By John Helmer, Moscow
The US, Germany, Turkey and the NATO allies think they have almost all the ordnance required to produce regime change in Syria, as they had in Libya. But they don’t appear to have the €5 billion required to do the trick in Cyprus, after the regime change the Cypriots themselves had voted into power a month ago. Saturday’s gambit, to seize this money from Russian and other depositors in Cyprus banks, appeared a safe bet in Brussels because apparently influential Russians – First Deputy Prime Minister Igor Shuvalov, Finance Minister Anton Siluanov – had signalled their willingness to go along.
But Shuvalov and Siluanov are clerks, no-counts politically. The one Russian who counts has now been presented by the western alliance with an opportunity to effect a strategic power shift in the Mediterranean at minimal cost upfront and little forward risk. It’s an object lesson in the greater value of money over arms in grand strategy.
It’s also a shift which the western powers and the Ottoman empire fought for three centuries to prevent. They succeeded against Empress Catherine II and Count Alexei Orlov’s fleet in 1770; he won the Battle of Chesme*; then betrayed the Daskalogiannis revolt against the Turks in Crete, and ultimately lost the war in the Med. The allies succeeded against Stalin between 1945 and 1949 because his priorities were further north. In 1974 NATO encouraged, and preserved the Turkish occupation of northern Cyprus, because Leonid Brezhnev’s Politburo  couldn’t resolve its internal differences, feared to offend Turkey, and made one mistake of intelligence assessment after another.
The way this story is told in Greek history, the Hellenes remember – they are reminded often enough — that in their direst hour, Russian promises of help against the infidels don’t materialize. There is even a Russian name in Greek for this betrayal. The failure to arrive in time in Crete and the bloody Turkish reprisals of 1770 are known in Greek by Orlov’s name as Ορλωφικά.
Let’s see how much better Putin has it within his power to do: the new Ottomans have presented him an opportunity to counter-attack and win. But what are the concrete Russian interests now at stake, and are they large enough to stake on a grand strategy of sweeping the board?
The Russian media have been unusually slow in assessing the news from Cyprus, and the Kremlin unusually silent. The latter explains the former. Click here . Prime Minister Dmitry Medvedev didn’t allow breath to pass on the subject until after Putin issued  his condemnation, the only head of government or state to do so in the world. After meeting with the board of Vnesheconombank (VEB) Medvedev said: “this looks like confiscation of someone else’s money. I don’t know who came up with this idea, but this is how it seems. Regrettably, we have been aware of this practice during the Soviet times, when money was exchanged with a coefficient and not returned to people in full. But Cyprus is a country with a market economy and is supposed to be a member of the European Union. Of course, we will have to draw certain conclusions from this because we have our own relations with Cyprus and we will continue the consultations. But we will have to make certain adjustments in our position even with the understanding that in general it would be better to keep the money in Russian banks.”
After the board finished its session, VEB’s chief executive Vladimir Dmitriev said there had been no discussion of the Cyprus situation after Medvedev’s opening remark. Asked what he or VEB thought of the position, Dmitriev ducked. “I’m not sure I can say it any better than the Prime Minister and the chairman of our Supervisory Board.”
An Uralsib bank report issued on Monday was sanguine. “At this point, risks to the Russian economy and businesses appear insignificant, provided that any run on banks in Cyprus does not result in a new full-scale European debt crisis.We highlight that among traded banks VTB has the largest exposure, while Novatek and Lukoil’s share buyback programs may be affected. Potential M&A activity of entities that are Cyprus residents may suffer.” The capital outflow that is likely to follow from Cyprus will take Russian money elsewhere: “Russia is unlikely to become a harbor for this money.”
The deposit levy itself would, if implemented to the 9.9% level initially proposed, be too small for a serious impact. According to the Uralsib research team, led by Konstantin Chernyshev. “The Russian banking sector would lose just 1% of their interbank-related assets (0.1% of the total sector’s assets), which looks rather immaterial.” The bigger risk for Russia, Uralsib calculates, would follow if the bailout fails altogether, and the Cyprus banks default. “There are indirect implications including the hit that Russian depositors could take (Cyprus banks hold $19 bln in non-banking Russian deposits according to Moody’s, or 2% of the sector’s total deposits). Also, with a final decision on the bailout still pending, the risk of bankruptcy in Cyprus is not completely out of question. In the worst case, the Russian banking sector risks payments on $40 bln of loans to Cyprus entities being suspended (6% of the sector’s corporate portfolio), with a chain reaction possible via rising NPLs ($40 bln in loans is 130% of total corporate overdue loans); this would stall lending and deposit activity and damage profitability. Roughly assuming that the sector would need to fully provision $40 bln of loans (though this is unlikely), it could end up with a net loss for the year (2012 net income amounted to $33 bln). Sberbank denies Cyprus-related lending, while other banks with the largest exposure according to Moody’s include VTB, Alfa-Bank and Gazprombank.”
