Russian banks consult with lawyers over Cyprus

ITV's Laura Kuenssberg:

Chatham House's Professor Philip Hanson writes on what the Cypriot bailout could mean for Russians:

Estimates of the scale of Russian deposits in Cypriot banks range from €20bn to €30bn. Some of those who stand to lose have been laundering the proceeds of dubious activities in Russia, but many are operating entirely legally – “optimising taxes” through Russia’s favourite offshore financial haven and endeavouring to keep their assets out of the reach of a predatory Russian state.

Most of Russia’s largest private-sector firms are closely held by one person or a small group of associates, with a modest fringe of minority shareholders. These strategic stakeholders typically channel profits to a holding company in a tax haven. The British Virgin Islands is widely used, but Cyprus is the most popular. For example, Evraz, Severstal, Magnitogorsk and Novolipetsk – most of the Russian steel industry, in other words – are all controlled through holding companies registered in Cyprus. One outcome will be more business for other tax havens.

The use of Cyprus also shows up in flows of dividend payments and “round-tripping” capital flows. In 2011, outward foreign direct investment from Russia totalled $67.2bn (£44.2bn), of which a third ($22.4bn) went to Cyprus. Inward foreign direct investment into Russia was $55.6bn, of which almost a quarter ($13.5bn) came from Cyprus.

But while the direct and immediate impact of a Russian haircut on the two-trillion-dollar Russian economy will be in aggregate terms quite modest, the longer-term impact will be more serious in two ways.

First, a large part of the Russian business world will be under pressure to re-organise its affairs. Payment flows will be impeded for some time, and most observers think Cyprus will cease to function as an offshore financial centre.

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