An Old, Small Opening Salvo v Russia? 2013 Bank Bail-In “increasingly has the smell of a proxy Germany v. Russia struggle through Cyprus”

Your humble blogger took a gander through NC archives, to see if her recollection that the cramdown of Cyprus depositors to bail out its banking system, a measure never before or since taken in the Eurozone, could be viewed as primarily intended to hurt Russia. While Europe sticking to a new bad policy of “no bailouts” which ultimately can and here did mean depositors take losses looks like the proximate cause, a widely-touted rationalization at the time was that Cyprus was a hotbed of dirty Russian money and therefore its bank depositors didn’t deserve to be treated well. Not only was that false, but big economic significance of Cyprus to Russia was as a conduit for foreign investors, including respectable multinationals like BP, to make investments in Russia. So the damage to Cyprus almost certainly had an effect on Russian investments, but how much and how quickly Russia and interested commercial parties came up with new approaches is over my pay grade.

I very much welcome informed reader comment. We covered the non-bailout negotiations in depth at the time, since the deposit haircut was a terrible precedent. But it appeared depositors in other Eurozone banks concluded that bad things happened only to depositors in small and weak periphery countries or were otherwise stupid. Recall that Spain had within the last year come close to doing a bail in via having its banks aggressively pitch a “better than deposits” product: preferred stock that paid more interest than deposits with money market fund type liquidity. Then oopsie! These preferred stockholders took haircuts of 16% to 46%. That was admittedly less brutal than the 70% cramdown administered to holders of similar paper at Allied Irish Bank the year before. But yours truly is pretty sure the bank itself didn’t aggressively hawk these instruments to trusting depositors shortly before goring them.

A quick, high level recap. Cyprus was vulnerable to mishap by having an outsized banking system, with bank assets at 9x GDP. That sounds really terrible, but Luxembourg has no real economy to speak of and then had a banking system with assets at 21x GDP. And Cyprus was in large measure a victim of its big bank’s exposure to Greece. From a 2012 post:

It’s key to understand that this crisis was created by the Troika. Cyprus asked for a bailout nine months ago and the deadline is a bond payment this June. And while it has become fashionable to pin the blame for this mess on Cyprus, the backstory is more complicated. From

Not all the banks are in the same condition.

(a) Cyprus has two money-center type banks: Laiki (Popular) Bank and Bank of Cyprus.

(b) Laiki was purchased by a Greek vehicle (Marfin Investment Group) backed by Gulf money. Marfin’s purchase of Laiki took Laiki from being a fairly conservative local bank to being highly exposed to Greece. Laiki is definitely insolvent and needs to be restructured.

(c) Bank of Cyprus has been more conservative vis-a-vis Greece, but still has meaningful exposure. It is conceivable that, given time, Bank of Cyprus could survive.

(d) Beyond the main two banks, there is Hellenic Bank (a much smaller bank with much less Greek exposure), Cyprus Development Bank (no Greek exposure), the Co-ops (no Greek exposure) and the Cyprus subsidiaries of foreign banks (aka, Russian, English, etc banks), also with no Greek exposure.

(e) All the local oriented banks (BoC, Laiki, Hellenic, Coops) have exposure to the local real estate market that went through a bubble during the 2000-2009 period. This exposure however is not short-term and could be resolved over the period of years. It is a problem, not a crisis, and is offset by the fact that the two main banks have quasi-monopolistic earnings power locally. Given the time and some financial represssion (a la the United States) and the local issues would be manageable.

In other words, the bank that is the epicenter of the problem was driven into the ditch by foreign buyers. Now admittedly, the local bank supervisors did nothing to stop that, but can you point to a single national bank regulator (ex the Canadians) that put much in the way of constraints on their banks prior to the crisis?

And the idea that Cyprus is a hotbed of Russian Mafia money also appears to be exaggerated. This looks to be a combination of a need to scapegoat the latest supplicant to the Trokia plus Anglo-German prejudice against Central and Southern Europe.

In fact, only €20 billion of the €70 billion in bank deposits were from Russians. Remember that there were many Russian retirees in Cyprus, so they would be well represented in this group. Similarly, Russian businessmen serving the Cyprus market or acting as facilitators of investment into Russia via Cyprus would have offices and therefore deposits in Cyprus.

