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From the Managing Director's desk

Cyprus: does the boomerang really come back sometimes?


01/10/2013

varadi_laszlo_400To be brief and to the point, the answer is yes. And there are several layers to this categorical yes which are worth exploring and taking into account when analysing the way things may develop in the future. It would appear from many points of view that this year is going to be about Cyprus in European business circles, even if, albeit more than six months ago, the island’s banks closed down for two weeks – unheard of in modern business history – and they only operated under severe restrictions once they reopened.

Let’s return to the beginning of the financial crisis in Cyprus: in February and March of this year the Cypriot government and banking sector came under heavy criticism, as the German government accused them of being a haven for illicit funds, arriving primarily from Russia and being deposited in the country’s banks. For this reason, when Cyprus officially approached the Union for financial aid, the Merkel administration sent out this loud and clear message: we do not want to help Russian money launderers; illicit funds can not be saved or aided with EU funds. So, let the money launderers perish in Cyprus! If the banks can not be saved from other sources, then it is necessary to dip into the amounts deposited in the banks, if that is in the bank’s interest. And the more well-to-do really did lose out, with LAIKI Bank customers losing 100% of amounts over 100 000 EUR, while “only” 47.5% was taken from those banking with the Bank of Cyprus.

The recipe seemed so good that the EU immediately passed a directive whereby in the future other countries would also be able to apply a similar type of deposit confiscation, if required in the sacred procedure of saving the banks. Quite simply, using Cyprus as a tiny laboratory, they had carried out an experiment to produce the technology which in the future could be applied anywhere, irrespective of the country, size or geographical location. Naturally, at this point the “star economists” start queuing up to have their say, claiming that struggling banks, companies and individuals should be allowed to go bankrupt, as bankruptcy is a natural part of economic life. I didn’t put the term star economists in quotation marks by chance: where were these great minds when the banks started irresponsibly handing out credit like there was no tomorrow, and the population couldn’t get enough of it? They had 50 or 60 years to open their mouths, as the US started running into debt after the end of the Second World War. This is a country where the average person spends 1.5 dollars for every dollar they earn. Bankruptcy can be the only possible consequence, and you don’t need to run an economics department at Harvard to see that.

Getting back to Cyprus, the loss of bank deposits naturally caused a huge outcry, even if there were many among the “losers” who didn’t dare to open their mouths, fearing that it might become known that they had offshore money. The exact figures have not been revealed, or rather the press have published so many conflicting reports about the amount of money that was deposited in the Cypriot banks that there is no clear picture. What is known is that there were tens of billions, a significant part of which was Russian money “parked” on the island. The Cypriots came up with a rather original way of compensating the customers of the Bank of Cyprus: those who lost money were given shares.

From here, events took an interesting turn, as following the rounds of buying and selling, the proportion of Russian shareholders in the bank now exceeds 60%! That is, the boomerang has come back. Mrs Merkel didn’t want to help the Russian money launderers, but now the most important company in Cyprus is in Russian hands. Following the merger with what remained of the LAIKI Bank, the Bank of Cyprus now controls a larger slice of the financial market. Every state organisation and all of the largest companies and hotels hold at least one account in the Bank of Cyprus, while there probably isn’t a family on the island that doesn’t have an account there. So after all this, anyone who looks in to the bank’s books and records will get a pretty clear picture of the real financial situation and processes in Cyprus, as well as the indebtedness of certain individuals.

Europe begrudged Cyprus the money needed to save the financial system while at the same time they were squandering hundreds of billions helping the Greeks. Their thriftiness led to the financial system of one of the EU members, albeit in their view an insignificant one, apparently falling into the hands of Russia, the country most feared by the EU. On September 10th, the Bank of Cyprus held a general meeting of shareholders, in which 6 Russians were voted on to the 16-member board of directors. Vladimir Strzhalkovskiy, former vice-president of the Norilsk Nickel company in Russia, was elected vice-president.

Two things are very apparent along with this gain of ground by the Russians. Firstly, presumably huge interests are at stake in the background, and this whole affair is probably not just about the banks and the Cypriot financial system. Norilsk Nickel is one of the most strategic companies in Russia. In 2012, when he left his post as vice-president, Vladimir Strzhalkovskiy received a 100 000 000 USD (yes, 100 million US dollars!) golden handshake. This was the biggest payment of its kind ever in Russia. The relationship with the Kremlin is excellent, as it is with the president himself, and I assume that the reader here can also put 2 and 2 together and draw the necessary conclusion. The other thing which is very noticeable is that the Cypriots are welcoming the Russian presence in the bank. They naively see the Russians as the “saviours”, and expect the situation to stabilise because of them, whereas there are those on the island who believe that the Russians have no intention of operating the banks, and merely want to withdraw the money and then take French leave. One thing is certain: whoever has control of the Bank of Cyprus can check and have a hold on the whole island through its financial affairs.

