CYPRUS AND THE “RIDDLE, WRAPPED IN A MYSTERY, INSIDE AN ENIGMA”

3/20/13

My already seminal 3/18/13 piece, THE CYPRUS DEPOSIT “TAX”:  “DON’T CRY FOR ME (NICOSIA)!” covered my larger thoughts on the situation in Cyprus.   But the situation is rapidly evolving and new thoughts spring up more quickly than revisions and rejections of proposals for salvaging the balmy money laundromat in the eastern Mediterranean.

The key to saving Cyprus may be Russia, the citizens of which have about $30 billion deposited in Cypriot banks, or about one third of all bank deposits in Cyprus.  Russia could easily bail out tiny Cyprus, the economy of which is about one quarter of the size of all bank deposits there and a tiny fraction of the GDP of Russia.   Russia could easily extend and increase its current 2.5 billion euro bailout loan to Cyprus and thus save the day, probably in return for some financial, but also some largely geopolitical, concessions from Cyprus.  The question is whether Russia has the will to bail out Cyprus.  That question centers around whether Russia wants to bail out the gangsters and other felonious finaglers who have money deposited in Cyprus.  

One school of thought contends that the Russian government surely doesn’t want to save people who have put their money in Cyprus to avoid Russian taxes.   While that would make sense on its face, Russian politics is perhaps murkier now than it was back in the ‘30s when Churchill said that Russia was “a riddle, wrapped in a mystery, inside an enigma.”  We can’t assume that the Putin government, despite its bravado, is on some crusade to destroy the oligarchs and the thugs who control much of its wealth; indeed, sometime the oligarchs, thugs, and politicians in Russia are indistinguishable.   As one who has spent most of his life in and around Chicago, which has long had a similar system of government, one could easily see at least elements of the Putin government using public resources to rescue its friends who live and prosper in the shadows.

It’s already quite clear that the powers that be in Cyprus are quite concerned with mollifying the dirty money that has made that island off the underbelly of Turkey something of a world financial center.   Note that the plan to tax deposits greater than 200,000 euros as the onerous rate of 15%, the plan on the table when I wrote my 3/18 piece, was quickly scrapped in favor of a plan that would keep that rate at 9.9%, thus skewing more of the burden away from the dirty money and toward the average Cypriot saver.   And one does not have to be as cynical as your truly to think that yesterday’s parliamentary rejection of the whole deposit tax scheme did not bear the fingerprints of the “international investors” who doubtless have some pull in the Cypriot parliament. 

We already know the Cypriots, understandably, have some interest in protecting the dirty money that has made their country the Mediterranean’s foremost money laundromat, a status that has mightily contributed to whatever prosperity the island enjoys.  The question is whether the Putin government has an interest in protecting its citizens who use Cyprus to avoid Russian taxes.   Don’t assume it doesn’t.