Companies investing in Russia through Cyprus would presumably need a Cyprus legal entity and therefore bank account. The reason for foreign businesses to utilize Cyprus is that its courts operate on an English-law basis and contracts written for inbound Russian investment would specify English law as governing law. And my understanding was that the Cyprus courts had a good reputation. I had a colleague who as a very small fry was extremely careful about his exposure when doing deals in the CIS. He would regularly opt for disputes to be adjudicated in Cyprus.

And since when is anyone upset by money laundering/tax losses outside their jurisdiction? Have you ever heard gnashing of teeth and rending of sackcloth over Citigroup’s long-standing and very large Latin American wealth management business, which is widely recognized to consist significantly of what is politely called flight capital? How about the notorious Belgian dentists taking suitcase money to Luxembourg?

Wikipedia is uncharacteristically even-handed in its recap:

A minority proportion of it was held by citizens of other countries (many of whom from Russia), who preferred Cypriot banks because of their higher interest on bank account deposits, relatively low corporate tax, and easier access to the rest of the European banking sector. This resulted in numerous insinuations by US and European media, which presented Cyprus as a “tax haven” and suggested that the prospective bailout loans were meant for saving the accounts of Russian depositors.

So at first blush, the rough handling of Cyprus looked to be driven by Germany’s finance minister, Wolfgang Schauble, being presented with a situation where he could give his wrathful tendencies free rein. As we and others chronicled at the time, with considerable alarm, the Trokia was determined to make the Cyprus banking system eat losses, even though they were largely Greek in origin. And the reason the depositors were bled was that if you were going the bail-in route, there were no other acceptable deep pockets. From a March 2013 post:

In an excellent and important post, “A stupid idea whose time had come,” Joseph Cotterill of FT Alphaville explains why the axe fell on the depositors. First, have a look at the balance sheet of one of the two big (and about to fall over) banks:

Notice there is pretty much squat in the way of equity and senior debt. The “other liabilities” may be secured. So then we get to liabilities to central and other banks. The liabilities to central banks are not going to be haircut; that is part of the “private sector participation” premise. Remember, banks in periphery countries have been pledging any asset the ECB will take to it, and any stuff the ECB won’t take to their own central bank. In the case of the Cypriot banks, the exposure is almost entirely that of the local central bank. Again from Cotterill:

As of January, the Cypriot central bank was extending around €9bn of secret liquidity in return for collateral no longer accepted at normal ECB liquidity ops. Much of it (it’s naturally difficult to determine how much) was probably going to Laiki.

Now remember, that’s €9 billion of Cyprus loans to the banks, mainly Laiki, which is junior to deposits, versus the €5.8 billion to be seized from depositors. So why aren’t the loans from the Cyprus central bank being written down and the Cyprus sovereign debt investors taking losses? Well, it turns out it is easier to screw retail customers than it is professional investors:

As it is, there were lots of good reasons why a sovereign debt restructuring did not happen. I don’t want to downplay them. Notably, the fact that the bonds that were best to restructure were governed under English law, and were likely held by the kind of investor who’s willing to litigate. I listed the problems here. Around it all was the inability to get write-downs out of Cypriot domestic-law sovereign debt, because that was held by the banks which already bore big black holes in their balance sheets. Again we come up to something that could be raised in the defence of the deposit levy — local exposure was so great everywhere, that any distribution of losses would have been painful. For the widow depositor, substitute the pension fund holding local-law bonds.

During the negotiations, the Troika made clear it wanted the Cyprus banks to absorb a set level of losses, and didn’t care much about how the math worked. The Cyprus government and the Eurocrats initially discussed whacking both deposits under €100,000, which were supposed to be guaranteed, and a higher expropriation on deposits over that level. The notion of “taxing” supposedly sacrosanct guaranteed deposits freaked out analysts and commentators, who argued that move could create bank runs all over the still-shaky Eurozone periphery.

In the end, deposits over €100,000 were haircut by 47.5%. Mind you, any non-trivial business will routinely have balances over that level. So we and others predicted the obvious: that the bail-in would hit the economy hard:

And big depositors suffered even if their accounts were at sound banks.

This was the thanks Cyprus got for being a good Eurozone citizen and sending €3 billion to help the Greek government.

So far, the Russian angle looks incidental, but when you dig deeper, it appears to be material. Recall in 2011, Russia gave a €2.5 billion loan to Cyprus to keep it afloat. But those funds were for the government, not the wobbly banks. Putin was reportedly ripshit at Russia not being included in the bailout negotiations.