Moody’s has issued a report by Evgeny Tarzimov, claiming the proposed deposit levy would trigger an outflow of Russian client funds from the Cyprus banks. That in turn might oblige Russian banks to resupply their Cyprus subsidiaries with cash. VTB, the second largest of the state lenders after Sberbank, appears to be exposed more than others through its subsidiary, Russian Commercial Bank (RCB); Moody’s reports it had assets of $13.8 billion and equity of $374 million at the end of 2011. There are unverified reports that VTB’s Cyprus deposits amount to $3 billion, with risk of loss up to $300 million, though no direct liability for VTB or RCB.
VTB has been playing down its concern, at least to protect its share price, which has dropped 9% so far this week. Whether it has been saying the same thing to Putin is another matter. According to the Uralsib report, “the Cyprus arm [of VTB] paid RUB2.8 bln ($100 mln) in dividends for 2011, with 60% of this going to VTB – meaning that even if the group completely loses its earnings from Cyprus, which does not appear to be the case for now, it will lose less than 2% of net income. VTB does not disclose the amount of loans to Cyprus-based corporates as well as interbank deposits, while holdings of Cyprus bonds are immaterial. The bank itself does not see a major threat from this situation and believes there is little reason for concern at this point.”
VTB’s board chairman, Sergei Dubinin, has announced a Soviet-style scheme of nationalization for rescue. Dubinin has been sacked twice already for presiding over financial disaster – the rouble collapse of 1994 and the government bond default of 1998. “The responsibility for the state of the banking business,” he said of Cyprus, “must lie primarily with those who took the risks of the business, that is, the owners and shareholders of the banks.” If they are obliged to cede control to the state, then, he implied, the Russian government may be in a position to refinance the Cyprus government, with sovereign security instead of commercial. To prevent a run on the banks, Dubinin also said Cyprus bank deposits should be split into portions subject to delayed withdrawal regulation.
An analysis by Ivan Tchakarov of Renaissance Capital, released on Monday morning, counted just $3.1 billion in Russian funds directly exposed to loss – $1.9 billion of non-bank Russian depositors in the Cypriot banking system, and $1.2 billion of Russian bank cash placed on deposit with Cyprus banks. Altogether, this sums to 0.24% of Russia’s 2012 gross domestic product (GDP) — “a trivial amount from a Russian macro perspective.”
But “the costs could rise to non-trivial levels (2% of GDP) if Cyprus imposed capital controls,” according to the RenCap report. “Strictly speaking, the USD40bn of outstanding loans should not be impacted by the deposit haircut as: 1) these are loans and not deposits; and 2) the loans are generally used for financing activities that are outside Cyprus and thus unrelated to the macro situation in Cyprus. Of course, if Cyprus were to impose capital controls, this would not be the case and Russian banks could face significant losses amounting to almost 2% of GDP.”
Uralsib assesses the impact on the major Russian metals companies as slight. “Almost all of them have subsidiaries registered in Cyprus, but the main trading operations are carried out through trading companies registered in other countries, especially Switzerland. Although the major beneficiary shareholders reportedly often own stakes in Russian metals names via Cyprus-registered off-shore companies, the ownership/registration structure is irrelevant at the operating level for the companies.”
The Uralsib analysts appear not to be aware of how much Cyprus banking (as well as Latvian) is done off the main Rusal accounts by associated companies . On the other hand, Rusal’s chief execuitive Oleg Deripaska spent last week  publicly attacking Russia’s state banks for over-charging Rusal on interest rates. By something resembling a coincidence, the chairman of Rusal’s board of directors, Matthias Warnig, is also a director on the VTB board.
Deripaska appears now to be begging the state banks to refinance Cyprus bank debt. Another Rusal board member, Dmitry Afanasiev, who doubles as Deripaska’s personal lawyer, announced yesterday in Moscow that Vnesheconombank (VEB), the same state unit which saved Rusal in November 2008, should go to Cyprus’s rescue. He is quoted in a Moscow newspaper as urging VEB to secure its bailout loan with rights to Cypriot gas reserves, as well as real estate and bank stocks. “VEB could then issue securities backed with the assets. The plan is common for developing economies that seek to raise money”, Afanasiev said.
Other Russian corporate interests impacted by the proposed Cyprus exaction include Novatek, LUKoil, and TNK-BP (now part of Rosneft). TNK-BP told Uralsib “the balance of Novy’s Cyprus accounts is negligible. It [Novy Investments Ltd.] appears to be an intermediate company, set up to minimize the tax on dividends received from TNK-BP Holding. There is no indication that the deposit tax will affect Rosneft’s purchase of TNK-BP…. We doubt that Lukoil has more than $2.5 bln in cash with a Cyprus bank, so in the worst case, it could lose $250 mln from the tax, or 1% of 2013E EBITDA.”
In Russia’s transportation sector, Uralsib reports that “Global Ports [owned by Nikita Mishin, Andrei Filatov, and Konstantin Nikolaev] and Globaltrans [same ] are registered as Cypriot legal entities. The companies’ representatives have said that the impact from the deposit tax being imposed by Cyprus’s government will not be material for either company. Globaltrans and Global Ports maintain negligible cash positions in Cypriot banks, as their operating activities are outside Cyprus.”
