Cyprus Bailout Hits Snag Over Russian Mob Allegations

The allegation—which drew strenuous objections from the Cypriot government—comes from German news weekly Der Spiegel, which said on Nov. 5 that it had obtained a secret report by Germany’s foreign intelligence service, known as the BND. According to the magazine, the BND estimates that Russians have deposited more than €20 billion ($26 billion) in Cypriot banks, more than the island nation’s estimated €18 billion gross domestic product. “Money laundering is facilitated by generous provisions for rich Russians to gain Cypriot citizenship,” Der Spiegel said, quoting the BND report as saying that 80 Russian oligarchs had done so.

No one disputes that Russians have deposited large sums in Cyprus banks. The question is whether there’s anything illegal going on. Many Russian companies, as well as Russian units of multinational groups, have established Cypriot sales subsidiaries because Russia imposes punishing taxes on domestic companies that make sales abroad. Russia does not object to the practice.

The Cypriot government says it has enacted anti-money laundering rules that comply with European Union guidelines. “It is imperative to terminate speculation and the spreading of allegations that exacerbate the psychology of the market, cause confusion and panic among citizens, and distract from the aim of reaching an agreement” on a bailout, government spokesman Stefanos Stefanou said in comments posted on the government’s website.

The controversy comes at a delicate moment for Cyprus, the European Union’s third-smallest economy (after Malta and Estonia). In late June, Cyprus requested help from the so-called troika of the European Commission, the European Central Bank, and the International Monetary Fund to prop up banks hard-hit by losses on Greek debt. Cypriot government officials are to meet on Nov. 9 to discuss a possible rescue package that could provide €10 billion in fresh capital for the banks, in exchange for promised austerity measures.

A German Finance Ministry spokesman said on Nov. 5 that the allegations raised in the Spiegel article would be “part of the discussion” with the Cypriot government. The Finance Ministry also agreed to let Bundestag members review the BND report on a confidential basis. German lawmakers could potentially derail a Cyprus aid package because it would involve the new European Stability Mechanism, to which Germany would contribute funds.

Cyprus is under pressure to conclude a bailout agreement quickly. Moody’s Investors Service (MCO) on Oct. 8 downgraded the country’s credit rating, citing “profound difficulties” in its banking sector. Cypriot banks lost more than €4 billion from the writedown of Greek debt they held. The European Commission estimated on Nov. 7 that the country’s GDP would shrink by 2.3 percent this year and by 1.7 percent in 2013.