And the Cyprus government turned to Russia for help, including asking them to bail out Laiki and offering up offshore gas assets. Then Prime Minister Medvedev bothered calling a press conference to say Russia had no idea what they were worth and the Turks were not happy (true). 1

As we wrote in a March 20 post:

The cynic in me wonders if the crippling Cyprus international banking business is not simply an accidental by-product, but in fact was the motivator for the ambush of the new [pro EU, pro austerity] President. As the Financial Times indicates, legitimate Russian businesses are scrambling to move their deals to other tax haven centers, like Luxembourg. Remember that Russia is funneling arms to Syria. That means paying arms merchants. I would assume it’s harder to move those payments quietly through banking centers in the US or UK banking complexes than one largely outside it (well, you can always use overinvoicing and other tricks, but I assume that is more cumbersome).

And on March 21, we chronicled a recent rise of non-organic messaging about the supposed Russian position in the Cyprus banking system:

This move by the EU increasingly has the smell of a proxy Germany v. Russia struggle through Cyprus. But why? I’ve had Germans say they think their future is more aligned with Russia than the US. Why go out of your way to alienate a supplier of important resources? I can’t fathom the logic here.

And there are signs the ground for a move against Cyprus was being seeded months ago. Reader Dr. Kevin sent along an article about a Russian tax fraud, Hermitage, and the headline and much of the text tries to make Cyprus somehow responsible. In fact, all the main actors were Russian and the Russian government was the loser. Our Richard Smith happens to know the case well, since it used shell companies formed by the notorious New Zealand incorporator, GT Group. Cypriot banks are known to have been involved, but to the tune of just $31Mn. At least equally at fault: New Zealand, Moldova, the UK, and, of course, Russia. Yet it is Cyprus that is attracting opprobrium (and now, much more).

In fact, if you look at real money laundering (as opposed to tax avoidance of the sort that Apple, GE, Starbucks, and a horde of multinationals engage in through various jurisdictions), Cyprus gets better marks than Germany from the official Council of Europe body that evaluated anti-money laundering measures (cumbersomely named the Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism, aka MoneyVal). See this table (full report here). Notice that Cyprus is one of the few countries that is fully complaint (click to enlarge):

And the propaganda against Cyprus started months ago. I pinged the author of the articles we’ve featured, and he wrote:

Cyprus is (was?), bar none, the best jurisdiction for routing investment into Russia – it has the best treaty rates with Russia and you avoid the Russian tax/legal system.

so, it is practically malpractice NOT to structure investment into Russia as a Cyprus co.

(BP-Russia is a Cyprus company and their partner AAR are also a Cyprus company. So when they were fighting last year, they were having the board meetings in Limassol).


All these articles are the equivalent of “discovering and being shocked by” that 100% of public companies involved in SEC violations or 100% of LLC subs of FT 500 companies engaging in tax structuring were incorporated in Delaware. Obviously, there must be something very shady about Delaware that causes SEC violations, as opposed to noting that *everyone* uses a Delaware corp, whether they are nice, mean or indifferent.

The people who are behind these articles know better and I noticed this about 6 months ago that the drumbeat of these articles started out of nowhere and just kept repeating “cyprus = money laundering for Russia”.

As if the EU just discovered 6 months ago that Cyprus has a tax treaty with Russia…and every country in the EU, the USA that all the governments obviously voluntarily signed.

That is when I knew the setup was coming. Why now? Why so consistent? Even the FT which really should know better has basically not written an article about Cyprus in the last six months without some type of ‘shady Russian’ insinuation.

This is how this test of savings confiscation is being sold in the rest of Europe. “Yeah, I know it looks bad, but it is a special case because cyprus have all this Russian mobster money there so it is fair to take their money”

The ECB has given Cyprus virtually no runway. It’s a deal by end of Monday or off with their heads. Given the difficulty of cobbling anything else together, this would seem to force Cyprus into only being able to structure yet another variant of the “rape depositors” plan.

Back to the current post. So even though Cyprus was likely to have been treated badly by virtue of its small size and northern European prejudice against its south, the “not letting a crisis go to waste” appears to have resulted in Cypriots taking additional lumps for the purpose of getting at Russia. And ironically, Germany having been the key enforcer then is now on the receiving end via the loss of cheap Russian gas. As some readers are wont to say, karma is a bitch.


