IT IS EXACTLY two years since the first Eurogroup decision for the recapitalisation of Cypriot banks by a bail-in of all bank deposits. The legislature rejected that decision and turned to Russia for help. As a result of the rejection, the banks remained closed for two weeks. By the time they re-opened, there was no Laiki – instead of being restructured it was closed down – while the Bank of Cyprus instead of being recapitalised was being restructured.
From what the parties said in the House, their reasons for rejecting the Eurogroup decision were ‘national dignity’, the refusal to comply with the diktats of the troika and the expectation of help from Russia. Apart from the naivety of the political parties that believed there were viable solutions outside the EU, there was another, unknown aspect to the goings-on of those days. The political system sacrificed two Cypriot banks so that the deposits of Vladimir Putin’s circle in the Russian Commercial Bank (RCB, the Cyprus-based subsidiary of the Russian state-owned bank VTB) would not be touched.
A few weeks ago, on the occasion of President Nicos Anastasiades’ visit to Moscow, the Duma approved the restructuring of the €2.5 billion Russian loan, secured during the Christofias presidency. The restructuring of the loan was described as ‘a gift’ from Moscow to Cyprus. In reality, the Russian loan proved the start of Cyprus’ woes, while its restructuring had been imposed on Moscow by the EU in exchange for the exemption of RCB from the deposits’ hair-cut. But we should take the events from the start.
Cyprus was excluded from the markets in April 2011. On January 14, 2014, Olli Rehn, the European Commissioner for Economic and Monetary Affairs, said that “from November of 2011, for us at the Commission it was obvious that Cyprus, unfortunately, was on a path that sooner or later would lead it to an adjustment programme.” Instead of asking for assistance from the European support mechanism as other eurozone countries excluded from the markets had done, the Christofias government bought time by securing the Russian loan. Rehn said: “If they had acted sooner, Cyprus would not have faced the dramatic consequences of the bail-in as eventually happened in 2013.”
When the Russian loan was given it was considered a blessing and welcomed by everyone. History has shown that it was the worst thing that could have happened because the Christofias government was able to put off taking any measures and the economy deteriorated. With the hope of securing another loan – Christofias applied to Moscow for another in June 2012 – he obstinately refused to complete negotiations for an assistance programme with the Troika and plunged the economy deeper into trouble.
The inaction and uncertainty ended on March 16, 2013, when the new president, Anastasiades, faced with the prospect of the collapse of the banks, agreed to their bail-in, via the imposition of a one-off levy on all deposits (6.75 per cent for deposits above €20,000 and 9.9 per cent for deposits above €100,000) at all banks.
The next day (Sunday) the Eurogroup rescinded the decision as deposits of up to €100,000 were guaranteed and proposed a haircut of 15 per cent on uninsured deposits at all banks. However, the new decision, although communicated to the House by the Central Bank governor, was ignored as the parties were stridently opposed to a bail-in. Today everyone recognises that decision would have been the least painful, as the levy represented three years of interest earnings.
Moscow, protecting its financial interests, played a substantial part in the rejection of the first Eurogroup decision. Russian money in Cyprus is split into two categories – that belonging to the Russian government and the ruling elite of the country, which was primarily kept at the Russian Commercial Bank (RCB) and that of the plutocrats, who had taken it out of the country, so the regime could not get its hands on it, and kept it in the Cypriot banks.
Moscow, since the time of the Soviet Union, has had a very effective mechanism of exercising influence over decisions taken by Cyprus. In this case, according to the admission of the DIKO leader at the time, Marios Garoyian – made on October 9, 2014 – the parties had rejected the first Eurogroup decision after pressure from Moscow.
Garoyian said: “The highest Russian leadership ensured it conveyed the message that if we touched RCB, we would have seen a reaction we had never seen before.” He added: “There is a parameter that many do not take into account. The first bill envisaged an across the board haircut of deposits, which would have also touched the RCB in which the Russian state had an interest.”
Asked what, in his opinion would have been the nature of the reaction, Garoyian said, “those who know, know and could understand. It was a crystal clear message to all of us.” In the interview, Garoyian said he had acted patriotically, because he could not “put at risk relations with Russia, a country that supported us when other supposed allies had abandoned us”.
