Who Needs EUROs We Want Russian Rubles.

English: THE KREMLIN, MOSCOW. Before the start...

Options.

A very good thing to have if you are a Euro Zone member in search of a bailout.

It’s especially good if you also happen to be an ‘onshore’ financial centre with a corporate tax rate of 10% – the lowest in Europe – and none to fussed about Europe’s bailout ‘strings’.

Cyprus is in a bit of a pickle.

It needs money – a lot of it- and it needs it fast. The country’s Deputy Minister for Europe estimates that it needs the equivalent of EUR1.8 billion to prop up its Popular Bank, hard hit by Greece’s implosion, though according to the Deputy Minister, the country would take up to EUR4billion ‘to be on the safe side’.

You would have thought that a Euro bailout for Cyprus would be a foregone conclusion and theirs for the asking, not only because Cyprus is part of the European Union (EU), but more importantly perhaps because on July 1st this year it assumes the Presidency of the regional bloc.

But the Cypriots aren’t so sure.

In the early days of EU-backed bailouts when Ireland got theirs, it seemed to be just the ‘tonic’ to quiet the flutters in the domestic and the international markets while adding strength and credibility to an economy tottering on the brink of collapse.

Now that the markets have built up a ‘tolerance’ to the EURO-money linctus, as illustrated by their apathetic response to news of Spain’s bailout, in the words of Cyprus’s Deputy Minister “Euro money now has negative connotations” and points not to an economy poised for quick recovery but one that is not insulated from economic and political free fall even with the bailout funds in hand.

With general elections due in February next year, the Cypriot government is not anxious to experience what happens when EU-style austerity is foisted on a country.

Cyprus has another option – Russia.

This is not the first time that the Cypriots have needed a bailout.  They got one last year from Russia with no apparent conditionalities. That’s appealing to Cyprus not only because they can take the money without any interference from the Kremlin in their domestic affairs but also because Russia is the island’s lucrative ‘hinterland’ for its successful international financial services sector.

Naturally as creditor Russia would have even more incentive to guarantee the continued viability of its strategic offshore partner.

In fact Russia has already put measures in place to ensure that Cyprus earn enough to pay its pre-existing debt. Two years Russian President Medvedev signed a protocol to its 1998 tax treaty with Cyprus and confirmed that the country would be removed from its tax haven ‘blacklist maintained by Russia’s Central Bank.

The ‘blacklist’ was part of an amendment to the Russian tax code which introduced a tax exemption on the repatriation of dividends from foreign subsidiaries of Russian companies, but specifically excluded Russian subsidiaries based in the fifty-four territories and countries on its so-called ‘blacklist’.

To re-affirm their good relations, in addition to the protocol, President Medvedev also signed fourteen new agreements to enhance economic relations with Cyprus.

A Prisoner’s Dilemma

Cypriot Finance Minister Vassos Shiarly says he will exhaust all options to seek the best possible terms for his country’s economy. Others are confident that the government will ‘not wait to the last day’ to find a solution to Popular, but Moody’s Investor Service has this week cut the credit rate on Bank of Cyprus; put Popular on review for downgrade; and says that Cyprus’ third bank – Hellenic – is also due to be downgraded.

The ‘last day’ may be around the corner, but Cyprus, with all of its options, may yet face ‘Hobson’s choice’.

Advertisements

One thought on “Who Needs EUROs We Want Russian Rubles.

  1. I blog quite often and I really appreciate your content.
    Your article has really peaked my interest. I will take a
    note of your site and keep checking for new information about
    once per week. I subscribed to your RSS feed too.

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s