Cyprus, Russia – and Syria

March 21, 2013

Just as I was getting used to thinking of Cyprus as the Mediterranean clime where Hezbollah agents go to spy on ‘the Jews’ and Rami Makhlouf is granted citizenship, I awaken to the fact that future of the eurozone may in fact depend on the good graces of Vladimir Putin. An island nation with a ten percent corporate tax rate and no-questions-asked banking protocols is hardly the new “sick man of Europe,” as it’s been called. It’s a national Rick’s Cafe, where everyone professes himself shocked, shocked to discover that illicit or suspect activities have been going on all this time.

The oligarchs may cut the first check, but they’ll still have the last laugh. Russian wealth now accounts for a third of Cyprus’ entire banking sector, with Russian commercial, institutional, and individuals’ deposits – some 31 billion USD – exceeding Cyprus’ GDP.  Much of this money is thought to have been stolen or laundered. There are, according to a leaked and much-discussed German intelligence assessment, around 40,000 shell companies in Cyprus, all registered with no background checks as to where their capital came from. Larnaca was a popular landing post of many of the state officials and mafiosi involved in the 230 million USD tax fraud perpetrated against the investment bank Hermitage Capital. The fiasco culminated in the arrest, murder and now posthumous trial of Sergei Magnitsky, the whistle-blowing attorney who exposed the fraud and was then blamed for masterminding it. In a perverse twist of irony, Ivan Tchakarov, the chief economist at the Russian investment bank Renaissance Capital, told Sky News that about 40 percent of capital outflow leaving Russia is “corruption money.” He did not add that Igor Sagiryan, a former president of Renaissance Capital, has been implicated in the transnational crime group behind the Hermitage fraud and Magnitsky affair.

Nicosia has harbored no reservations about becoming a warm-water oblast of the Russian Federation. In September 2010, 25 foreign businessmen were granted Cypriot citizenship. Most of them, according to the Cyprus Mail, were Russian. This includes billionaire Alexander Abramov, the second biggest shareholder in Roman Abramovich’s steel and mining giant Evraz, which is listed on the London Stock Exchange. As Cyprus’s then-interior minister put it, Abramov had rendered “the highest level of service to the Republic of Cyprus” by arranging for Evraz’s purchase of stakes in several Cypriot enterprises. According to a British High Court judgment from 2008, Abramovich himself uses the Cyprus-based company Meritservus as a nominee or director for many of his own pseudonymous entities, especially those that control his “livery,” which is to say his mega-yachts and helicopters.

Cyprus has a population of around 800,000; the per capita income is around 27,000 USD. So it won’t shock you to discover that most of the deposits in Cypriot banks in excess of 130,000 USD are foreign deposits. For Russians, an austerity troika used to consist of the names Bukharin, Rykov, and Tomsky. Today, they’re the European Commission, European Central Bank, and the International Monetary Fund, all of which decided that it should be the foreign depositors – chiefly, the Russians; specifically, the billionaire oligarchs – who ought to assume most of the burden of any bailout package necessitated by Cypriot banks’ reckless investment in Greek bonds.

On Tuesday, the Cyprus parliament resoundingly rejected the treatment prescribed: a 13 billion USD IMF/EU credit, offset by a 7.5 billion USD tax (or ‘haircut’) on bank deposits, with a 9.9 percent tax on all deposits above 130,000 USD and a 6.75 percent tax on smaller ones. A late revision to the plan, offered by the newly elected center-right president Nicos Anastasiades, stipulated that no deposits under 25,800 USD would be taxed at all (presumably, this was a vain flirtation with populism as the average Cypriot probably does not have in his checking or savings account more than he makes in a year.) In effect, the Russians were being asking to pay a 2 – 3 billion USD bill to rescue one of their preferred offshore tax havens. As Moscow-based oligarch watcher John Helmer put it on his blog, the troika’s program constituted “one of the biggest attacks on Russian financial interests since the US and the NATO alliance went to war in Libya, killing Russian arms supply charges, infrastructure contracts, and past-due state debt.” So while Angela Merkel might not do humanitarian interventions in the Middle East, she still knows how to hit Putin where it hurts the most.

For his part, the king of the Kremlin has ostensibly declared war on his subordinates’ keeping assets offshore, yet now rejects an initiative that would certainly speed ‘de-offshoreization’ along nicely. He called the EU/IMF plan “unfair, unprofessional and dangerous” even as his own deputy minister of finance thought the package was the best that Cyprus could expect to get under the circumstances. Cyprus Finance Minister Michalis Sarris is now rumored to be traveling to Moscow to see if Russia will extend the terms of a four-year loan it previously made to Cyprus for 3.2 billion USD (at an interest rate of 4.5 percent) and to possibly even offer the Kremlin a buyout stake to one of the most imperiled national banks, Laiki. Gazprombank, the financial arm of the largest gas company in the world, is reported to be eyeing Laiki in the hopes of profiting from Cyprus’s natural gas reserves. But for every long-term prospect, there’s a short-term condition. On Wednesday, Sergei Glazyev, an advisor to Putin, suggested that if Russia were to finance Cyprus’s debt restructuring, then Cyprus should fall under Russian jurisdiction.