1 These assets are still nowhere to being developed despite later exploration finding additional fields. In addition to Turkey engaging in threatening naval action in the area, the EU can’t get out of its own way. From Cyprus Mail in August:

The EU has been making it abundantly clear that it needs new gas supplies this decade so that it can replace Russian gas, but not beyond 2030. Its official position is that it will be reducing gas consumption as we approach 2030 and beyond, in line with its target to achieve net-zero emissions by 2050. Gas consumption in the EU has already declined by about 11 per cent year-on-year, mostly as a result of the exorbitant prices.

This is clearly spelt-out in the recent MoU signed between EU-Egypt-Israel, the term of which is restricted to 2030, without provisions to extend it.

I believe this position will be challenged in a few years when it is realised that renewables and hydrogen alone cannot provide Europe’s energy needs reliably.

But right now this is the official EU policy and it discourages oil companies and institutional investors from investing in long-term projects that depend on supplying the EU with gas

And the EU is set to miss its renewables targets:

Print Friendly, PDF & Email


  1. Susan the other

    So if true this situation, which seems to have spun off into the conflict in Ukraine, could have used some timely good faith negotiations with Russian Oil. And that did not happen because we don’t have control over Russian oil. We only control the Gulf states and western aligned oil. We want to be the last gas station standing in a CO2-controlled world. That’s clearly not happening, so that leaves war. Lovely. And naturally, Germany was the pawn. Kinda makes sense.

    1. britzklieg

      “so that leaves war.”

      Indeed, makes a ton of sense. I think Yves is spot on and hope this essay gets legs.

  2. flora

    Thanks for this post. I’ve wondered lately if any of the current unpleasantness is related to the uncleaned up bank balance sheets in the West after the 2008-9 great financial crisis. Most recent iteration being the US confiscating RU assets in the US as a sanction seemed odd to me at the time. I mean, if one wants to project confidence in and security of US banking institutions this seems the wrong way to go about that task. / my 2 cents

  3. dandyandy

    Strange that the analysis mentions lots of “Cyprus” while it mentions no “Albania” at all, although Cyprus figures in the chart (28b) are not world apart from Albania(18b), and given that “Albania” under NATO tutelage was very much a vociferous party to destruction of Yugoslavia and its successor states, only just 30 years ago.

    Our U.K. suites and talking heads are at a glacial speed hinting to be becoming aware or acknowledging that our country is being subjected to an invasion of alien species with a proven track record of subversion and demolition of welcoming hosts.

    MSM is on stream endlessly with “Dangerous” and “Hazardous” crossings of the Channel putting the lives of “immigrants at risk” (give me a napkin), as opposed to more truthful “invasion of aliens that we in government do nothing about because it suits our (slaves based), cash flow”.

    1. Yves Smith Post author

      *Sigh.* Your comment is tantamount to going to a Japanese restaurant and being upset about not being able to order kebab. This post is about whether the sudden pulling of the rug out from under an admittedly very sick Cyprus banking system was an early measure in the economic assault on Russia.

  4. Alan Roxdale

    2013 appears early only if your timetable heads towards 2022. If you consider a different election outcome in 2016, how does the timing look now?
    Personally I have always felt Washington’s mood was hot for war in 2014. Maybe the outcome would be different if the Russians had less time to prepare.

    1. Michaelmas

      2013 appears early only if your timetable heads towards 2022. If you consider a different election outcome in 2016, how does the timing look now?


    2. Bugs

      Exactly. HRC was hot for war with Russia and the Pentagon was already making squealing noises about it (meaning they weren’t happy) in the run-up to her coronation. I’m not tinfoily but Russiagate, etc., sure show that the Blob was very unhappy not getting their expectations fulfilled. Sadly, I don’t think the Trump of now is nearly the threat he was then. And Sanders would have probably stood back and let them go at it to get a few crumby “socialist” measures passed. We live in a crap timeline. Now here comes H1N5.

      1. JTMcPhee

        Probably a jejune observation — maybe Trump is Hari Seldon’s Mule? The Clantons from Arkansas sure looked to be a dynastic duo.

        Anyone following what the Clantons are up to in the way of Fokkering up the planet in their dotage?

