In turn, that has raised worries over the position of Russia, whose corporates and citizens have a larger stake in the island state.
Indeed, the indignation registered by Vladimir Putin, Russian president, over the terms of the original bailout proposals makes sense when the extent of the country’s use of Cyprus as an offshore location for tax optimization purposes is considered.
According to Rosstat, Cyprus is the largest foreign investor into Russia by total capital injections, 25% of Russia’s accumulated $362 billion by the end of 2012, while being the second largest recipient of Russian investment abroad – 25% of $118 billion by the end of 2012.
Furthermore, Moody’s estimates that Russian banks have more than $12 billion in deposit exposure to Cyprus. Meanwhile, estimates suggest Russian banks have $30 billion to $40 billion in cross-border loans to Cyprus-based companies and Russian corporates have $19 billion parked in Cyprus.
Indeed, as Dmitry Polevoy, economist at ING Financial Markets, points out, any new loan after the €2.5 billion provided by Russia to Cyprus in 2011 is less affordable now for Moscow, given a slowdown in its non-oil revenues.
Furthermore, he says, the recent strengthening of an anti-corruption campaign in Russia and a focus on the on-shoring of the economy might mean problems in Cyprus are quietly welcomed.
Still, despite Russia’s exposure to Cyprus and the uncertainty surrounding a bailout, the rouble has remained relatively stable against its basket and, as can be seen in the chart below, USDRUB has not rallied as much as the recent decline in EURUSD might have suggested.
USDRUB set to play catch-up with EURUSD
Polevoy says the rouble has only held its value because of tax payments due in March. Around $7.5 billion to $8 billion in VAT payments are due on Wednesday, about $7 billion to $7.5 billion in mineral extraction tax is due on March 25 and corporate profit tax of $10 billion to $13 billion is due on March 28.
“Russia’s exposure to Cyprus and near-term uncertainty demand a greater risk premium in the rouble,” says Polevoy.
“The fact that it has not weakened already largely owes to March tax payments.”
ING believes support for the rouble should evaporate during the coming week, and forecasts USDRUB to trade up to R31.60, about 2% higher than current levels.
It would appear not just to be the euro that Cyprus threatens to drag down with it.