For many of Russia 's richest men and women, Cyprus has long been a haven of sun, sea and blissfully low taxation, but the European Union 's bailout of the Mediterranean island has now delivered a painful blow to their cherished offshore accounts.
Foreigners hold some 40 per cent of the €68 billion sitting in Cypriot banks, and most of that belongs to Russians, who for decades have favoured the island as a place to stash their money.
An editorial on the website of the Russian edition of Forbes said: "Russians have lost up to €3.5 billion in one day. The news of a 10 per cent tax on deposits in Cypriot banks has sown panic among the richest Russian businessmen."
Russian individuals, and companies big and small, stash tens of billions of euro abroad each year, preferring places like Cyprus – relatively stable, with a relatively clear legal and taxation system, low tax rates and light regulation – to chronically unpredictable Russia.
Bloated bank sector
This capital flight helped to bloat Cyprus's banking sector, which is now more than seven times larger than the island's gross domestic product.
This avalanche of cash cascading over Cyprus from Russia and the former Soviet Union has long attracted suspicious looks from the EU.
“Suspicion arises – and it’s plain to see – because Russian investment in Cyprus is so high and at the same time Cypriot investment in Russia is high,” German finance minister Wolfgang Schäuble said in January. “You may ask why Cyprus is the second largest foreign investor in Russia and we need clear answers to that.”
Late last year, Germany's Der Spiegel magazine cited a German intelligence agency report warning that "Russian oligarchs, businesspeople and mafiosi" would benefit most from a bailout.
Germany, the Netherlands and Finland pushed hard for depositors in Cypriot banks to help pay for the EU bailout, and Russia – given its exposure to the island – ultimately had little choice in helping the West keep it afloat.
Last week, Moody’s ratings agency estimated that Russian companies could lose $19 billion (€14.5 billion) if Cyprus defaulted and froze loan repayments.
Russian 'contribution'
EU economic and monetary affairs commissioner Olli Rehn said he believed "the Russian government is ready to make a contribution with an extension of the loan and a reduction of the interest rate" on Moscow's existing €2.5 billion credit line to Cyprus.
Cypriot finance minister Michael Sarris is expected in Moscow for talks this week, amid rumours that Russian banks may seek stakes in Cypriot lenders.
Whether the EU-imposed levy on deposits in Cyprus damages its standing with Russians remains to be seen.
“Faith in Cyprus as a place that’s convenient to keep your money will be undermined,” said Anatoly Aksakov, a parliamentary deputy and head of a Russian association for regional banks.
Russian senator Alexander Torshin, with a nod to Russian president Vladimir Putin’s recent pledge to repatriate Russian cash from offshore havens, struck a different note.
“Now then, my good men (and bad men), how do you like Cyprus?” he posted on Twitter. “How many times did we tell you – keep your money in Russian banks!”
