Perhaps, the Dutch Finance Minister and chairman of the Euro-group Jeroen Dijsselbloem will sometimes wake up in the middle of the night, in the coming months, soaking wet from perspiration: "What the heck went wrong with Cyprus?! It was my first exam and I flunked it… badly!"
What started as a relatively small issue, concerning a relatively small island in the Euro-zone, that needed a relatively small amount of money, is turning into a serious testcase; not only for Dijsselbloem himself, but also for the Euro and the European Union.
Maybe it is good to summarize the situation round Cyprus:
Cyprus was one of those relatively small nations with a top-heavy banking industry. Just like Luxembourg, Ireland, Iceland and… The Netherlands.
The island had been favoured by British investors, but also by Russian businessmen and some ‘suspiciously rich’ Russians: people of whom the source of their wealth was not so clear.
The Russian people loved the island from way back and felt connected with it, due to their mutual orthodox religion, the beauty of the island, the fine climate, the general safety for their wifes and children, contrary to the domestic situation and last, but not least… a favourable taxing climate.
These wealthy Russians caused an enormous influx of money into the Cypriot banks. In contrary to populist believes, this was not black and grey money alone. There was also a vast amount of white money from genuine Russian businessmen. People, who didn’t trust the Russian banks and decided not to take a risk with their capital, but instead took it over to Cyprus.
People, like Dmitry Kostygin, co-owner of the popular Russian chains of luxury products "Wild Orchid" (lingerie), "Rive Gauche" (perfumes and cosmetics) and "Yulmart” (computers and household appliances).
The investments in Cyprus went fine for a number of years, but then things started to go wrong.
Investments by the Cypriot banks in the island’s main energy plant went awry, when the plant caught fire due to an explosion in a nearby gunpowder storage. Besides that, the island became the victim of its historically strong ties to Greece, when its investments in Greek sovereign bonds and loans to Greek banks lost a large share of their initial value. This had devastating results for the balances of the Cypriot banks and thus for the financial situation of Cyprus itself.
Soon, the island, with its top-heavy financial industry threatened to become a second Greece. At that point the European Union decided that the country should be helped to overcome the desperate financial situation. However, the EU and especially the Euro-group with Dutchman Dijsselbloem at the helm – in the best European tradition – caused so much commotion that a relatively small and easily containable problem is now threatening to become an economic conflict between the EU and Russia. It all seems to be a simple question of being pennywise, but poundfoolish.
If the Euro-group would just have given Cyprus the amount that it needed to save the banks and the local economy, the whole Cypriot banking crisis would have been over before it even started. It would have costed the European tax-payers money, that’s definitely true. Nevertheless, the amount of money would have been controllable.
As you know, that is not what happened: the EU didn’t want to pay more than €10 billion from the total €17 billion of Cypriot debt; the rest should be coughed up by Cyprus itself.
In a messy, last-minute meeting, where it had not been clear at all who was in charge and who did what, the Euro-group decided to let the Cypriot depositholders bleed for the losses of the Cypriot banks.
‘Someone’ (was it the Cypriot president Nikos Anastasiades or German Finance Minister Wolfgang Schäuble?) decided that the small depositholders beneath €100,000 should also do their part of burden-sharing, in order to save the important, large depositholders from losing a substantial share of their deposits.
Since then, the Cypriot soap unfolds before the very eyes of the flabbergasted Russian and British investors and the also shocked financial markets. Everyday a new episode with more cliffhangers and more intrigues…:
- Will the small depositholders do burdensharing in spite of all protests?
- Did some Russian investors, with close relations to the Cypriot government, receive a warning in advance by President Nikos Anastatiades himself?
- Will Cyprus ring the doomsday clock for the Euro again, as many American pundits do believe?
Stay tuned, ‘cause there is much more to come!
In the first episode of this series, you could read that PM Rutte of The Netherlands disliked the fact that he had to bail out Russian depositholders: it gave him a bad taste in his mouth. Unfortunately, I have bad news for him.
The Russian online newspaper DNI (i.e. 'Today’s news') stated that Russian depositholders have targeted some other countries in order to store their black/grey/white money: one of those countries is (who will be surprised…) The Netherlands. The following snippet comes from this article. It is translated by Google Translate and somewhat improved by me:
The situation in Cyprus was condemned by Russian entrepreneurs, many of whom kept their money in Cyprus banks, according to the business newspaper "The View". According to Moody's, about one third of all deposits in Cypriot banks - up to €27 billion euros from the total amount of €68.4 billion – is owned by Russians.
