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Wednesday
Jan092013

Russian “Black Money” Threatens To Boot Cyprus Out Of The Eurozone

German Bailout Chancellor Angela Merkel, who is trying to avoid any tumult ahead of the elections later this year, has a new headache. Cyprus, the fifth of 17 Eurozone countries to ask for a bailout, might default and exit the Eurozone under her watch. Using taxpayer money or the ECB’s freshly printed trillions to bail out the corrupt Greek elite or stockholders, bondholders, and counterparties of decomposing banks, or even privileged speculators, is one thing, but bailing out Russian “black money” is, politically at least, quite another.

Cyprus is in horrid shape. Particularly its banks. Their €152 billion in “assets” are 8.5 times the country’s GDP of €17.8 billion. “Assets” in quotation marks because some have dissipated and because €23 billion in loans, or 27% of the banks’ entire credit portfolio, are nonperforming. That’s 127% of GDP! And then there are the Russian-owned “black-money” accounts.

A “secret” report by the German version of the CIA, the Bundesnachrichtendienst (BND) was leaked last November, revealing that any bailout of Cyprus would benefit rich Russians and their €26 billion in “black money” that they deposited in the now collapsing banks. The report accuses Cyprus of creating ideal conditions for large-scale money laundering, including handing out Cypriot passports to Russian oligarchs, giving them the option to settle in the EU. Much of this laundered money then reverses direction, turning minuscule Cyprus into Russia’s largest foreign investor [read...  The Bailout of Russian “Black Money” in Cyprus].

Now Cyprus needs €17.5 billion—just about 100% of its GDP—of which €12 billion would go directly to the murky and putrid banks. The package should be wrapped up and signed on February 10 at the meeting of the European finance ministers.

“I cannot imagine that the German taxpayer will save Cypriot banks whose business model is to abet tax fraud,” grumbled Sigmar Gabriel, chairman of the opposition SPD that has been a supporter of euro bailouts; and Merkel, hobbled by opposition within her own coalition, had relied on them to get prior bailouts passed. “If Mrs. Merkel wants to have the approval of the SPD, she must have very good reasons,” he said. “But I don’t see any....”

The Greens are resisting the Cyprus bailout for the same reasons. And 20 members of Merkel’s own coalition are categorically opposed to it. For the first time, Merkel has no majority to get a bailout package passed. The opposition smells an election advantage.

Before the German finance minister can vote in the Euro Group of finance ministers for disbursement of bailout funds, he must seek parliamentary approval. The German Constitutional Court said so, inconveniently. But without his yes-vote, which weighs 29%, the qualified majority of 73.9% cannot be reached. The bailout disbursement crashes. That’s what Cyprus is contemplating.

Fearing defeat, sources within the government now made it known that they wouldn’t even present a bailout package unless Cyprus agreed to “radical reforms,” including massive privatizations of the bloated state sector—precisely what communist President Dimitris Christofias has ruled out.

The Russian “black money” is so unpalatable that even the bailout-happy President of the EU Parliament, Martin Schulz, got cold feet. Before a bailout package could be put together, he said, “it must be disclosed where the money in Cyprus is coming from.”

Markus Ferber, head of Merkel’s coalition partner CSU, demanded a guarantee that “we help the citizens of Cyprus and not the Russian oligarchs.” In addition, he wants Cyprus to reform its naturalization law. If Cyprus wants to get bailed out, he mused, it must make sure “that not everyone who has a lot of money can get a Cypriot passport.”

Foreign Minister Guido Westerwelle (FDP), who is no Eurosceptic, hammered home that the Cyprus won’t get special treatment. The European community is “ready for solidarity, but only in return for real structural reforms,” he said. “Greece didn’t get a blank check, Cyprus won’t either.” And those reforms included “banking transparence.” They’re all out there now, griping about German taxpayers bailing out Russian “black money.”

Having learned a lesson from Greece, Cyprus has gone on a charm offensive to persuade the other 16 Eurozone countries that its “black money” problem has evaporated and that more reforms aren’t necessary. On Monday, Central Bank President Panicos Demetriades invited the finance ministers to a dog and pony show that would explain the banking sector and the perfectly legit activities of the Russian funds.

