‘People will not put money in Cyprus for years‘ – Russian Deputy PM

Europe's banking practices are bordering dangerous - with the exception of Germany and Switzerland- and the banks will be crippled as a result of the new precedent set by the Cyprus bailout deal.

Russia’s Deputy Economic Prime Minister Arkady Dvorkovich discusses ‘dirty Russian money’ in Cyprus, the EU ‘banking disaster’, and Russia’s plan to create its own tax haven which could someday rival Hong Kong or Shanghai on RT’s SophieCo.

RT:Following the Cyprus financial crisis, media outlets reported there was anywhere from 5 to 30 billion euros of Russian money in the Cypriot banking sector. What is your number?

Arkady Dvorkovich: I hate playing with numbers. Nobody knows exactly as some people invested under their own name and others used aliases of friends or other legal entities in Cyprus to hide their identity. I think the number is pretty big, certainly higher than 20 billion. 30 billion is probably the right number, but again nobody knows exactly.

RT:Why was there so much Russian money there?

AD: Well Cyprus was convenient as a warm and friendly island not far away from Russia, easy to reach, jurisdiction is good, and taxes are low. Banks are quite good and convenient to operate with money, to proceed with transactions across the world, to transfer money, to pay for services. And the rules of the game were known to everyone. Not just for Russians, but many British and Americans were using Cyprus as well. But again for Russians it was a close and convenient jurisdiction.

RT:And is it fair to say that Cyprus was the most popular offshore for Russia…up till now?

AD: Yes.

‘Russian government did not lose anything in Cyprus’

RT:  Do you know how much Russia lost, approximately?

AD: A few billion dollars, but nobody will know until the whole story unravels. Everyone who has money in Cyprus understands that most of the savings will be lost, but the percentage people will be left with is still unclear.

RT:30 billion euros is a lot of money. Why wasn’t the Russian government more proactive in securing their assets in Cyprus?

AD: The Russian government protects savings that are made within Russia. The government cannot track savings people make abroad.

RT:Were the savings public or private?

AD: Most of the savings are private. State-controlled banks have subsidiaries in Cyprus.

RT:Like VTB bank.

AD: Like VTB bank. And Russia was very active in protecting the property of VTB, as the government is the main shareholder of VTB.

RT:Did the Russian government lose anything at all with this whole Cyprus story?

AD: No. The Russian government did not lose anything.

RT:The signs of this crisis were looming before March, and everyone knew it was coming.

AD: That’s correct, but the key thing that changed the situation drastically was the Greece bailout, since all European countries had to participate in saving both Greece and Cyprus. It was a burn in the Cyprus balance sheet. And after that it became clear that Cyprus was in huge debt. Russia was actually helping with debt resolution for Cyprus, giving it quite a big loan [€2.5bn] and after the crisis in Cyprus we made the decision to improve loan conditions for Cyprus so it could repay debts quicker and more easily.

RT:Did you personally see the signs of this looming? Did you think it was going to happen the way it happened?

AD: All European countries are under stress. Southern Europe is under the most stress. Nobody believed that Europe would pressure Cyprus to levy its deposits, I don’t think it was by anyone, by any economy, by any government. But major European governments decided that they didn’t want to help Cyprus any more and they should resolve their own issues. I would say for Russia it was completely unexpected.

RT:So no one was warned that it’s going to happen behind the scenes? 

AD: No. We knew that Cyprus was under stress and they requested support from the Russian government on a number of occasions. But we thought that the Cyprus issue would be resolved in a similar way to the Greece issue.

'The Russian factor'

RT:When this whole thing was going on, Angela Merkel in particular was very adamant that Cyprus didn’t enter negotiations with anyone besides EU members, especially Russia. How did Merkel expect Cyprus not to be in contact with Russia when it holds 30 billion euros in Cyprus banks. There was a conspiracy that Russia would bailout Cyprus because Russians had so much personal wealth stored there.

AD: I have heard such an argument. But I think all arguments were taken into account when the decision was made so I wouldn’t dismiss that German or French politicians were thinking about Russia when they made the decision to bail out Cyprus, but I don’t think it was their main motivation.

The main motivation was that Cyprus was hurting the mainland of Europe by draining money that could go elsewhere in Europe, and because Cyprus is a money haven, they should resolve its money haven problems on its own. The Russia factor didn’t play a big role.

RT:The Russian factor was icing on a cake.

AD: Yes.

RT:You heard so much talk in the media about ‘dirty Russian money’. What exactly is ‘dirty Russian money'?

AD: I think politically for Europeans it was important to mention ‘dirty Russian money’. But I don’t think it was the key argument. It was a good argument to present publicly, but not for pragmatic decision-making.

RT:There is a lot of speculation in western media that the top Russia’s rich had their money saved in Cyprus, and that same 80 oligarchs gained access to the EU through Cyprus. It was reported in 2011 alone, over 80 billion euros was channeled from Russia through Cyprus, and then elsewhere.

AD: I’m confident most of the funds transferred to Cyprus were done so legally- it was not money laundering, it was not dirty money. Rather it was dividends paid by legal companies, public companies to the owners of these companies, to Russian 'oligarchs'. But it was not about money laundering. It was about better taxes. It was legal.

RT:British money is about a quarter of foreign investment in Cyprus- why was there little discussion of ‘dirty British money?'

AD: They were acting in a quietly.

RT:Do you think Cyprus set  a precedent in how Europe will act on bailouts in the future?

AD: I think if Europe acts in a similar way in other countries it will lead to a disaster for their banking system.

RT:How can Cyprus save their economy if 80 percent is based on financial services?

AD: It is a disaster.

RT:Who is going to invest money Cyprus now?

AD: For many years- no one.

RT:Could this also be a reason for future cash outflow in Europe in general?

AD: Certainly – except maybe for German and Swiss banks – yes, Europe will be hurt, and the European banking system will be hurt by those actions since people will believe that if this happened in Cyprus it’ll happen in Spain, Portugal, Italy – why not?

The case for a Russian tax haven

RT:Prime Minister Medvedev has proposed to create Russia’s own havens. What’s the reasoning behind it? Who is going to put money in a Russian offshore? Cyprus showed Russians like keeping funds outside of sovereign borders.

AD: The idea is that Russia can become one of the global financial centers or at least a regional financial center. It was on the table long before the Cyprus crisis. When the 2008 financial crisis began and regulations in the US and Europe tightened, Russia became an appealing financial industry for wealth not already in the US or Europe. We started drawing up regulations that will be more convenient for banks, for investment companies, and for people. We started reducing taxes on financial transactions, savings and dividends- and it worked! The inflow of capital started in 2010, and we had pretty good results. Then this year the money flow reversed, and we experienced a big capital outflow. After Cyprus, we thought we could make the case that the Russian banking system is the safest. 

RT:Can we make that case?

AD: I think so. I think that Russian banks have a better capital position than many banks in Europe and the United States right now.

RT:Explain.

AD: Basically Russian banks are more conservative than most banks in the world. Our companies are always saying that it’s very difficult to get loans, get credits, interest rates are very high- but that’s just one side of the story. This helps banks not tie their money up in risky dealings, and therefore other depositors’ funds are not at risk.

RT:Who will Russian offshore clients be?

AD: Russia can become one of the most convenient financial centers to invest capital. With 13% percent income tax, Russian can serve as a jurisdiction for investment banks worldwide. Russia would like to model a Far East offshore- similar to Hong Kong or Shanghai, which will offer lower corporate tax rates.