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.