* How and why Russian 'big business' is using Cyprus as an Offshore Zone *
By Makis Georgiou
The Cypriot financial crisis has revealed profound problems not only in our country in particular but also in the European Union as a whole. Our small island has suddenly turned into an indicator of all of Europe’s rather precarious political and financial conditions. That could be expected, though, which cannot be said about a discovery that was unexpectedly made during the current critical phase of the crisis. It turns out that our big Orthodox brother – the mighty Russia – showed exceptional concern at the highest level about the situation on the island. Now that the problems of our Russian friends are being addressed – Cyprus has recently eased restrictions on financial operations of two major Russian banks (the Russian Commercial Bank Cyprus Ltd., a branch of the state-controlled VTB, and OJSC Promsvyazbank) – it is appropriate to ask the question: why was Russia, which had always been so kind to us, suddenly so furious?
At the height of the crisis, Russian president Vladimir Putin called the actions of the Cypriot authorities an unjust, unprofessional and dangerous decision.
Prime Ministry Dmitri Medvedev followed suit and assessed the situation as “confiscation of other people’s money.” He suggested that money would be safer placed in banks in Russia and that it would be a good idea to establish an offshore zone of their own in the Far East. At the same time, Putin and Medvedev held a series of urgent conferences on the situation in Cyprus. One could think that it was a noble impulse of the Russian leadership to help simple Russians who had deposited their money in Cypriot banks, similar to what the British did with respect to their citizens on the island when they made sure that the restrictions would not affect them.
Unfortunately, that was not the case. If the Russian rulers worried not about their countrymen, then about whom?
Russian deposits in Cyprus banks may amount to 35 bln euros, according to some old data, or maybe less. Of course, the enormous amount includes a share belonging to ordinary Russians, but the state could not care less about them, and state officials have said that publicly. But the biggest part of that money belongs to major companies and banks close to the state. These banks and companies transfer a portion of their assets to Cyprus and use it to avoid taxes at home. Not surprisingly, the Russian elite got concerned over the fate of their fortunes. It is hypocritical that while talking about a de-offshorisation of its economy, Russian authorities and their supporters in fact during a long period of time transferred money out of Russia through state-controlled companies into offshore zones.
Sovkomflot, AvtoVaz and Itera are examples of companies from among hundreds of big ones that know first-hand about doing business on our island. But most of the fame during the crisis went to Russian Commercial Bank (Cyprus) Ltd., a branch of the state-controlled VTB bank, which became a stumbling block at numerous Russian-Cyprus highest-level talks; this was the structure whose interests were high on the agenda of the Russian authorities, and a cautious treatment of it was the principal condition for a prolongation of a credit to Cyprus.
Why would there be such a degree of interest, one may ask, about a Cyprus-based bank in which a significant stake, according to reliable information, belongs to top managers of its parent VTB bank.
But let’s look at the matter from the beginning. The history of RCB predates to the Soviet times, when the Moscow Narodny Bank, a Russian foreign bank forming part of the USSR State Bank system, opened a branch in Beirut. In 1985, at the height of the war in Lebanon, the branch was closed and its business transferred to neighbouring Cyprus. RCB was registered as a foreign branch of the USSR State Bank in 1989, and later was handed over to VneshTorgBank (VTB). In August 1995, the branch obtained a full banking license and a Cyprus subsidiary status of VTB.
At the height of the 2009 financial meltdown in Russia, a curious story happened in the history of the bank. Media reports on the operation of the state-owned VTB group, the second largest financial group in Russia, describe the purchase of RCB shares by the VTB management, suggesting that in 2009 a private company controlled by VTB top managers bought about 40% of RCB, VTB’s own subsidiary, and a short while later managed to reverse its investment and even make a profit of $13 mln.
At the same time, Mikhail Kuzovlev, a key player in the transaction, who had worked as RCB’s CEO for five years and at the time of the transaction was first deputy president of the parent bank, subsequently obtained Cypriot citizenship and was awarded with the post of top manager at Bank of Moscow, which was in turn taken over by VTB. Cyprus ex-president Demetris Christofias is reportedly a godfather of Kuzolev’s children.
As for VTB boss Andrei Kostin, he was on many occasions suspected of gaining an additional income through the bank’s Cypriot branch. Thus, Forbes, in its article ‘Treasure Island: VTB Cypriot branch managers earn $20 mln of dividends in six months’, pointed out that the top managers of the parent bank would also enrich themselves that way and it was not ruled out that the bank’s highest level patrons would do the same.
The VTB bosses had also threatened Cypriot authorities that they would shut down RCB and leave Cyprus. It is curious why they changed their minds.
It is precisely this type of behaviour that was the excuse for the EU authorities to treat Cyprus so harshly. However, as final proof of the Russian ruling elite’s overriding concern over the affairs of VTB and the power they still continue to exert, it has recently been announced after high level meetings in Cyprus that restrictions on the financial operations in Cyprus for VTB will be lifted following satisfaction of certain preconditions.
Makis Georgiou is a political/business analyst and a regular contributor to the Financial Mirror. [email protected]