Rubles in the Sun

MOSCOW — The last time a crisis on a faraway island was this much of a headache for Moscow — as Russians have recently taken to joking — was in 1962, and the issue was missiles, not bank deposits. The news out of the Eastern Mediterranean in the last two weeks has been increasingly dire, particularly from a Russian point of view. First there was the strong-arm bailout deal pushed on Cyprus by the European Union, which included a 9.9 percent tax on large deposits, many of them held by Russian businesses and individuals. Then came the news that the second biggest bank on the island, the Cyprus Popular Bank, will go bankrupt. Hundreds of bank accounts filled with billions of euros saved by rich Russian individuals or invested by Russian private and state companies have fallen under threat of being partly expropriated, or at least frozen. Granted, the consequences aren’t quite on the scale of a global nuclear war, but the closure of Cyprus as an offshore banking center means that an integral aspect of how well-heeled Russians have conducted business for the last two decades is coming to an end.

Publicly, at least, the Russian government doesn’t approve of Russia’s one percenters shipping their capital overseas. "In my view they continue stealing what’s already been stolen," Prime Minister Dmitry Medvedev said of the new Cypriot tax, paraphrasing Vladimir Lenin’s defense of robbery by Bolshevik revolutionaries. But while nobody really knows exactly how much Russian money is sloshing through Cypriot banks, it’s clear that some of those affected are close to the center of Russian political power.

According to the credit rating agency Moody’s, Russian corporations, including state gas giant Gazprom, kept more than $30 billion in deposits on the island. On top of that, many powerful Russian individuals transferred money to their Cyprus saving banks hoping to one day live happily in a comfortable place with good medical service, transparent courts, and a more humane climate. Those dreams have gone down the drain and the dreamers want answers.

Just like any story about Russia, the Cyprus saga has several chapters. During the years of privatization in the early and mid 1990s, the first generation of rich Russians did not believe the country’s free-market system would stay in place for long. They preferred to keep their winnings in offshore accounts — an arrangement that had the added benefit of significant tax savings. After Vladimir Putin and his circle of former secret police officers took power, the country’s economic elite divided between those who fled the country, including the recently deceased billionaire Boris Berezovsky, and those who stayed behind, willing to play ball with the heavy-handed new regime. But no matter where these tycoons lived, their money tended to reside in Cyprus.

Over the past decade, the worst fears of many Russian businessmen came true: it became close to impossible to keep a business registered in Russia without the constant threat of a hostile raid by tax authorities, a problem known by the pseudo-Russian word "raiderstvo."

"If your business was registered with Inspection #46, the major inspection office in Moscow, anybody any day could pay the girl at the counter $1,000 and re-register your business in their names," Moscow-based analyst Yuri Krupnov said, explaining the mechanism these raiders used. "It still remains a common trick for taking over businesses and nobody can prove the truth," said Krupnov, an adviser for the Kremlin. Under these circumstances, it’s not surprising that Russian businesses preferred to register in comparatively stable Cyprus, which was barred by treaty from exacting a double tax on the deposits.

There’s certainly been a fair amount of schadenfreude directed at the tax refugees in the wake of the Cyprus collapse.  Last week, a Duma deputy from Belgrad demanded the publication of a public list of all Russians with money in Cyprus, "so we could see who is the patriot and who is a Cypriot." The unhealthy curiosity reflected common public opinion: "Those who are losing money in Cyprus today prefer not to talk about it and businessmen keeping money in Russia happily laugh at victims of the crisis, " said Mikhail Krylov, leader of Opora, a national organization for small and medium business.

The oligarchs Alexander Lebedev and Mikhail Prokhorov — both associated with the "liberal" political opposition — have been willing to admit that they have been caught up in the Cyprus crisis, while brushing off its significance. Lebedev admitted that he was losing around $10,000 in the raid on his Cypriot bank deposits, but told the Guardian it was "not worth talking about." Prokhorov said in an interview on the network Rain TV that he had registered shares of his Onexim LTD holding company on the island.

Other prominent "Russian Cypriots" whose holdings are public knowledge include Russia’s richest man, Alisher Usmanov; energy trader and friend-of-Putin Gennady Timchenko; as well as the president’s old judo buddy in St. Petersburg, Arkady Rotenberg, who has close connections to Gazprom.

Working under the mindset that everything in the world circles around Russia, many in Moscow complain that the reason Germany engineered the deal was in order to punish tax-dodging Russians. "It looked like expropriation of assets in the Bolshevik style — there must be a generalization that all Russian money was stolen and therefore their owners should be treated like robbers," said Igor Bunin, the head of Center for Political Technologies, one of Russia’s oldest think tanks.

But after an initial round of outrage when the bailout was first announced, Putin and his senior officials have been relatively quiet about the events. In the end, there may even be a silver lining for the president. With their favorite tax havens closing up shop and new U.S. legislation threatening sanctions against them for human rights reasons, Russian elites may be more inclined to keep their money in the country, which would make them more dependent on the good favor of the president.