However, not everybody is happy about this. At the time of writing this article, Panicos Demetriades, the president of the Central Bank of Cyprus, had not yet approved the newly elected Russian members of the board of directors of the Bank of Cyprus, including the vice-president. It is a point of fact that elected officers can only take up their posts if the supervisory body, to wit the Central Bank, approves their suitability and aptitude. The president of the Central Bank made it quite clear in one of his statements: the decision is in his hands, and without him no-one in Cyprus can be a banker. The situation has become so acute that even Nicos Anastasiades, the country’s president, has brought the importance of the matter to the attention of the president of the Central Bank, pointing out just how pressing a swift resolution to the question is, not only for Cyprus but for the whole international business world. Both the markets and the investors would like to see some calm, but this can only be achieved if the Bank of Cyprus finally resumes normal operation, which in turn can only truly be achieved if the management is in place. The president literally said that the Bank of Cyprus is not a children’s toy, highlighting the seriousness of the situation and the responsibility of the decision. The Central Bank, however, retorted that politics and the president should not interfere with the bank’s independence. The actions of the president of the Central Bank have also been criticised by the people and local businesses, with many claiming that he is not up to the task of running the Central Bank and that it would be in the interest of the country to replace him. However, as an elected official he can not simply be removed from office. One possible way of removing him would be through the Supreme Court, who could issue a decision declaring the unsuitability of the president of the Central Bank. It is not quite clear what prompted the decision, or what pressure influenced him, but finally, 14 days after their election, the president of the Central Bank gave his approval to the appointment of all the new members of the board, so the real work could begin.

So that is where we stand at the moment. The markets’ trust of Cyprus is perceptibly low. This is not at all surprising, as what happened in Cyprus was unprecedented in the financial world, and not even insiders are able to explain part of it, let alone the whole thing. As Cyprus was an extremely important jurisdiction for us at LAVECO Ltd., as soon as the crisis erupted, we immediately began to look for alternatives. It soon became clear that the crisis was affecting the financial sector and institutions, while the Registrar of Companies and other state organisations resumed work as normal after March 16th. We had to look for an answer, therefore, to the question how and where we could open bank accounts for those companies who up until now did their banking in Cyprus.

We travelled the world, from Malta to Mauritius, via Singapore. We were amazed to discover that there are now very few places in the world where they will still open accounts for companies which are not registered there, or if the beneficial owners do not come from that country, or if the company does not actually carry on any activities there.

We spent an awful lot of time and money on this project, and eventually had to face up to the fact that in Europe there are currently two countries where it is still comparatively easy - relatively speaking - to open accounts which can be used for everyday banking transactions for a foreign company. One of these countries is Cyprus. Recession or not, the Cypriot banks still open and manage company accounts quickly, relatively free from bureaucratic obstacles and with fees which are not unacceptable irrespective of whether the company is registered in Cyprus or abroad, whether the beneficial owners are local or foreign, and even if the company activities are not carried out on the island. 

So, has the boomerang come back here too? It would appear so. No matter how hard the EU tries to exclude offshore funds, it simply isn’t going to work. Quite simply because there is nowhere else for the funds to go to, and the Cypriots certainly have no intention of turning their backs on what is for them „a nice little earner.”

I’m sure that many of you reading this will be shaking your heads and don’t even want to hear the word Cyprus. I can understand this. It will take time for people to come to terms with this situation, and it is also necessary to wait and see what the Russians plan to do with the Bank of Cyprus.

There is an even more important lesson to be learnt in the field of international crisis management: a crisis can never be resolved without first asking the major owners what they want. The major owner in Cyprus is Russia. Without Russian tourists and Russian money, this small country can not even begin to exist by itself, as the EU-IMF-ECB troika will never provide them with the funds required to survive as an independent country within the EU.

This then brings the American question to the fore. When the US financial situation turns critical, the government will be left with no option but to approach the Chinese to discuss the matter with them. The Chinese are the ones who have invested most heavily in US state bonds, so it will not be possible to resolve the financial problems in America by going behind their backs. The boomerang comes back once again. But let’s be optimistic and hope that it will be a long time before this happens.

Happy crossword and riddle solving!

With warmest regards

László Váradi
Managing Director
LAVECO Ltd.

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