Cyprus has for decades been a favorite place for Russian businessmen to place their savings and for corrupt Russian officials to stash ill-gotten gains. Like all deposits in Cyprus, that money is expected to be taxed as part of a bailout deal that Cyprus is receiving from its fellow members in the eurozone.
Russian President Vladimir Putin on Monday criticized the decision as "unjust, unprofessional and dangerous," according to his spokesman. Here's a glance at why Russians keep so much money in Cypriot banks and how Russia can be affected by the island nation's crisis.
HOW MUCH MONEY DO RUSSIANS KEEP IN CYPRUS?
Russians keep about $19 billion in deposits in Cyprus, mainly through companies they set up there, according to the Moody's ratings agency. Russian banks also had around $12 billion placed with Cypriot banks at the end of last year and have loaned about $40 billion to Cypriot companies of Russian origin.
WHY DO RUSSIANS KEEP SO MUCH MONEY IN CYPRUS?
Russia boasts some of the world's lowest income and corporate taxes — both flat at 13 percent. But over the past two decades, Russian businessmen have preferred to place their savings in offshore, partly to escape political uncertainty and corruption in Russia. Cyprus offers a 10 percent corporate tax rate and relatively stable political situation.
Cyprus is also believed to be a top destination for money-laundering. It is much safer for a corrupt Russian official to keep proceeds from illegal activities abroad, hiding information about their fortunes and holdings away from the prying eyes of Russian banking regulators.
Russian officials estimated that about $49 billion, which is equivalent to 2.5 percent of Russia's gross domestic product, was wired to foreign accounts illegally last year. Sergei Ignatyev, outgoing chief of the Russian Central Bank, has said that these transfers might be linked to drug trafficking and corruption activities.
DO ORDINARY RUSSIANS KEEP MONEY IN CYPRUS?
No, middle-class Russians mainly keep their savings and investments at home.
HOW COULD DEVELOPMENTS IN CYPRUS AFFECT RUSSIA'S ECONOMY?
Tens of billions of dollars have left Russia in recent years, mainly because businessmen are anxious about Russia's politics and corruption, analysts say. Russian officials, however, do not expect troubles in Cyprus to bring the money back home. Deputy Economic Minister Andrei Klepach said Monday that he does not think that developments in Cyprus will affect capital flows in either direction.
More than $56 billion was transferred from Russia to other countries last year.
WHAT ARE THE DANGERS FOR RUSSIAN BANKS?
Russian banks have given loans worth about $40 billion to Cyprus-based companies of Russian origin, according to Moody's. If investors start pulling big sums of money out of Cyprus, the government there could freeze capital flows. That would block loan repayments to the Russian banks.
Ivan Tchakarov, chief economist at the Moscow-based Renaissance Capital investment bank, said in a morning note to investors that if Cyprus were to impose capital controls, "Russian banks could face significant losses amounting to almost 2 percent of the GDP."
CAN RUSSIA HELP BAIL CYPRUS OUT?
Russia has loaned Cyprus money before. The island nation is now anxious to delay payments for a 2011 loan of €2.5 billion ($3.2 billion) it received from Moscow.
Cyprus is also seeking a new €2 billion loan from Russia. Putin has said Russia would be willing to help Cyprus once a European rescue package is in place, but many senior cabinet ministers have spoken strongly against lending money to Cyprus.
Finance Minister Anton Siluanov, who is expected to host his Cypriot counterpart on Wednesday for loan talks, said last week that Russia may in exchange ask Cyprus for information on the Cypriot companies registered by Russians.
Siluanov on Monday complained that Russia had not been informed of the decision to levy a tax on deposits despite an agreement for Russia and the EU to coordinate their efforts. Siluanov said that the ministry will have to reconsider whether to provide Cyprus with financial aid "in the light of the new situation."