If Greece is any guide, Merkel will vociferously demand more reforms and transparence in the banking sector. The February 10 deadline might pass. Cyprus will come up with a list of promises. Gradually the rhetoric will change. Words like “progress” will show up. “Black money” will disappear from the media. This might even culminate with a heartwarming meeting in Berlin between Merkel and Christofias. And suddenly, voting against the Cyprus bailout, once a safe bet, will become politically risky. It worked before. It might work again. If not, Cyprus with all its “black money” might become the first Eurozone country to go bust.

The European Commission issued its report on bank bailouts, the “2012 State Aid Scoreboard.” Turns out, the amount that the 27 EU states had handed to their banks amounted to €1.6 trillion. 13% of GDP—to bail out bank stockholders, bondholders, and counter parties, and enrich privileged speculators. Read.... The EU Bailout Oligarchy Issues A Report About Itself.

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Reader Comments (5)

Perhaps it would be best for Cyprus to bail out of the EU. Then we can watch the dominoes fall all over Europe. As it spreads, one will reach across the Atlantic and the Us will fall. And about time! Then we can pick up the pieces and build a 3rd world level everywhere. That is the future anyway, if Mother Nature allows us enough time to accomplish it.
January 9, 2013 | Unregistered CommenterMakati1
This will be a difficult one for Merkel. MSM are in general EU-positive, but they are not completely in Merkel's and other politicians pocket. They support the general idea. However at the same time MSM also are anto things like: corruption; Putin; Russian oligarchs; tax-havens; black money; tax evasion etc. These issues will in relation with Cyprus therefor keep coming up even in the pro-bail out press.

Another case of mismanagement. Say 1 1/2 year ago when Cyprus came up it would have been relarively easy to brush the whole thing under the carpet. While also at that time at was already clear that dodgy banking would become an issue.
Basically the problems are with 3 or 4 banks with heavy Greek financial relations. If the local regulator had forced the banking sector to dump all the rubbish there; forced these banks to bring the rubbish in seperate entities, you would have had a clear overseeable problem (out of the public eye), now it is the whole sector that is affected.

Merkel is kicking the hot potato forward but also closer to the German elections. And I doubt if Cyprus can survive that long without a rescue. And again likely not at the same time as Spain proper.

In my eyes as a rescuer you should always avoid having to rescue countries like Greece or Cyprus or Italy with Berlusconi. You simply will look several times a complete idiot in the eyes of your own local public opinion. Greece is a self-repeating PR disaster and now they have 2 (and when Berlusconi get back possibly 3). While at the same time stating if Greece falls away the Euro and therewith Europe will fail. Utterly stupid, you create your own problems that way.
January 10, 2013 | Unregistered CommenterRik
Cyprus as a tax-haven does not harbor german tax evaders, nor french, italien, spanish aso, nor even greek ones. I fancy trusting that Merkel does not give much of a damn if other non-german tax evaders choose Cyprus for their relief.

Corruption at higher level than in Romania, Bulgaria or Greece is hard to find in Cyprus. Take (american company) Bechtel that had to build a motorway in Romania to be finished this year. Bechtel played solely every possible role in the project: designer, builder, supplier, auditor. The project is only 10% finished and has a budget overrun of over 1 bn Eur. The project was facilitated in 2004 at the highest political level in the land and stopped this year for lack of further funding. What goes on in Cyprus or even Greece is small fish by comparison.

Tax evasion or corruption would clearly be false pretenses. The real motives can only be Putin and Russia (don't know why the rich russians are called oligarchs while other rich nationals are called investors). The campaign against Putin and Russia has clearly intensified since he won the re-election. Merkel and Hollande clearly spearhead this campaign and even more clearly this goes against great economic interests of both Germany and France in Russia. Somebody else seems to pull the strings which animate the german and french politicians.

