In the immediate aftermath of the abortive deposit levy in Cyprus, I confessed being unsure as to why Russian stocks took a bigger hit than about stocks in any other country, including those in the EU where the precedent of expropriating insured depositors would seem to be most salient.
Upon reflection, the most likely explanation is that Cyprus’s financial straits would impede the utility of the country as a tax haven for Russian companies.
Although European and US stocks have rebounded, Russian stocks haven’t. This got me thinking about the implications of the recent deal for Russian companies.
Capital controls appear to be the key. If Russian corporates can get their money into Cyprus, receive the favorable tax treatment, and then get it out again, boomerang-like, they are OK. Conversely, if Cyprus becomes a roach motel, where money goes in but can’t get out, that would really put a tax crimp on Russian corporates.
There have been wildly conflicting claims about the prospects for capital controls in Cyprus. This seemingly official announcement only adds to my puzzlement:
Capital controls imposed to avert a run on banks in Cyprus after a painful EU rescue plan will be “loose” but will apply to all banks on the island, the Central Bank governor said on Tuesday.
“We aim for some restrictions which, in the words of the president, will be loose,” Cyprus Central Bank governor Panicos Demetriades said. He said the measure would apply to all banks based on the island.
Demetriades said the restrictions would be “temporary” but would not say how long they would last.
“Temporary” I sort of get. Though I think of the withholding tax, which was a “temporary” wartime measure adopted in 1942. Better yet, the “temporary” tax on telephone services, adopted to fund . . . the SpanAm War in 1898. Still on your bill today, folks.
The “loose” part is a mystery. WTF does that mean, exactly?
My interpretation: Cyprus wants to ensure that Russian companies can continue to boomerang money through the country. If capital controls are “tight”, Cyprus becomes a roach motel, and Russian money will not check in knowing it wouldn’t be able to check out.
My question: what say the Germans about this? I sense that the back-and-forth over capital controls is just part of the battle between the Germans and the Russians, in which the Cypriots want to support the Russian side. I suspect the Germans will consider “loose” to be unacceptable. Meaning that there will be more conflict to come.
The anti-Russian implications of the German hard line on Cyprus are striking, and hard to understand completely, given the fact that Germany has taken a relatively pro-Russian line in Nato. But perhaps there’s something deeper going on here. Maybe something personal. I wonder if Putin regrets setting his dog loose on Merkel-a notorious caninophobe. Could caninophobia have led to Russophobia?