As the Cypriot parliament convenes in an emergency session to decide whether to ask its citizens to part-fund a bailout for the country's banks, the shadow of Russian money on the island in the form of billions of euros of banking deposits and a $3.3 billion loan, looms large.
Investors in Europe are digesting the news of Cyprus' surprise bailout proposal which includes a levy on savers as a condition for 10 billion euros in financial aid. Dow Jones Cyprus reported on Monday that the initial proposal will be amended.
According to two sources cited by the agency, the new proposal would see savers with less than 100,000 euros in their accounts pay a one-time tax of 3 percent (the initial figure was 6.75 percent). Those with deposits from 100,000 to 500,000 euros would pay 10 percent and anyone with over 500,000 euros in their accounts would pay 15 percent.
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With an estimated 37 percent of the $68 billion of deposits in Cypriot banks belonging to foreigners, many of whom Russian investors and businesses according to experts, Cypriots are not the only savers that could lose money under the deal.
Vladimir Putin's spokesman quoted the Russian President as saying on Monday morning that a deposit levy would be "unfair, unprofessional and dangerous", Reuters reported.
Conservative reports put the amount of personal deposits of Russian money in Cypriot banks at 20 billion euros, though it could be as high as 35 billion euros, according to media reports. Last year, Moody's ratings agency reported that at the end of 2012, Russian banks had around $12 billion placed in Cypriot banks, an increase of around $3 billion from 2011, according to data from Russia's central bank.
Russian businesses and investors have been attracted to Cyprus for its low corporate tax rates and relaxed financial regulation. The latest bailout proposal, the first of its kind in the euro zone, would see corporate tax raised from 10 to 12.5 percent. The richest depositors stand to lose 15 percent of their savings.
Liza Ermolenko, emerging markets economist at Capital Economics, told CNBC that the move was bad news for Russian depositors.
"The details of the Cypriot bailout are bad news for Russian depositors who hold around 20% of total deposits of the Cypriot banking system," she told CNBC on Monday.
"All of Russia's major banks have some exposure to Cyprus and stand to lose some of their deposits there. Nonetheless, as things stand it looks like the effects on the Russian banking system as a whole should be relatively limited. So far the biggest impact has been on the Russian stock market…with banks being the biggest losers," Ermolenko said.
"In the longer-run this means that if the deal goes ahead, Russian banks and companies will probably start to transfer their money away from Cyprus," she added.
Indeed, the IMF is reported to have been keen on the levy as a way to stem the flood of Russian money into the island over the last few years which has prompted concerns over money laundering.
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If ratified by parliament on Monday in an afternoon vote, the money could be extracted from savers' accounts before banks open on Tuesday. Russian investors have been spooked by the move. The Moscow exchange fell 2.3 percent at the open though the Russian deputy economy minister Andrei Klepach said the proposal would not alter Russia's domestic capital flow.
"I don't think (the tax) will have significant implications... This is a matter of increased risks, not (capital) flight," Klepach said, according to the Prime news agency.
On Wednesday, Cypriot Finance Minister, Michalis Sarris, will visit Russia to discuss extending a 2.5 billion ($3.3 billion) euro loan to Cyprus and reduce interest rate payments. The country has already requested 5 billion euros more from Russia, but the country has refused. No decision over whether to extend the loan to Cyprus has yet been made, a source told Reuters.
Sarris told CNBC that Cyprus had managed to pursuade EU officials that the country was not facilitating money laundering or tax evasion, and had agreed to undergo a "a very thorough analysis" of its financial practices. "We have committed to adopt best-practice based on the findings and outcome of this thorough investigation," he said.