By Bill Wilson — When the original terms of taxing bank deposits in Cyprus was announced on March 18 — wherein deposits less than €100,000 ($128,570) would have faced a 6.75 percent levy and those with more a 9.9 percent tax — it was quite clear the cost of bailing out the banks there was going to fall largely on wealthy Russian depositors who had parked their money there.
At the time, Russian President Vladimir Putin was opposed to the deal, calling it “unfair, unprofessional and dangerous.”
Prime Minister Dmitry Medvedev blasted the tax, saying, “This practice, unfortunately, was very well known and is familiar to many Russians from the Soviet period, when money was exchanged with coefficients and never returned.”
The original deal was defeated in the Cypriot parliament, and in the interim, Russia rejected the opportunity to bail out Cyprus itself. Then, just days later, a second deal was announced — this time a 30 to 40 percent tax on deposits over €100,000.
For the Russian depositors in question, this was an even worse deal than the first one. Yet, suddenly Russia embraced the new deal. The only response from the Kremlin was to announce that it intended to restructure a €2.5 billion ($3.2 billion) loan with the government of Cyprus with either a lower interest rate or an extension of the life of the loan.
Putin spokesman Dmitry Peskov said, “Considering the decisions adopted by the Eurogroup, Putin considers it possible to support the efforts of the president of Cyprus and the European Commission aimed at overcoming the crisis in the banking system of this island state.”
Quite the turnaround. A nearly 10 percent tax on Russian depositors to bail out Cyprus’ banks was “dangerous,” but a 30 to 40 percent levy was suddenly acceptable to Moscow, and on top of that the Cypriot government got a loan extension, too? What changed? Is Putin going soft?
Perhaps Russia simply feared the spillover effects of a euro collapse. If Cyprus had turned to Russia for aid, for example, and was prompted to leave the Eurozone in the process — which could have set off a wider financial crisis in Europe — that could have been as damaging to Russia’s economy as Europe’s.
As the Financial Times’ Ian Bremmer notes, “Russia’s largest trading partner remains the EU; Moscow is dependent on revenues from gas sales to Europe. The bottom line: Moscow has far more to lose than gain from aggressively reacting to the crisis.”
That certainly would make sense. And there may be nothing more to Moscow’s seeming capitulation on the issue. In that case, the risks of fighting for the Russian depositors may have been deemed to be too great, and the reward for reclaiming them too minimal.
On the other hand, perhaps Putin got something in return for embracing the depositor haircut and agreeing to restructure of the €2.5 billion loan to Cyprus.
For example, expansion of Russia’s naval capabilities has been a top priority for the nation ever since Peter the Great in the 17th Century. Since that time, the construction of Russia’s ports over the years has proven to be of critical strategic importance.
In 1704, Peter founded St. Petersburg as Russia’s gateway to the outside world.
By the time of World War II, the port of Archangel, which Peter also founded, and Murmansk, which was built by the Romanovs, were both instrumental in the success of the Allied Lend-Lease program that supplied Soviet Russia during the war.
Supplies from the Arctic convoy, which landed at Archangel and Murmansk, assisted the Soviets in lifting the Siege of Leningrad (St. Petersburg). If Leningrad had fallen, the northern supply route could have been rolled up by the Nazis and certainly Moscow was next on the list.
The Crimean War in the 1850s was fought by Great Britain, France, Sardinia, and the Ottoman Empire against the Russians primarily to keep them from establishing naval dominance in the Mediterranean Sea. The effort succeeded.
But is not forgotten. Could Putin be attempting to correct this outcome through the establishment of such a port in Cyprus? That might explain the Kremlin’s seeming silence on an issue that hit so close to home while they work to turn lemons into lemonade.
Combined with China’s purchase of the port of Piraeus in Greece, such a move on Cyprus would amount to an encirclement of Europe — an opening of a new southern flank to potentially challenge NATO in the future. Something to consider, in the least.
But, perhaps with Russian deposits still trapped in Cyprus, Putin through acquiescing to the latest deal is merely be playing for time to help the wealthy Russians, who the Financial Times’ Bremmer calls “one of his most loyal constituencies,” to get the rest of their money out of the banks there.
Whatever the case may be, the world does not take Putin as one to roll over so lightly after taking such a strong stand. Perhaps he did get rolled, but we would not be surprised if the Russian leader still has an ace up his sleeve.
Bill Wilson is the President of Americans for Limited Government.
Source: Americans for Limited Government