        1. agent ranger smith

          Well, among other things they may be keeping a quiet spiderweb of alliances and connections in place for Chelsea Clanton to use if/when she goes into elective politics.

          Metastatic Clantonoma. The gift which keeps on giving. And spreading. And popping up when you thought it was all over.

  5. ChrisRUEcon

    Thanks for this! Once again, this beloved family blog delivers. It is becoming clear that the EU had both an economic, and a military purpose – conjoined by the fact that banks have largely replaced tanks in modern times [See Greece] – unless of course you’re Communist, Muslim, brown, have natural resources coveted by western capitalists or … drumroll please … you’re Russia … in which case, you get attacked both by tanks and banks.

  6. ejf

    And where does Wilbur Ross figure in this? From Wiki: he was “…vice-chairman of the board of Bank of Cyprus, the largest bank in Cyprus, after he and his investors invested €400 million in the bank in 2014.”

    1. Yves Smith Post author

      Ross is a distressed investor and I cannot imagine he had any meaningful Troika connection. The fact that Americans as opposed to Europeans invested suggests Europeans were still too leery of the parlous state of periphery banks to consider it (the ECB would have preferred a merger into another bank, but as a Japanese friend said long ago, “Marrying two sick dogs does not produce a healthy cat”).

      I would guess someone like Goldman either was hired to flog the investment or knew the bank and the authorities would be super receptive and presented it on a more informal basis.

  7. The Rev Kev

    I can’t really speak about the Russian connection here but there is something I came across which might indicate that taking down Cyprus may have been an indirect attack on Greece which preceded the “Grexit” crisis of 2015. In reading up on Wolfgang Schäubl I found mention of how Yanis Varoufakis thought that Schäuble had wanted to force Greece out of the Euro. It would sound nutsy that but this line of thought was actually confirmed by former US Treasury Secretary Tim Geithner in early 2014. He thought the plan nuts as well. So perhaps Wolfgang Schäubl wanted to wreck a useful ally of Greece – Cyprus – before going after Greece itself-

    1. Michaelmas

      I found mention of how Yanis Varoufakis thought that Schäuble had wanted to force Greece out of the Euro.

      That’s not ‘nutsy’ at all, but the way it was reported as going down at the time, and not just by Varoufakis (who was then a participant, remember). Forex —

      Wolfgang Schaeuble: Germany’s man with a Grexit plan

      Schäuble reportedly told Greece: ‘How much money do you want to leave the euro?’

      1. The Rev Kev

        Thanks for those links. I was following the Ukraine crisis more closely than the Grexit crisis at the time so missed this story. The thing that to me that makes it nuts is that as Yves has talked about, leaving the Euro was made deliberately near impossible. Forgetting the fact that those countries were required to destroy their money printing presses, it would take years to adjust all the banking software alone and Schäuble must have know this and yet this was his grande idea. Of course it could have backfired down the road. If Greece did well out of leaving the Euro because they would have regained the ability to devalue the Drachma, then other countries seeing this might start thinking about jumping ship.

    2. agent ranger smith

      I am surprised that any German thinker/planner would consider this even against Greece. Surely a forced-exile from the Euro for Greece might have lead some other European victims-of-the-euro to wonder whether they could try a voluntary escape from the Euro by choice.

  8. Michael Hudson

    Here’s an anecdote that may be a bit out of date. In spring 1997 my Harvard/ISLET group had a meeting on Mesopotamian land tenure patterns, held at Saint Petersburg’s Oriental Institute. I had invited some anthropologists, but was told by one of their administrators that the next week there would be an anthropological meeting in Cyprus. They were afraid to fly from Saint Petersburg to Cyprus because so many planes had been blown up or crashed on the Russia-Cyprus route, apparently with gangsters shooting each other.
    Re Scheuble targeting Cyprus at the time of the Greek euro crisis, I was in Athens and asked by a Cypriot official to visit the island to help develop a defense — but my Greek friends advised me to protect my safety and stick to my theoretical work.

  9. Susan the other

    Schaeuble must have had a clear sense that oil was the prize and Germany was caught in the middle. I imagine that all the fudged balance sheets of so many (all?) western banks beginning in the 90s gave him an ulcer because he could see chaos coming. And he clearly understood the danger to Germany. Now I’m wondering if it’s a classic pattern that finance goes crazy leading up to war?

Comments are closed.