations over the EU's forthcoming budget, is broke.

Hellenic Cyprus is the fifth EU country that asked Brussels for a bailout. It applied in June but negotiations are only happening now.

Cyprus' problems were largely caused by its motherland, Greece, says German weekly Die Zeit. The country's two top banks had "made multibillion-euro loans to Greece — and have suffered big losses of late".

Plus there was February's Greek haircut, when creditors had to accept write-downs on Greek bonds. That, too, was a disaster for Cypriot banking. "They lost around four billion euros on that," says the Hamburg weekly.

At the same time, continues Die Zeit, the ruling Cypriot Communist Party's decision to bestow generous salaries and pensions on top public servants hasn't helped Cypriot finances. Public service "bosses", who earn more than any CEO, are the Communists' "most loyal clientele", opines the social democratic weekly. Excessive spending has worsened Cyprus' problems, concludes the Hamburg weekly.

But unlike Southern Europe, which has had to take round after round of painful spending cuts, Cyprus has been resisting the Troika's prescriptions until now. Neither IMF, EU or World Bank calls for spending restraints has made the island buckle just yet, because the island has gone begging to an A to Z of potential creditors.

Moscow has already bailed Cyprus out once before and it may do so again. In December last year, Russian state news agency RIA Novosti announced that the Kremlin accorded a 2.9 billion euro credit to Nicosia.

Why the generosity from Moscow?

Old Cold War links and Russian money, argues Spain's El País. The island's communist president, Dimitris Christofias, and a "large part of the Cyriot establishment were educated in Moscow and speak fluent Russian".

Indeed, "Cyprus is a real Russian offshore colony", a European diplomat told the Madrid daily.

"You have the added advantage [there] that you can do business in the east without leaving the EU — and vice versa."

Doing business on a broke island would normally scream risk to investors — but not Cyprus, which leads a double life as a communist tax haven, according to Slate France.

The island has turned into a "niche for illicit financial flows [circulating] between the ex-Soviet republics," says the magazine. With a corporate tax rate fixed at 10 per cent, Nicosia fears having to hike that rate if it accepts Europe's money.

Hence the earlier Russian bailout. Cyprus "maintains its advantage" for Russian companies aiming to move their money offshore, Slate France says. They get to avoid Russian corporate taxes, while the Russian government turns a blind eye.

Yet Russian corporate rubles aren't the only investment that Cyprus has been attracting, revealed German weekly Der Spiegel last week.

In a leaked report, the German Intelligence Service warns that the island's banks are a haven for money from "Russian oligarchs, businesspeople and Mafiosi". Thousands of Russians who flock to the Cypriot town of Limassol every summer do so because "shell corporations are still anonymous [and] the banks secretive," writes the weekly magazine's investigators.

According to that report, German spooks warned that Cyprus hadn't been complying with laws against money laundering. Moreover, Nicosia has been making money laundering easier by granting rich Russians citizenship there.

"German Intelligence Service information shows that 80 oligarchs have secured residency for the entire EU in this manner," says Der Spiegel.

Russians have deposited a total of 21 billion euros in Cypriot banks, the Hamburg-based magazine writes.

And Cyprus is asking the EU for a 10 billion euro bailout, mostly to secure the liquidity of the island's banks. So it's those depositors — oligarchs, Mafiosi and tax evaders — who will benefit. Because they won't lose their deposits when the Cypriot banking sector collapses.

Yet German chancellor Angela Merkel believes that letting Cyprus collapse would endanger the entire Eurozone, says Der Spiegel. The Cypriot government is also "banking on" the chances that Europe will step in at the end of the day, reports the magazine.

However, while those negotiations are underway, Cyprus has also been bargaining with its existing creditors, reveals conservative daily Die Welt. These include a shadowy financial institution called The Federal Bank of the Middle East (FMBE).

FMBE was once housed in the Cayman Islands. But in 2003, it moved its headquarters to Tanzania. "The African country is one of only 17 still left on the OECD's black list of states that haven't signed onto the international fight against money laundering and terror financing," writes the German paper.

FMBE applied for a banking licence in Cyprus, right when its Cypriot bonds were due. If the bank had called in the money on those bonds, the Cypriot government "would have been bankrupt". But, luckily, the "bank has agreed to roll over its loans, and Nicosia doesn't have to pay them back in the near future", says Die Welt.

And with the EU currently negotiating revised rules for banks, its current president — Cyprus — has had a fair bit to say about the matter.

"Banks could pay managers and bonds traders bonuses five times bigger than their pay packets," under draft plans proposed by Cyprus and leaked to German business daily Handelsblatt on Sunday.

Shareholders would have to approve bonuses of that magnitude, adds the financial paper. But bank managers could still decide to award themselves bonuses three times bigger than take-home pay without shareholder approval.

Cyprus' plan "bridges the gap" between demands for bonuses to be smaller than salaries and calls to preserve unlimited bonuses, says Handelsblatt.

Still, the debate's timing appears to create a conflict of interest for Nicosia, which is struggling to keep its status as a banking haven.

ABOUT BEST OF THE REST: It's a big world out there and plenty of commentators and journalists are writing about it — but not always in English. And not surprisingly, ideas about big events of the day shift when you move away from the Anglosphere. Best of the Rest is a fortnightly NM feature by Berlin-based journalist Charles McPhedran. Charles reads the news in French, German, Spanish and Portuguese and reports on what the rest of the world is saying about the big stories.  

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kevin47
Posted Monday, November 12, 2012 - 14:02

It seems that Alexander Downer is still the UN special envoy to Cyprus. Don't know what they pay him but it appears to be money down the drain. Should spend more time trying to unite that country than trying to divide ours. On election day, he had the cheek to accuse Obama of being too partisan. Why do the ABC get the likes of Downer and Reith to give their poisoned commentary? Hope they don't get paid via our taxes.

Kevin Rennie
http://www.redbluffr.com/

Rocky
Posted Monday, November 12, 2012 - 15:08

Apparently all that's keeping Cyprus from imitating Iceland is shady money, the EU circus is just so entertaining, and there's always a fresh bunch of clowns ready to perform.

outrider
Posted Tuesday, November 13, 2012 - 16:33

Outrider
Very interesting article; we hear so little about Cyprus. The absurdity of the EU is shown by Cyprus having the presidency of the European Council. Bit like having Lord Howe Island as President of Australia by rotation (or bribery or something).

ruby32
Posted Monday, October 14, 2013 - 17:14

They get to avoid Russian corporate taxes, while the Russian government turns a blind eye.
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