The latest drama out of the euro zone involves Russian oligarchs, colourful characters who have become the JR Ewings of the 21st century. Russian billionaires after 1990, like the US oil barons in the 1970s, have come to personify wheeler deals and unbridled greed.
And, in the nature of things, when they come across a handy tax haven, they scuttle into it.
Cyprus served their purpose well, according to business.insider.com, because of an amendment to a double tax treaty, originally signed between Russia and Cyprus in 1998. The online publication said the amendment allowed dividends received by Russian companies from Cypriot subsidiaries to qualify for “the Russian dividend participation exemption”.
This made Cyprus one of the most attractive jurisdictions for Russian investment, business.insider noted.
So oligarchs happily parked their money in the island’s banks, prompting Forbes to describe Cyprus as a “hotbed of Russian money laundering”. Spiegel.online reported Russian deposits in illegal bank accounts totalled $26 billion (R242bn).
Now the tax haven is under threat.
Not surprisingly, when troubled Cyprus sought a e10bn (R121bn) bailout from the EU to save its banks – the fifth euro zone member to ask for help – EU officials balked at the prospect of guaranteeing the deposits of illegal Russian money.
In the circumstances, the EU demanded the imposition of a once-off tax on all the island’s bank deposits. This involved imposing a fee of 6.75 percent on deposits of less than e100 000 and 9.9 percent on deposits above that amount.
Unfortunately this unfairly caught small depositors in the net designed to catch Russia’s JR Ewings. One can sympathise with the EU’s sentiments, but there must be a better way to deal with the problems of money-laundering and tax havens than starting a bank run.
Confining the tax to big depositors would have made the point adequately and done less damage. When the public loses confidence in banks, the banks run out of cash as depositors queue to take their funds out and put them in another country or under their mattresses.
The fallout from a bank run is contagious because of interbank commitments.
Banks pump the life blood of an economy though their systems. And bank failures threaten to cut off the supply of oxygen to the country, with disastrous consequences.
The Cypriot government temporarily averted a run on the banks by closing them and blocking electronic transfers. But this cannot last for long. Already the halt to banking operations is causing havoc among businesses, which cannot conduct their day-to-day transactions.
A sharp economic contraction, even in a tiny economy, also spills over to its neighbours. Problems in Greece in 2010 immediately triggered problems in other fragile euro economies. Eventually they aborted the region’s economic recovery and the EU is still mired in recession.
The markets had spotted the problem, Reuters reported on Friday: “World shares headed for their worst week since last November while gold rose strongly as Cyprus scrambled to avoid a meltdown of its banks and exit from the euro that could upset the whole region.”
There seems to be no end to the skeletons in euro zone closets. No sooner are there signs of life in the global economy than another peripheral euro economy threatens to fall over the edge. page 23