Category Archives: cyprus Russia

Stuck in Cyprus? Head to the Beach Perhaps…

The information below is based on quality media reports made today (March 25th). However, at this stage there is very little official information published about the agreement, so important details may be subject to change.

1. Bank Popular (Laiki) will be closed. Accounts less than Eur100k will go into Bank of Cyprus, which will get support from the ECB. In cases where accounts have more than Eur100k, it is not formerly stated whether the first first Eur100k will be transferred to BoC, but this is a reasonable assumption. Investments remaining in Bank Popular will be written down against its losses. The owners of these deposits will be compensated with equity of the remaining bank, although this will likely have only very low residual value. Bond holds of this bank, should also expect to be written down.

2. Bank of Cyprus will remain open, receiving ECB funding and insured deposits from Bank Popular. As it is also in a very weak financial position, large depositors in this bank will likely be partially written down (estimates maximum 40% loss) to restore the banks solvency. It is currently unclear if bonds in this bank will be written down. Those experiencing write-downs may also be compensated with equity, although again the residual value will be very low.

3. In theory no other depositors in Cypriot banks will suffer losses. However, even when the banks reopen, capital controls will remain in place, it is not clear how or when money will be released from accounts. This will likely depend on how quickly Cypriot banks can liquidate assets themselves. The fact that Cypriot banks will have to sell assets to fund withdrawals explains our caution about the short-term market direction.

Best regards,

James

Notes on Cyprus (from someone who’s been there)

Leaving aside the implications of hitting deposits ostensibly covered by guarantees (big, but likely containable) here is the Russian view: 

Contrary to what the media keep saying, Cyprus isn’t full of “mafia” money. It’s full of Russian corporate money, which goes there legally and illegally to avoid excessive taxation in Russia. Of course, this differentiation doesn’t help much – companies need their working capital more urgently than mafia bosses need their ill-gotten gains. 

Cyprus is very widely used, so there is a distinct risk to the Russian economy from this event. Not from the taxation so much, but from the closure of the Cypriot banking system. This makes cash management very inconvenient for a lot of Russian businesses. It’s a risk, but most likely people will find alternative capital sources; and where they fail, the government and CBR will help out, likely indirectly through VTB and SBER. 

Longer term, this event is good news for Russia. It is a mistake to say that Putin is sabre-rattling. He is unlikely to do anything dramatic. Firstly, he understands that he can’t change what Europe will do, although he’d like to be kept in the loop. Secondly, this news is actually very good for him. Russia’s “de-offshore-ization” campaign just got a giant shot in the arm. Expect Russia to be cooperative behind the rhetoric and behind the scenes. 

The bigger problem here is Cyprus itself. Unless it can offer something a motivation not to withdraw, a very large volume of Russian money will leave Cyprus when the banks reopen. 

It seems impossible to tax deposits guaranteed (sub Eur100k). But equally, the banking system in Cyprus (functional or otherwise) is a major economic sector, taxing large deposits held there threatens it very directly. Without banking, essential forward projections of Cypriot GDP are useless, and the plan proposed doesn’t seem to have enough leeway for this sector to fail.