Sanctions imposed on Russia and Russian citizens so far will not significantly impact the Cypriot economy as its banks have very satisfactory levels of capital and one of the best levels of liquidity in the EU, central bank governor Constantinos Herodotou said on Friday.

He was speaking after a meeting with President Nikos Christodoulides, held with the government in damage control mode, after dozens of Cypriots and Cyprus-based companies were hit by sanctions from the US and UK last week.

The sanctions on 23 Cypriots – 10 of which are Cyprus born – and 20 companies based in Cyprus, accuse them of knowingly assisting Russian oligarchs Roman Abramovich and Alisher Usmanov to hide their assets in complex financial networks.

Christodoulides also said later that the government was about to receive the first concrete information it has requested as regards the sanctions imposed to persons and legal entities in Cyprus.

Nicosia is in contact with the US and the UK on a daily basis about this issue “with a view to have all the information before us, so that the competent authorities of the Republic of Cyprus will do what they have to do.”

“We will continue until the end and we will not allow anything that will create problems to the image of our country, to the conditions acknowledged as regards our country, especially during recent years,” he said.

Asked about the next steps , he said: “Meetings were taking place “every day on this issue, either by me, or by my aides, and these meetings will continue next week. At the same time we are in contact with the US and with Britain.”

“Probably today we will get the first information, because we have asked for concrete information, as regards the decisions that have been taken, and I consider that the Republic of Cyprus must do, and that is what we are doing, everything possible so that there will be no negative impact on the country’s image,” he added.

Herodotou, asked about the possibility of new sanctions against Russia, and whether there would be a more extensive list of people sanctioned by the UK and US, said the central bank had not been notified of any such developments.

“As it was already announced, Cypriot banks applied both recent and previous sanctions immediately,” he said, adding that “it is important to be compliant with European and other relevant legislation”.

According to Herodotou, Christodoulides told him that this was an opportunity for Cyprus to show good will and to improve its reputation, nothing that the central bank, “as an independent authority has always acted to strengthen stability and ownership of the banking sector and the country”.

Asked whether the expansion of sanctions against Russia would have an impact on the economy, the central bank governor responded that those imposed so far will not have a sizeable impact, adding however that he could not predict the impact of potential future sanctions.

On whether there would be capital outflows from closing the accounts of Russian nationals, he said that “our banks have very satisfactory levels of capital and one of the best levels of liquidity in the EU”.

He also stated that closing the accounts of some bank customers “does not affect the bank or any of its other customers at all,” stressing that what is happening is that some accounts, “among the hundreds of thousands on our system,” are being frozen.

Herodotou explained that closing a bank account is one thing and freezing it is another, as the latter means the money in it remains in the account, instead of being returned in the case of the former.

At the moment, he said, accounts are being frozen, which “does not allow the return of the money to the people who are subject to these sanctions”.

The meeting between the central bank governor and the president also covered other issues, such as non-performing loans, inflation, and interest rates.

Asked for reactions to the finance ministry’s proposal for banks to absorb some losses to avoid raising interest rates on performing loans, Herodotou said that “whatever banks decide to do must be consistent with European regulations”.

They should also be careful not to do anything that would automatically, due to regulations, count as loan restructuring, he added.

“At the beginning of the coronavirus pandemic, the central bank planned the first suspension of loan instalments across the board, but we took care to avoid this move counting as a restructuring based on European regulations,” he said.

Any move now decided by the banks must achieve the same, as a restructuring would be one step closer to those loans being categorised as non-performing, he added, explaining that after two restructurings, loans are automatically classed as NPL.

Asked if something similar to what was done by the Greek banks, which froze loan rates, was possible. Herodotou said that the Central Bank is in contact with the Bank of Greece.

“Allow me to be the one in charge of announcing the kind of assurances Greek banks got, and whether they were sufficient, but we do have that insight,” he said.

The central bank governor could not give any numbers on whether there is an intention for another interest rate hike on behalf of the European Central Bank.

Instead he said he asked for a wait-and-see stance until the latest data on the Eurozone economies for March and April are announced, on the basis of which it will be decided whether a new interest rate increase is needed and how much it will be.

He said that the rate hikes that have been made are “starting to have an impact on inflation” and added that “interest rates are the only tool we have to deal with rising prices.”

Herodotou said that price increases have nothing to do with supply issues.

“It started with energy prices, but since last summer this inflation has penetrated the entire economy, because the entire economy uses energy, and this it affected demand, and all other sectors of the economy,” he said.

“The ECB started raising interest rates from July onwards, because until July it was on the supply side, and after July we saw that it found itself in the rest of the economy and households and businesses had to be protected,” he added.

On an optimistic note, he said that all forecasts show a significant reduction in inflation by the end of 2023, because interest rate changes take around 16 to 18 months to have an effect on the economy.

“When inflation goes down, interest rates will go down,” he said.

Equating interest rate hikes to a “cure” for continued increases in prices, he said that they will decrease when inflation reaches satisfactory levels, which are 2 per cent and not 8 per cent, as was recorded last year in Cyprus.

Asked whether there would have to be an increase in deposit rates for the aforementioned cure to work, Herodotou said that the central bank has made some interventions which will be formally announced in due course.

“I also had bilateral contacts with some banks to begin the increase in deposit rates, and I think you will see the first results today”, he concluded.