According to analysts, the consequences from the situation in Cyprus will be that business will be transferred to other jurisdictions: Luxembourg, the Netherlands and Switzerland. Russian businessmen, who are perturbed that a viable solution from the Cypriot authorities stays away, are planning to evacuate their business from the island.
Of course, you can rest assured that our fair and honest PM Mark Rutte will be present at Schiphol Airport to personally stop these Russian investors with their black money. Even the thought of them, bringing their money to The Netherlands, makes him sick…
Nevertheless, the soap around Cyprus could get a nasty new episode. Yesterday, the Kremlin unofficially warned the EU, through an ostensible insider, that burdensharing by large Russian depositholders could have serious repercussions for European (read: German) companies.
Russia is supposedly having a treaty with Cyprus that states that Russian investments will always be paid back in full and cannot be considered for any kind of burdensharing.
The following snippets come from The Guardian:
Fears mount that Russia could act against European companies if charge on deposits hits €30bn Russian investments
Fears are growing of Russian reprisals against European businesses as EU authorities desperately seek a deal to save the Cypriot economy by imposing a 25% levy on bank deposits of more than €100,000.
As the island scrambled to put together a rescue programme, its finance minister, Michalis Sarris, said "significant progress" had been made on the latest levy plan in talks with officials from the European Union, the European Central Bank and the International Monetary Fund.
The government in Nicosia faces a deadline of Monday to reach an agreement or the European Central Bank says it will cut off emergency cash to the island, spelling the likely financial collapse of its banking system and a potential exit from the European single currency.
However, with Russian investors having an estimated €30bn (£26bn) deposited in banks on the island, the growing optimism about a deal was accompanied by fears of retaliation from Moscow. Alexander Nekrassov, a former Kremlin adviser, said: "If it is the case that there will be a 25% levy on deposits greater than €100,000 then some Russians will suffer very badly.
"Then, of course, Moscow will be looking for ways to punish the EU. There are a number of large German companies operating in Russia. You could possibly look at freezing assets or taxing assets. The Kremlin is adopting a wait and see policy."
Nekrassov rejected suggestions that Russia might hit back by cutting off gas supplies, a tactic the country used in 2009 after the collapse of talks with Ukraine to end a row over unpaid bills and energy pricing.
"Gas is no longer a weapon," Nekrassov said. "When Russia did that before, it realised that the foreign energy lobby reacted and efforts to find alternative sources were increased. If Russia kept threatening, it knows that nobody would be buying its gas in 20 years' time."
There you have it. This is the situation…, whether you like it or not. The Russians play hardball and they don’t play it by the book, if they need to. For me personally, it is not a question of agreeing or disagreeing with such gungho policy. As a matter of fact, I disagree with this, of course. However, you ought to know that the Russians do business this way.
If you know and you still tempt them like the Euro-group did, you must face the consequences of your policy. I have little doubt that this Alexander Nekrassov is sent by the Kremlin itself to give the EU an unofficial, but crystal-clear warning.
Tonight, the negotations on the future of Cyprus will be started. It is still very unclear in which direction these negotiations will go:
- Will Cyprus receive the money it needs (ALL the money)?!
- Or will Cyprus be forced to let its depositholders do burdensharing, in spite of the warnings by the Kremlin?!
- Third, perhaps Cyprus will even be forced to the exit of the Euro-zone, due to conditions and constraints by the troika (IMF, ECB and European Commission) that it cannot and will not fulfill.
Personally, I think that the politics of burden-sharing, although it didn’t sound very unreasonable, has been a grave mistake from the beginning.
It has been done for the wrong reasons in my humble opinion, namely to punish ‘scary’ people from the ‘scary’ Russian empire. People, by the way, whose black / grey / white money is more than welcome in other European countries with banks that are much too large for their country’s financial stamina (Switzerland, The Netherlands and Luxembourg). And now this burdensharing has led to a big, financial mess.
Yet another financial mess in a long line of financial blunders by the Euro-zone… A mess, that Dutch minister Dijsselbloem will surely cost some sleepless nights.
Of course Cyprus made mistakes. And of course Cyprus should not have had such large banks as it did. But from the officials; who bothered to tell this to the Cypriots five years ago, when the country entered the Euro-zone?! May I see fingers, please?!