Cyprus unlike Greece has significant oil and gas finds in which Gazprom of Russia as well as several israeli companies want to play a role. The "unpublished" bailout negotiations will be about limiting Gazprom involvment or even removing it from competition altogether. However Cyprus will not be refused a bailout simply because it has alternatives which can be far more damaging for those that pull the strings and are behind the "public reticencies" vented in the german MSM. The german electorate can never be a hindrance since it has been for a long time now as re-active as a dead man's eyes.
January 10, 2013 | Unregistered CommenterTon
@Ton
You miss a point. The EZ countries will have to go after their own tax evaders. Not only the more criminal ones like the ones with political connections with Greek socialist parties bit also in general and also in the North.
And more important (big) business has got away with paying ridiculously low rates the last decades (as they are location-flexible).
Anyway it is one of the untapped main sources of tax revenue available. You cannot reneg taxtreaties with other taxhavens if you have them inhouse yourself.
Another reason is this has to be sold up North (bailing out Russian oligarchs sell as good as selling as selling cars with turds on the seats)>

Cyprus is less corrupt than a few others but for the rest as badly managed.

It is not only Germany. You need to sell it in a lot of other Northern countries as well (and basically all can spoil it) tax evasion and Russian ologarchs simply donot sell. This is the stuff that can make local parliaments rise against a bail out programm. And subsequently spoil possibly the whole Euro-rescue. It simply has to be solved (in the eyes of the rescue brigade) it is too risky. Even when only cosmetically so it becomes aceptable, but as soon as the local media start to pick it up you have a problem (and you cannot control that proces)
And Cyprus is likely going the Greek way )protestwise and not meeting targets, you cannot have tax-dodging Russian oligarch on the frontpage twice a year. Cyprus is already a PR disaster waiting you cannot make it even considerably worse than it is.

The German electorate can be a problem. It is a top of the agenda, long term issue. Which simply means public opinion is highly important. It is not something forgotten at electiontime it is simply too big for that. And if Merkel has the choice of dropping Cyprus or not getting reeleted it is bye bye Cyprus.
There are clearly people in especially the german government that oppose bail outs that looks where most of the leaks are coming from. And the German press is simply on it (mainly as rescues are highly unpopular and a good news item). The press is still independent. They support mainly rescue policies (if they do) because they think it is the decent way to do. And they donot think that recuing tax dodging Russian oligarchs is a positive. They hate that and it is a good newsitem.
So in this respect: always some German official opposing bail outs in general that will leak, and the press that always will pick it up (and likely/possibly in other countries as well).
January 12, 2013 | Unregistered CommenterRik
What you guys seem to purposfully ignore as Mrs Merkel and Co is that Cyprus banks wouldn't be in this mess if the EU Leaders did not agree the Greek Bond haircut. This, in effect meant dumping on Cyprus Economy and Cypriot Taxpayers a hugely disproportional burden, amounting to 4.5 billion euros or 25% of Cyprus GDP. These were the losses in Cypriot banks Core Tier 1 funds, just from the POLITICAL decision for a greek bond haircut! In effect, in order to save Greece the EU leaders distroyed Cyprus.
Without the Greek haircut Cyprus would never need a bailout. Its 2010 economic indicators were Debt: 62% and Deficit: 5%, much better than France, UK and even Germany at the time and hardly a difficult to control situation.

So comparing Cyprus with Greece or even Portugal isn't realistic. Ireland may be a closer to Cyprus example. Now as far as money laundering is concerned this is a great irony! Cyprus is ranked 7th among the eurozone when it comes to compliance with world anti laundering standards according to MoneyVal and FATF well ahead of countries like Germany, France, Luxemburg, etc. In some areas its anti-money laundering regime is the strictest in EU according to the same assessments.

http://www.mof.gov.cy/mof/mof.nsf/All/7898A0DEC664B4D9C2257AEF0043718D/$file/AML%20MOKAS.pdf

In my opinion here we have an example of big country interests creating the problem and then threatening to further punish their victim. Cyprusmay not be their prime objective probably Russia is their target. In the process if they also get a bonus in the form of russian funds migrating from Cyprus to their countries, even better for them..

So much for European solidarity... pfff
January 22, 2013 | Unregistered CommenterPablo

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