What the international financial press has missed in this frenzied geopolitical comedy is how intimately tied up the Cyprus-Russian financial nexus is with the unraveling nightmare in Syria. According to the Wall Street Journal, one of the most vulnerable Russian financial institutions to be affected by a possible Cypriot default is VTB, the second largest bank in Russia. Splintered off from the USSR’s Russian State Bank (Gosbank), VTB is today 75 percent state-owned with a presence in 19 countries. In 2011, it took in the equivalent of 712 million USD in deposits from French and German pensioners, making it a rather significant retirement fund for Western Europe. It is also the only main Russian bank to have a licensed subsidiary in Cyprus, the Russian Commercial Bank, which controls some 5 percent of VTB’s total assets. This is why VTB’s shares fell 6.5 percent on Monday, after the news of the announced bailout package hit.

In recent years, VTB has been dogged by a host of international lawsuits featuring allegations of internal corruption (at worst) or extremely lax standards of due diligence (at best). Critics say it operates as little more than Putin’s ATM, or charitable voting-buying trust. In 2007, for instance, when the bank went public on the Moscow Stock Exchange, Putin decided to offer ordinary Russians the chance to become minority shareholders in what he termed a “stable” investment. The so-called “People’s IPO” was a people’s disaster; the stock prices dropped the day after the IPO, then plummeted a year later in the maelstrom of the global economic crisis. Last year, just as he was set to return to the presidency, Putin offered to buy back the original IPO investors at the original stock price they paid, with a ceiling of 500,000 rubles (16,200 USD) worth of shares per shareholder. This prompted fury from institutional investors who, not subject to this act of state largesse, were subsequently asked to part with 385 million USD to satisfy the Kremlin’s demagogic impulse, a fact well worth keeping in mind in light of Putin apparent displeasure with “unfair” terms of troika. (You can read all VTB’s history of scandals in a report I edited, available here.)

Subsequent to the Syrian uprising, Assad’s former fiance minister Mohammed al-Jleilati praised Moscow for having “given us a hand, especially in the financial sphere.” It won’t surprise you to learn that VTB was one of the banks offering fraternal assistance. In 2005, it signed a Cooperation Agreement with the Central Bank of Syria for “developing and strengthening mutually reinforcing cooperation between the banks, including direct contacts in trade finance and investment without any other bank being involved.” The Central Bank of Syria has since been sanctioned by the EU, but, according to the Financial Times, VTB and other state-controlled banks are still happily trading with it. Moreover, several months ago Bivol, a Bulgarian news outlet, produced what it claimed was a hacked communique between a Syrian security branch and Sergey Avakov, a VTB executive. The message, which is undated, appears to show Damascus raising its deposits to over 2 billion Euros. (VTB never responded to Bivol’s written request to verify the authenticity of this communique.)

Last June, I discovered another Russian-Cyprus connection with immediate impact on events in Syria. Just as the Houla massacre was getting underway, a Russian ship called the Professor Katsman was pulling into the port at Tartous. This vessel, which Western diplomats alleged was transporting arms to the Assad regime, was owned by a Russian-Dutch outfit called Universal Cargo Logistics Holdings (UCL), which itself is owned by Vladimir Lisin, Russia’s second wealthiest businessman, with a net worth of 15.9 billion USD, if Forbes is to be believed. Lisin was also the vice president of Russia’s Olympic Committee for last summer’s games in London, a title that came with diplomatic status. Like many Russians who prefer to earn at home and play and spend abroad, Lisin owns several expensive properties in the United Kingdom, including a castle in Scotland. Yet his ownership of the Professor Katsman wasn’t so transparent: UCL Holdings controlled the ship through a Matryoshka doll-like series of offshore shell companies. One of these was based in Cyprus. Syrian opposition figures who have since petitioned the EU to investigate whether or not the Katsman, and by extension Lisin or his company, might have violated sanctions were met with indifference, I’m told. Lisin has denied he did anything wrong. In a semi-legible press release, UCL Holdings claimed that “[a]t the moment we don’t have any prove [sic] that Profesor [sic] Katsman had delivered to Syria anything of a military nature that can be used against civilians.” Though here it’s worth noting that for the first year or so of the Syrian revolution, a main contention of the Russian Foreign Ministry was all materiel being delivered to Syria was not for use against civilians; this included, in the Russian definition, attack helicopters.

It may be going too far to say that bankruptcy for Cyprus would only tighten the economic noose around Bashar al-Assad’s neck, but whatever ultimately happens, “debt restructuring” affords an excellent opportunity for finding out who’s been up to no good in ‘Limassolgrad’ and facilitating barbarism a few points of longitude away, right under the EU’s nose.