The amount of money lost by Russian companies and individuals following the decision by Cyprusto impose a haircut on deposits above the European Union-insured 100,000 euros ($127,000) level is difficult to estimate, but analysts say Russian banks are the most likely to benefit over the long term.
As banks on the island, which have been closed for nearly two weeks, are scheduled to reopen on Thursday, the Cypriot government has said it would introduce capital controls in order to prevent a run on deposits.
Many of these deposits – around 19 billion euros according to IIF estimates quoted by analysts – are from Russia and Ukraine and while media reports talked about Russian oligarchs squirreling money away or about tax evasion and money laundering, the situation is more complex, with corporations and middle-class depositorsnow emerging as the most likely victims.
Jean-Gabriel Arqueros, senior executive vice president GMM Russia and CIS for Societe Generale Private Banking, said that Russian businesspeople have had a historic relationship with Cyprus dating back to the early 1990s when the country initiated privatizations of its Soviet-era industries but its legislative and banking system lagged behind.
"Russian law was not adapted for privatization. That's the reason why a lot of Russian companies are held by Cypriot companies," Arqueros told Emerging Markets in an interview.
Cyprus was the first country to sign a treaty to avoid double taxation with Russia, he said.
"The treaty between Cyprus and Russia is perfectly legal and correct. A lot of countries now, like Switzerland, like Luxembourg, like Holland, have signed such treaties. But at that time, in 1993-1994, these countries didn't have such treaties," Arqueros said.
He added that this "historical situation" and not the fact that Russians are trying to launder money or engage in "casino" investment is the reason for their high deposits in Cyprus.
WATCHING THE RUBLE
Arqueros does not believe that the haircut that will be imposed by the Cypriot government will seriously affect Russian companies that have accounts there.
Tatiana Orlova, strategist for Russia and CIS at RBS, agrees that the impact on the Russian economy of the Cyprus bailout will not be too big.
“The money that we are talking about is the money which has already left the Russian economy, so it wouldn’t weigh on the ruble market. This is something that has been already lost, so to speak,” Orlova told Emerging Markets in a recent interview.
In a research note about the effects of the freeze on deposits in Cyprus, Orlova wrote that what could affect the ruble's performance over the short term might be the temporary capital controls, which may impact the ability of Russian exporters to repatriate revenues from exports.
"Those Russian companies whose settlements are carried out via their accounts in Cyprus will likely continue to feel the pain for as long as their accounts in Cyprus-based banks remain subject to capital controls," she added.
Over the longer term, the Russian banking system may benefit if the banking connection between Cyprus and Russian businesspeople is severed, according to Orlova.
Arqueros said that what the Russian corporates and entrepreneurs wanted to see above all was a solid and safe banking system, and one that had enough sophisticated products to satisfy their investment needs.
"The consequence is that people will go more and more for safety," he said, and investors are going to go to banks perceived as strong and solid in any jurisdiction.
RUSSIAN BANKS
"If as a Russian I believe that Sberbank and VTB are solid and safe banks – and I think that a lot of Russian people believe that, they are state banks and the situation of the Russian state is very good – I will put my money there," Arqueros said.
"The only problem would be if these banks are not sophisticated enough to give me the service that I need, maybe not yet."
Another key factor that Russians will consider in deciding whether to put their money back into Russian banks will be confidence in the rule of law and political stability in their country, he added.
"In terms of safety, solidity and sophistication, Russian banks are in waiting [for Russian money to come back to the country]. In terms of confidence in the country, I don't know. Some people will be confident, others not," Arqueros said.
Orlova believes that the Cyprus debacle "may redirect Russian capital away from the eurozone."
"The money owned by wealthy individuals could flow into Swiss bank accounts, while the round-tripping of the corporate revenues will likely continue via other offshore jurisdictions outside the eurozone," she said.
Deposits in Russian banks were around $752 billion, or 37% of GDP, at the end of January, of which $453 billion were household deposits, according to RBS, which noted that household deposits in Russia have been growing at an average rate of 24% year-on-year over the past four years.
- Follow us on twitter @emrgingmarkets