The Lebowski Blog: What the @#%! just happened in Cyprus?

Where's the f'ing money, Lebowski?

Highway robbery, that's what.  Better put, robbery of (mostly) Russian oligarchs, businesses and money-lauderers by the European Union.

Cyprus - the tiny island in the south of Europe that accounts for 0.2% of Europe's economy - has existed in it's current incarnation since the 1990's.

Back then it decided to lower corporate taxes, sign a bunch of tax-treaties with Eastern European states and have extremely lax deposit controls (the kind where you can show up with a briefcase full of cash).  

This newly formed tax-haven became the Bahamas or Cayman Islands of Eastern Europe in the post-Soviet-collapse.  And oh how the money flowed in...

According to the Financial Times, when Cyprus joined the EU in 2008, the party really started with Israeli, UK and Canadian business money flowing into the island in large quantities.

Currently, a third of all deposits (about €25 billion) are controlled by Russian companies based in Cyprus while an additional third are non-Russian foreign.  The remaining money is local.

Like most countries, Cyprus became a tax haven to get foreign money into the island and bring in some head offices and jobs.  

But like many other tax haven's, in order to keep the money, you sometimes have to turn a blind eye to where it is coming from.  

Segei Magnitsky, a Moscow tax lawyer who uncovered massive Russian tax fraud in 2008 was found beaten to death a year later.  According to Magnitsky's boss, William Browder, while Cyprus was alerted to the fact that some of the money was being laundered in their country  they "steadfastly refused" to open a criminal case.  

Browder, angered by the death of his coworker, brought the information uncovered by Magnitsky to a host of European countries including Germany.  

And it's here where the mechanics of the Cyprus bailout start to make sense.

Cyprus required a bailout because of the EU's actions in Greece.  When the EU bailed out Greece, they required that holders of Greek debt (a number of them Cyprus banks) take a "haircut" (read: lose money).  When this happened in 2011, Cyprus banks were not going to stay solvent.  As their collapse would have meant a total collapse of the Cyprus economy, Cyprus went to the EU and IMF for money.

During negotiations, the German foreign service had a report leaked to Der Spiegel in November pointing out that 80 Russian oligarchs have gained Cypriot citizenship and while many, including Germany's finance minister, questioned whether Cyprus' anti- money laundering laws are being implemented.  

In the midst of discussing Cyprus' €10 billion bailout, Germany and Europe decided that, unlike the last bailouts, this one would dip into depositors savings in what the Guardian's Aditya Chakrabortty refers to as "bank robbery pure and simple."
 
The previous plan hatched last week would have taken money from all savers.  It was rejected by the parliament and almost caused a bank run in Cyprus.  The new plan, passed last night, restricts it only to those with more than 100,000, assumed to be mostly Russians, though a number of businesses and people with large savings (including many pensioners) will also be hit.

And this has infuriated Russia.  Dmitry Medvedev, the Russian Prime Minister, called it a "very strange decision".   The irony of the EU going after Russian oligarchs and money-launderers was not lost on him either.

Speaking to the European press, he stated that if the Eu was going to go after a tax haven like Cyprus that it should go after others as well including major Canadian tax havens.

"There is a bundle of them" according to Medvedev.  "The British Virgin Islands, for instance.  Or the Bahamas.  Are they better than Cyprus?  We shouldn't apply double standards here."

The Liebowski blog tracks big piles of money.  It appears regularily on the Toronto Media Co-op.