During those dramatic days, the political establishment appeared certain that Russia would come to Cyprus’ rescue. The day after the House of Representatives’ ‘resounding no’ (March 19, 2013) then finance minister Michalis Sarris left for Moscow to seek an aid package that would have allowed Cyprus to ignore the Eurogroup decisions.
AKEL chief Andros Kyprianou said his party was in direct contact with Moscow and proposed that all the party leaders travelled to the Russian capital in order to lend support to Sarris. During Anastasiades’ briefing of the legislature on the Eurogroup decision, AKEL deputies asked two questions. Both related to the exemption of the subsidiaries of foreign banks from the hair-cut of deposits – presumably their concerns was for the depositors of RCB.
On Thursday, March 21, 2013, the scheduled EU-Russia meeting was held in Moscow and it was attended by the president of the Commission Jose Manuel Barroso. At the talks, the Russian side raised the matter of the impending hair-cut of deposits at RCB. Indeed, in public comments before the meeting he was scheduled to have with Barroso, Russia’s Prime Minister Dmitri Medvedev threatened that Moscow would re-consider its policy in relation to the euro which accounted for 41-42 per cent of the country’s foreign currency reserves.
“The prospect of the imposition of a special levy by the EU on bank deposits in Cyprus, a large part of which is Russian capital, would be cause to re-examine the euro,” said Medvedev.
While Russia was in consultations with the EU Sarris was in his hotel room waiting. Also in Moscow was Commerce Minister Giorgos Lakkotrypis and he was accompanied by then permanent secretary of the ministry Zeta Emilianidou who had taken with her a suitcase of documents on the exploratory blocks in the Cypriot exclusive economic zone. The Cyprus government was also prepared to discuss the granting of military facilities to Russia.
In the EU-Moscow talks it was agreed that the subsidiaries of foreign banks in Cyprus would be exempted from the hair-cut of deposits. In exchange, the Commission asked Moscow to restructure the Russian loan – reduce the interest and extend the repayment period.
This was acknowledged by Putin, during a visit to Germany a few days later (April 8, 2013), when he said: “The EU asked us to restructure the loan and we agreed to do it. This was our real contribution towards the solving of Cyprus’ problem.” So the approval of the restructuring by the Duma was no ‘gift’ but a procedural act.
Once Moscow received assurances from the EU that RCB would not be touched, it gave its OK for Sarris, who was waiting in his hotel room, to have his meeting with his Russian counterpart Anton Siluanov. The meeting, held on the evening of March 21 was of a routine nature. Afterwards Siluanov said the talks had been completed without a result. “Russian investors were not interested in the underwater natural gas deposits,” he said.
By the time Sarris returned to Cyprus, Laiki had been closed down. The political parties, which refused to discuss anything in anticipation of Moscow’s assistance, passed the banking resolution law, which had been prepared by the Central Bank months earlier and included the provision for a bail-in.
Meanwhile, Moscow had another issue to settle in Cyprus – the freezing of all deposits as a result of the capital restrictions imposed. The Russian government warned that if its deposits in Cyprus were not immediately unfrozen it would react. RIA Novosti broadcast a statement (April 3, 2013) by a Medvedev spokesperson, Natalya Timakova, who said: “Do not dare tamper with the Russian Commercial Bank because you would feel what Russian rage means.”
Moscow, according to Timakova’s statement, had linked the completion of the agreement on the loan restructuring with the unfreezing of RCB’s capital. She said: “The Russian government will closely monitor the situation regarding the Russian Commercial Bank – subsidiary of state bank VTB – before it decides ways of offering support to the Cyprus economy.” In the end, the second decree on the restrictions of capital transfers by foreign banks (May 10, 2013) issued by the finance ministry, exempted foreign banks, including RCB.
Speaking on German TV station ARD (April 4, 2013) and asked if he felt offended by the European rescue plan for Cyprus, Putin answered: “Of course not. On the contrary, to a degree, I am even satisfied because this exposed the inadequacy and lack of security involved in making deposits in western credit institutions.”
He felt the Cyprus experience encouraged Russian depositors to invest in their own country. “The more you squeeze foreign investors at the credit institutions in your countries, the better for us,” he said and added: “As all the affected parties are stricken and frightened, they should, we hope, come to our credit institutions and would keep their money in our banks.”
Cyprus’ politicians in March 2013, having nowhere to turn to, pinned all their hopes on the Russian government which, understandably, was only concerned about protecting its own interests.
Demetris Papadopoulos is a UK-based researcher