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Russian bank deposits in Cyprus, the root cause of Germany’s resentment to bail out the island’s economy, are estimated at about 32 bln dollars, half of which are deposited with Russian subsidiary banks in Cyprus, according to Moody’s.
“Russian banks' operations in Cyprus could incur moderate credit losses if those banks have material exposures to Cypriot companies of Russian origin or to Cypriot banks,” Moody's Investors Service said in a new Special Comment.
The rating agency, that has consistently downgraded Cyprus sovereign and bank ratings due to their massive exposure to Greek debt, has identified three channels through which Russian banks are exposed to Cyprus-related risks: loans to Cyprus-based companies of Russian origin; bank and corporate deposits and investments in Cypriot banks; and, Russian subsidiaries of Cypriot banks.
Moody's said its central scenario “does not assume a Cypriot sovereign default or moratorium on external payments in Cyprus this year. However … there is an elevated probability that the sheer size of Cyprus's anticipated debt load will compel authorities to pursue every avenue for debt reduction, including private sector losses on Cypriot debt.”
The crystallisation of these risks would be credit negative for Russian banks that have linkages to Cyprus, although not likely to be material enough to warrant rating actions, given the relative size of these exposures, the Moody’s report added.
Cyprus sought a bailout of about 17.5 bln euros from the Troika of international lenders – the EU, European Central Bank and the IMF – to help recapitalise the two main banks that have to date written off some 4.5 bln euros in Greek debt as part of an EU-wide decision for a haircut, as well as to roll over national debt and pay down a runaway public sector deficit due to rigid government wages.
Troika negotiators have warned that Cyprus needs to cut down its civil service wages, privatise profitable state-owned services and raise some of its competitive taxes, if its loan repayments are ever to become sustainable.
"The main contagion channel for Russian banks is their loans to Cyprus-based companies of Russian origin. We estimate that these loans totalled around $30-40 bln in 2012, or around 15%-20% of Russian banks' capital base. A potential Cyprus moratorium on external payments could block loan repayments to Russia, leading to some asset-quality pressures," explained Eugene Tarzimanov, author of the report.
Moody's said that Russian banks had around $12 bln placed with Cypriot banks (predominantly Russian bank subsidiaries in Cyprus) at year-end 2012, plus around $1 bln invested in the capital of their banking and non-banking subsidiaries in Cyprus. While these investments are mostly based on parent-subsidiary relationships, defaults by endogenous Cypriot banks, a deposit freeze and/or a moratorium on external payments, could lead to some losses for Russian banks.
There are also indirect risks for Russian banks related to Russian corporate deposits at Cypriot banks. Moody’s estimates that non-resident Russian corporate deposits in Cyprus could near $19 bln. In case of bank defaults, deposit freeze or burden sharing with wholesale depositors, these companies could take losses on their deposits or lose the possibility to repatriate their funds. In turn, this will decrease their capacity to service bank debt back in Russia.
The third transmission channel is Russian subsidiaries of Cypriot banks (Bank of Cyprus and Popular Laiki Bank), which Moody’s said “is not as significant as the previous two as the contagion risk affects just a few small Russian subsidiaries of Cypriot banks. These subsidiaries could face heightened credit risks, reputational damage and deposit outflows because of concerns related to their parent banks' growing problems.” The smaller Hellenic Bank only has a single branch operation in Moscow.
