The Russian government has announced it will not compensate its citizens who have lost money in the Cyprus banking crisis.
Russian citizens are believed to have billions of euros in Cypriot accounts and deposits above 100,000 euros ($128,200) in the two biggest banks (Bank of Cyprus and Laiki) could be reduced by as much as 60%.
The Russian government has announced it will not compensate its citizens who have lost money in the Cyprus banking crisis
Such losses would be “a great shame”, First Deputy PM Igor Shuvalov said, “but the Russian government won’t take any action in that situation”.
Cyprus now restricts cash withdrawals.
A 10 billion-euro bailout from the EU and IMF – required to keep the debt-laden Cypriot economy afloat – will only be granted if Cyprus itself raises 5.8 billion euros, most of which looks likely to come from depositors with more than 100,000 euros in Bank of Cyprus and Laiki (Popular Bank).
Laiki, the second largest bank, is being wound up and folded into Bank of Cyprus, the biggest bank.
Speaking on the Russian state TV channel Rossiya 1, Igor Shuvalov said Russian money in Cyprus included some that had been taxed and some that had not.
The Russian government would still look at cases where there were “serious losses, involving companies in which the Russian state is a shareholder”, he said. That review would take place in Russia, and “for this it would certainly not be necessary to help the Republic of Cyprus”, Igor Shuvalov added.
Many of the large-scale foreign investors in Cyprus are Russian – and in many cases they have taken advantage of the island’s status as an offshore tax haven. Some politicians have accused Cyprus of acting as a hub for Russian money-laundering – an allegation rejected by Cypriot officials.
After years of large-scale capital flight from Russia there is now a Kremlin drive to repatriate Russian money. The government has introduced tighter monitoring of foreign bank accounts held by Russian state employees.
Bank of Cyprus depositors with more than 100,000 euros could lose up to 60% of their savings as part of the bailout, officials say.
Cyprus’ central bank says 37.5% of holdings over 100,000 euros will become shares.
Up to 22.5% will go into a fund attracting no interest and may be subject to further write-offs.
The other 40% will attract interest – but this will not be paid unless the bank performs well.
The fear is that once the unprecedented capital controls – which are in place for an indefinite time – are lifted, the wealthiest will rush to move their deposits abroad.
Cyprus has become the first eurozone member country to bring in capital controls to prevent a torrent of money leaving the island and credit institutions collapsing.
President Nicos Anastasiades has said the financial situation has been “contained” following the deal.
The president has also stressed that Cyprus has no intention of leaving the euro, stressing that “in no way will we experiment with the future of our country”.
Cypriot Finance Minister Michalis Sarris has confirmed that the depositors with less than 100,000 euros in their accounts “will not be hit”.
People with more than 100,000 euros in their accounts could see about 40% of their deposits converted into bank shares, Michalis Sarris said.
“The exact percentage is not… yet decided but it is going to be significant,” he said.
The final figure will depend on how the government decides to protect pensions.
The finance minister confirmed that all Cypriot banks will remain closed until Thursday and that capital controls will be placed on the size and the amount of money people will be allowed to withdraw once they have reopened.
Cyprus bank deposits over 100,000 euros could be cut by 40 percent
These restrictions would “probably be a bit stricter” on the country’s two largest banks, Bank of Cyprus and Laiki, and would remain in place until the banking system “stabilizes”, Michalis Sarris said.
The exact details of this “two tier system” would be hammered out with the banks later on Tuesday, he said.
Michalis Sarris is expecting “some bleeding, some outflow” of funds once the banks reopen, but believes that once EU bailout funds begin flowing “in a matter of weeks”, confidence will return.
Although the economy would be badly hit by the economic crisis, Michalis Sarris admitted, he maintained that it could benefit from “an energy boom”, referring to the exploratory Aphrodite gas fields off the southern coast of the island.
“Yes, there will be a problem but we will overcome it in a relatively short period of time,” he said. He also said his government had renegotiated more favorable loans terms with Russia.
The Cypriot authorities had said all but the biggest two banks would open on Tuesday.
Banks have not been open since March 15. Their reopening had been expected after Cyprus agreed a deal with the IMF and the EU that releases 10 billion euros in support.
It was conditional on Cyprus itself raising 5.8 billion euros, most of which looks likely to come from depositors with more than 100,000 euros in Bank of Cyprus and Laiki or Popular Bank.
The banks remained closed after the country’s first money-raising solution, which would have hit smaller deposit holders as well as larger holdings, was rejected by parliament.
The new deal for Cyprus, unlike previous agreements, does not require parliamentary approval. It will also include austerity measures and tax increases.
Laiki will be shut down, and deposits under 100,000 euros, which are guaranteed by the state under EU law, will move into the Bank of Cyprus to create a “good bank”.
Deposits above that insured amount will be frozen and used to pay Laiki’s debts and recapitalize the Bank of Cyprus, with depositor losses eventually converted into shares.
Major depositors, many of whom are wealthy Russians, will not be able to access accounts exceeding the 100,000-euro limit until the restructuring of the banks is complete.
Cyprus banks are to reopen on Tuesday, March 26, although the two at the centre of the crisis, Bank of Cyprus and Laiki, will remain shut until Thursday, March 28.
President Nicos Anastasiades has said temporary limits will be placed on financial transactions after a bailout deal imposing a tax on bank deposits.
He said “very temporary restrictions” would be put on capital flows, but gave no details.
Controls to prevent money leaving the country are already in place.
Certain limits on the size of cash withdrawals are expected to continue.
Cyprus banks are to reopen on March 26, although Bank of Cyprus and Laiki will remain shut until March 28
The banks’ reopening came after Cyprus agreed a deal with the IMF and the EU that releases 10 billion euros in support.
It was conditional on Cyprus itself raising billions of euros, which it will do by way of a tax on deposits of more than 100,000 euros.
The banks shut a week ago after the country’s first money-raising solution, which would have hit smaller deposit holders as well as larger holdings, was rejected.
On Monday morning, hopes that the deal would solve the crisis lifted shares.
But later, stock markets were rocked after Jeroen Dijsselbloem, head of the Eurogroup of eurozone finance ministers, suggested that the deal for Cyprus model could form a template in any future bailout.
Jeroen Dijsselbloem, the Dutch finance minister who as head of the Eurogroup played a key role in the Cyprus negotiations, said the deal represented a new template for resolving future eurozone banking problems.
“If there is a risk in a bank our first question should be <<OK, what are you in the bank going to do about that?>>,” he told Reuters and the Financial Times.
Jeroen Dijsselbloem later added a clarification, saying that Cyprus was “a specific case with exceptional challenges”.
He said the pattern for bank rescues should see shareholders take the first hit, then bondholders, who lend money through financial markets, and only then should depositors with large bank balances be tapped.
The Cyprus deal puts the burden for dealing with problem banks on their shareholders and creditors – in this particular case, customers with large bank balances – rather than the government and taxpayers, or bondholders, who lend through financial markets.