Krugman: the Cypriot government isn’t willing to give up on its role as a banking tax haven

[pampango]

Round Trips to Cyprus

Still trying to wrap my head around the Cyprus situation; what makes it so interesting (as in “may you live in interesting times”) is the role of the island as a tax, regulation, and law enforcement haven.

It’s not just about the Russian connection, but that connection is really huge. Here’s another metric: Cyprus is, according to official figures, the largest single foreign direct investor in Russia — this from an economy roughly the same size as metropolitan Scranton PA. What’s that about? The FT explained it a while back:

The Central Bank of Russia classifies Cyprus as the largest single source of FDI in the Russian Federation, with a total of $41.7 billion in cumulative inbound FDI into Russia’s non-financial sector between 2007 and 2010 (over 2.7x German levels)… Cyprus is also counted among the top FDI investing nations in several Central Asian countries (likely Russian capital reinvested via Cyprus, a process known informally as “round-tripping”).

And a key aspect of the current mess is that the Cypriot government isn’t willing to give up this business. That’s why solutions like converting large deposits into CDs haven’t been on the table; once round-tripping Russians know that they can find their money trapped for long periods, they’ll go find another treasure island.

My guess is that in the end Cyprus can’t reclaim the round-tripping business — and once it decides that it can’t, a resolution will become much easier. But they’re not there yet.

http://krugman.blogs.nytimes.com/2013/03/20/round-trips-to-cyprus/
Iceland and Ireland, before Cyprus, had huge (5-8 times the size of the rest of their economies) banking sectors catering to foreigners. Theirs imploded too. Their recoveries were due to many actions, but one was realizing that their banking sectors could no longer serve as havens for rich foreign money. Their banking sectors had to be brought in line with the rest of their economies rather than running the whole show - IOW the bankers had to be reigned in.

Krugman seems to think Cyprus' crisis will be resolved when it, too, realizes that its banking sector has to change, but not until then.

[dipsydoodle]

1. Russia not interested in buying their banks

See here :

12.52pm GMT

Russia's two largest state-owned banks have now both said they are uninterested in buying Cypriot banks, reports Howard Amos.

The island-state's banking assets were one of the bargaining chips Cypriot Finance Minister Michalis Sarris was hoping to be able to use to tempt the Kremlin into offering a rescue package.

“We don't, of course, have any plans of that sort,” said Andrei Kostin, the head of Russia's second biggest bank, VTB. “Our interests are that we are given the opportunity to carry out payments and access the accounts of our clients.” VTB has a subsidiary on Cyprus called Russian Commercial Bank which is at risk of losing “millions of euros” in a compulsory levy.

German Gref, the head of Russia's biggest bank, Sberbank, said last night that he had been approached about buying Cypriot banks, but had turned the offer down.

http://www.guardian.co.uk/business/2013/mar/21/eurozone-crisis-cyprus-bailout-plan-b