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Update on Cyprus: Russian Banking Ingenuity

Posted by Larry Doyle on March 26, 2013 7:51 AM |

With the news that the larger depositors (i.e, those accounts with greater than EU100,000) in Cypriot banks will bear the brunt of the burden of the bailout and bail-in, one would think this might incite fear and outrage amongst this crowd.

These depositors are being prepped to lose upwards of 40% of their holdings. Many of these depositors are known to be Russian businessmen.

Who knows what the future holds for the island nation of Cyprus, but if we were to believe some of what we read in the Financial Times this morning, the fear and angst expected within the Russian business community seems to be met with an amazing sense of equanimity. How so?

Let’s navigate and read about some Russian banking ingenuity as the FT writes, Russians Seek Ways To Beat Curbs:

With most banks in Cyprus due to reopen on Thursday, the island’s many Russian depositors are scheming ways to beat the looming limits on withdrawals and money transfers designed to stem a run on the banks.

A majority of the deposits of more than €100,000 at the Bank of Cyprus and Laiki Bank are ultimately owned by Russian beneficiaries, a person close to one of the lenders told the Financial Times – meaning that Russian businesses and individual depositors will be paying the lion’s share of the local bailout.

In Limassol, the beach town home to many of the island’s Russians, talk has shifted from the mistakes of the first bailout proposal to how people are physically going to get their money out of frozen bank accounts.

Of particular concern are the powers granted to the Cypriot Central Bank last week which give it the authority to convert current account funds into taxable deposits, meaning that bigger Russian businesses who do not hold deposits in Cyprus could end up being affected. (this strikes me as a  particularly aggressive move)  

Nikolai, a businessman from Chelyabinsk, fielded calls on Monday about his deposit – “more than €100,000” – at Cyprus’s Hellenic Bank while lying poolside in Limassol. (LD’s edit: Poolside? What me worry? …another cocktail, sir?)

In Russia, getting money out of a frozen bank account would be easy, he said. “You would call the bank’s manager, give 10 per cent to him and keep the rest for yourself. Here it doesn’t work like that.”

Others, however, showed a more entrepreneurial spirit.

“If you have an account not just for yourself but for your wife, your mother, your father, your children, you can disperse the money between all the accounts of your relatives and little by little you can start moving it away,” said a Russian lawyer in Cyprus who asked not to be named.

“[The Cypriots] are sitting and waiting and they are hoping their government will care for them. Russians are used to taking care of ourselves,” he added – a benefit of having lived through three domestic financial crises in two decades.

Over a bottle of red wine on Friday, two Russian friends in Limassol began hatching a scheme to help one of them move €40,000 from his Laiki account to the other’s account outside Cyprus.

How they plan to circumvent Cyprus’s current freeze on bank accounts and capital controls without breaking the law will remain shrouded in mystery. “A good idea stops being a good idea when everyone knows about it,” deadpanned one of the friends.

“This is one of the things Russians are famous for. We are very inventive,” said the Laiki bank account holder with a wry smile. “Even if the rules change I think we will find some way to get around them.”

“Even if the rules change I think we will find some way to get around them.”  Really? Does that remind you of anything? Strikes me as a page straight out of the “organized activities” black market playbook, variations of which seem to pop up with increasing regularity between Wall Street and Washington.

Who were the teachers and who were the students?

Larry Doyle

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I have no business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

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