PUTIN'S MEDITERRANEAN MARCH 24, 2013
The day that Cyprus rejected a European bailout that would have given every bank account in the country a “haircut,” the Cypriot finance minister Michael Sarris went on a mission. He went not to Brussels or Berlin, however, but to Moscow. Sarris had to find $7.5 billion dollars to cover the gap between the $12.5 billion the Eurozone was going to give Cyprus—the Europeans and IMF insisted the loan be capped at 10 billion Euros— and the $20 billion that the Cypriots needed to plug the hole in their economy. Flying to wealthy, flashy Moscow, which, as we’ve all heard, has oodles of money in Cyprus, though no one knows exactly how much, was a predictable move, like calling your spendthrift millionaire friend when you can’t make your rent this month.
How does one explain to the average foreigner that the Russian government is sheltering its money…from the Russian government?
So Sarris showed up in Moscow, but not hat in hand, exactly. He came offering stakes in Cypriot telecom companies and in its recently discovered offshore gas reserves— reserves which Gazprom was reportedly eying in a potential private bailout. And yet, on Friday, the three-day talks with Russian Finance Minister Anton Siluanov and Dmitry Medvedev—who is said to have audibly cheered in a meeting when he saw the news that Cypriots had rejected the Euro bailout–ended with little to show for the effort. Medvedev said he wasn’t shutting the door on bailing out Cyprus with help from Europe, but Sarris went home to a ticking clock, empty-handed.
It’s not clear why Moscow didn’t bite, but all of this exposes a very interesting geopolitical situation. Russians are said to have up to $32 billion in Cypriot banks, which is not insignificant for a country with a $25 billion GDP. But don’t quote me on that Russian number. Asked by a Russian paper how much Russian money was in Cyprus, the head of the Cypriot Central Bank said, “depends on how you count it.” This is in part because it’s very easy for Russians to acquire residency as well as to register off-shore or shell companies on the island. Often, however, they are registered to a local lawyer, so the company is technically Cypriot, but stuffed with Russian cash.
Cyprus is often talked about as a money laundromat for ill-gotten Russian money, and as a tax shelter, but the more accurate description is probably “haven.” Some of Russia’s wealthiest tycoons have money stashed in Cyprus, but so do people from the humble ranks of Russia’s many, many millionaires, not to mention droves of the merely upper-middle class. (The big dogs have their money all over the world—Isle of Man, Switzerland, London real estate, the Cayman Islands—but Cyprus is the starter haven, the gateway to the world of offshore accounts.) The reason, as former Russian finance minister Alexei Kudrin explained, is simple: Cyprus was once an English colony, which means that it has English law, which the Russians revere for its ability to fairly settle business disputes.1 Not only is Cyprus an Orthodox Christian country, with an alphabet from which Cyrillic was derived, it is also a place with rule of law and a functioning, independent court system. Russians do not have this at home, where money or property can be yours one day, and someone else’s the next, without any legal recourse. So yes, money gets laundered in Cyprus, but money is also kept safe there from other Russians, specifically those working in the Russian government.
And that’s where it gets crazy: on Thursday, Medvdev said that unnamed “government structures” have their funds in Cyprus. Which explains Russian President Putin’s outburst when the European plan was first announced: Putin, the man who jails dissidents and on whose watch corruption and government extortion of businesses has reached near mythical levels, called the Cypriot bank tax “unfair.” But not really. How does one explain to the average foreigner that the Russian government is sheltering its money…from the Russian government?
It’s worth noting here that Russians generally don’t see their government as a ruling body and neutral arbiter, or as a guarantor of the rule of law. Russians, correctly, see their government as a collection of front-row seats to the auction divvying up Russia’s natural plenty. In the last decade, government bureaucrats have become the country’s new elite. Their expenditures on houses, cars, or watches rarely match their official incomes. Over the summer, for example, a Moscow real estate company found that over half of the luxury flats in Moscow—those priced at $2 million and up—were purchased by government officials. It’s no surprise then, that when Russians are asked about corruption, they are not so much infuriated as envious: polls repeatedly find that a majority of Russians simply want to get into a government post to get access to the goodies.
And once you get those goodies, you must hide them in a place where other people in the government—say, overzealous fire marshals—can’t get at them.
But the Russian government itself owns a lot of businesses, like VTB Bank—where Kudrin, until recently, served as chairman of the board—that, in turn, does a lot of business in Cyprus. VTB is one of Russia’s largest banks and it is mostly owned by the Russian government. Which makes some of its transactions seem rather strange indeed. For example, Alexey Navalny, an opposition politician, uncovered one such scheme: VTB decided that it could make some money renting oil drilling equipment it purchased from China. VTB did not purchase them directly, but through a Cypriot company, registered to two Russians, which bought and sold them to VTB at a 50 percent markup, and pocketed the difference: $150 million. (The point was for the Cypriot company to make the $150 million, rather than the rental of the drilling equipment, which is lying unused in some forsaken field in Siberia.)
To the Russians, Cyprus has become a kind of Mediterranean Russian colony. There are Russian storefronts, nearly 50,000 Russian residents, and many more vacationers from the Russian middle class. Cyprus has become wildly dependent not on Europe, whose currency it uses, but on Russia. It’s a particularly ironic twist given that Russia, historically, has seen itself as the Third Rome, the Orthodox power that picked up the flag that Byzantium dropped when it was conquered by the Turks. Perhaps it is because of this that the Europeans, particularly the Germans, pushed for the Cypriots to pay for part of their own bailout. Greeks are one thing, but Russians—whom Europe sees as the barbarians at the gate, aping its fashions and customs—are another, and Germany sees no reason why a country that turns off its gas supply to punish Ukraine, should be bailed out by German taxpayers.
The real question in the Cyprus debacle is why Russia is being so careful. You’d think Moscow would be happy to rush in and save a small European country that the Continent has snubbed. They already have a colony in the Mediterranean. $7.5 billion would be a cheap price to turn it into an ally.