One real estate company, AFI, may lose money, but not much. “AFI Development appears to be the most affected by the planned one-off tax on bank deposit. However, the company says that the size of its potential losses from the unexpected tax imposition in Cyprus looks to be very small, as it only has about $5 mln on its bank accounts in Cyprus. The rest of the money, which is booked as cash and cash equivalent, is classified as open bank facilities and therefore is not subject to the new tax initiatives. In the event that the new tax levy is approved by Cyprus’s parliament, AFI Development could lose $0.5 mln in the worst case, which is equivalent to 0.04% of its NAV”. AFI, though publicly listed in London, is controlled by Lev Leviev. He has appointed  three Cypriot politicians to the AFI board; one of them, Michalis Sarris, is the current finance minister responsible for accepting the bank deposit levy.
Russian business media have reported Alisher Usmanov, who runs his personal asset holding Gallagher, as well as Mail.ru and Megafon holding companies in Cyprus, as telling Vedomosti — a business newspaper competing with Kommersant, which Usmanov owns — that he won’t lose a kopeck. Usmanov claims he keeps all his cash in Russian banks, the newspaper reported. According to Uralsib Bank, “Mail.ru Group uses subsidiaries in Cyprus to hold some of its assets, the company said that it only has limited cash exposure there.”
Sources in Cyprus report that in negotiations with the Cyprus government stretching back over several months, Gazprom and other Russian entities had offered to buy and recapitalize the Cyprus banks. But the Cypriots had refused to accept the Russian terms. “The Cypriots did not want a fair valuation of their loan portfolios nor fork out [offshore] gas blocks in advance,” says one Cyprus-based business source. He believes the local Cypriot businessmen, who have borrowed heavily from the Cyprus banks and cannot repay their loans as the value of the real estate has plummeted, are in favour of Russian depositors carrying the liability, relieving themselves. This is a powerful constituency for the President, Nicos Anastasiades, who has been in office for just one month.
“The German and Dutch move was well planned”, the Cyprus source believes. “They ambushed the new President. But he has been dishonest – he should have packaged the bank loans and assets and sold them at a discount. We have to see if Nicos still thinks Berlin and [Chancellor Angela] Merkel are his friends. His parliament and his people are not going with him on this. It could be the shortest presidency ever.”
Now the source says Cyprus sentiment is moving towards nationalizing the banks, leaving the Euro zone, and renegotiating an entirely different scheme with Moscow.
But if the financial exposure is relatively small, are there other, larger Russian strategic interests at this point?
One of them, acknowledged by Finance Minister Siluanov after Putin made his announcement on Monday and Siluanov had recovered his voice, is that the European Union (EU) terms had been delivered to the Cypriots without the advance notice and consultation promised with the Russians. If Siluanov and his anti-Cyprus deputy Anton Shatalov were told last week what was likely to be decided, and while they were concurring they blindsided Putin, they are now trying to protect their behinds. The upshot is that the EU plan is an intended strike against Russian interests. If the Kremlin were to be viewed to be as tame and submissive as Siluanov and Shatalov are by nature, Putin appears to have decided already that’s bad strategy for him. Monday’s verbal attack said as much. If Putin fails to follow through with action during the negotiations with the Cypriots today, he will compound the damage.
What of the money-laundering and tax evasion claims, and the Kremlin policy of de-offshorization? Putin’s statement of Monday, as amended by spokesman Dmitry Peskov, emphasized that saving the Cyprus banks and their depositors isn’t about protecting Russian law-breaking. Putin, followed by Medvedev, reiterated that they see the short-term solution in negotiated data transfer and accountability between Russian and Cyprus regulators; the long-term solution, improving Russian trust in Russian financial institutions.
Because the latter is a non-starter right now, Putin, plus everyone else, acknowledge that if the current EU attack succeeds in knocking out Cyprus, it will be beneficial for the biggest money-laundering centre in the world – London. The London newspapers which have campaigned hardest in their columns against Russia in Cyprus –the Financial Times and the Economist, both owned by Pearson – have been keeping their own interests hidden. Both have been exposed in Private Eye, the London investigative magazine, as laundering their profit and loss accounts and evading taxes through schemes licensed by the UK’s tax authority and based in Luxembourg. The media attack on Russian deposits in Cyprus is coming from fronts like Pearson Luxembourg Finance no.2 Ltd., Embankment Finance Ltd (Luxembourg), and Luxembourg Holdings SeNC.
What Putin does next isn’t going to go down well in London and Luxembourg. But if he has the opportunity to rerun the Battle of Chesme*, and this time rescue the Hellenes from sinking, along with Russian money, Putin will be doing more for the strategic Russian interest in the Mediterranean than Catherine and Orlov managed in 1770. More, too, than ordering a squadron of six frigates and cruisers out of the Black Sea to sail round the Mediterranean on a permanent patrol .
[Asterisk] The original painting, titled “Catherine II laying the trophies of the Battle of Chesme on the Tomb of Peter the Great”, was commissioned by the empress in 1791 from Andreas Caspar Huhne, a German. This image is one of several drafts made by Huhne. Catherine thought of the picture as a demonstration that she was following her predecessor’s foreign policy success. In fact, no ceremony of the kind took place, and as depicted Peter’s tomb was an invention.