The very opacity of Russian money in Cyprus – and the spaghetti-like holding structures of Cyprus-registered Russian companies – mean that the potential damage to Russia from the Cypriot crisis remains all the more uncertain.
During and immediately after negotiations on a Cypriot bailout, many feared it would trigger new ownership conflicts, or a domino effect if Russian corporates with cash trapped in Cyprus were then unable to pay bills in Russia.
Such concerns appear to have died down, for now. Sure, Russian companies might need to expend lengthy legal legwork moving away from the practice of operating via special purpose vehicles in Cyprus for tax and legal reasons.
For good or bad, murky Russian cash that used to end up in Cyprus is now flowing, and will continue to flow, to other offshore centres: Latvia, Liechtenstein, Dubai, or elsewhere.
But Russian banks claim minimal impact. They say clients with Cypriot holding companies have operating assets and collateral outside Cyprus: transactions and settlements occur elsewhere, so are not subject to new Cypriot capital controls.
Still, fear of what might happen – particularly if Cyprus were to exit the euro – has contributed to sustained aversion towards Russian risk. Russia’s stock market, for example, fell around 10% in the weeks after the Cyprus crisis intensified.
This fall, in fact, is not out of step with peers in Brazil or elsewhere. It is also unclear how much it is a result of fears of the Russia-specific effects of the Cypriot crisis.
One factor is that Russia is joining Brazil and others in experiencing lower GDP growth. Russia had previously posted rising growth figures while peers such as Brazil suffered falling growth – largely because last year’s election in Russia meant more state spending.
Since the election, the finance ministry has tried to consolidate the state’s finances. Coupled with other factors, this is having a greater than expected impact on growth. The state cut its 2013 growth forecast to just 2.4% last month.
The Cyprus crisis is one more reminder why Russia has suffered a discount in stock prices compared with emerging market peers such as Brazil – because of authoritarianism, corruption and economic dependency on oil exports.
Private companies and cash from Russia ended up in Cyprus partly to protect them from state racketeering in Russia. But the latent reasons for Russia’s reluctance to bail out Cyprus might be another justification for the desire to get money out of Russia however possible.
Russia’s president Vladimir Putin might have been happy to see comeuppance for circumventing his rules of doing business in Russia, using offshore havens. Similar threats underline how difficult it is to do business in Russia, independently of Putin.
The acquisition by state-owned oil firm Rosneft this year of TNK BP – one of the most successful private companies in Russia – tells a similar story. TNK’s former owners will be encouraged to reinvest in carefully state-sanctioned projects within Russia.
As growth slows, Putin has pledged not to depart from a new budget rule linking spending to historical average oil prices. But if the Cypriot crisis intensified again – especially if it is accompanied by a dip in the oil price – Putin’s carrot-and-stick system of patronage and authoritarianism might stop functioning.