Cyprian offshores – an evil which used to work smoothly

Cyprus is the most popular offshore zone among Russian companies. Moreover, not only Russian private companies, but also state-owned enterprises keep their money in Cyprus. It goes without saying that none of them wants to lose 10% of the money. And it remains to be seen how long the money would be kept frozen.

In any case, offshore companies used to be a smoothly working evil. Today, large companies are facing a problem of destruction of this system. Speaking about losses, a very large amount of 3–5bn euro is being at stake, given that nearly 30–50bn euro of Russian companies is being frozen in Cyprus banks.

A proposal to issue a loan to Cyprus in exchange for Cyprian assets seems to be attractive. Indeed, bank assets are less attractive vs. participation in energy projects – offshore mining.  Here one may assume that Gazprom has a direct interest in this. On the one hand, both Cyprus and Russia have plenty to talk about, whereas, on the other hand, it is hard to predict the outcome of such negotiations.

However, confrontation with the European Union is expected in any case. By the way, such a predatory tax is an unprecedented measure of the European Union. None of the distressed EC countries have been offered to take such measures to date. The reasoning for this is as follows: elections are to be held in Germany in the coming fall, and German taxpayers are supersensitive about providing more support to any EC country. Thus, Germany simply suggests that Russia should share its money. A 10% tax on bank deposits is equal to a 10% debt remission.

On its part, Cyprus itself is unhappy to impose such sanctions, because they will kill its banking sector and reputation as an offshore zone. Even though no such tax is imposed, some investors would withdraw their money from Cyprian banks and leave the country. Nevertheless, with Russia’ support the Cyprian banking sector still has chance to regain confidence.

Should the foregoing tax be imposed, Cyprus would have to forget about anything else but to provide travel services.  

Vedev А.L. – Director of the Center for Structural Studies