Cyprus: don’t line up the dominoes

March 19, 2013

By Stephen Eisenhammer

Over the past few years we’ve become used to the global economy resting on a knife-edge. So when dramatic events like the levy on bank deposits in Cyprus happen we wait for the dominoes to fall. Two days on we’re still waiting…

The recovery in the euro zone, so vital to Europe’s emerging markets,  is undoubtedly fragile but the incident in Cyprus doesn’t seem to be enough to knock it all down now that the European Central Bank seems willing to step in if borrowing rates go to high.

Overall, this should not be read as a game-changer for the global markets but more as background noise creating indeed some volatility, on top of the uncertainty created after the Italian elections – Societe Generale.

Cyprus is unique due to the size of the economy (the bail-out is 56 percent of the country’s GDP) and the role of the country as an off-shore tax haven, according to Societe Generale.

The major question mark hangs over Russia, however. The majority of large depositors in Cypriot banks are Russian companies, banks and individuals. Moscow’s blue chip RTS stock index subsequently lost 3 percent as markets opened after the announcement. But falls have been minimal since and the index is largely flat on Tuesday.

Despite the fact that Russian banks and companies stand to be among the biggest losers of the deal, the effect on the Russian economy or the banking system as a whole should be limited – Capital Economics.

The bank notes that data on Russian deposits in Cyprus is patchy but estimates that any losses wouldn’t harm the economy considerably.

If the deal goes ahead as currently proposed, Russian depositors may lose around $3bn. This is equivalent to 0.4% of Russia’s total bank deposits and just 0.15% of Russia’s GDP. Accordingly, these losses look manageable for Russia.

The main question for Timothy Ash, analyst at Standard Bank, is whether Russia will step into protect its citizens’ savings. The matter is complicated with a lot of the money suspected of being dodgy.

Russians look set to be hit as well – and likely wealthly/connected individuals, so the question is will Russia finally step in, especially if the Cypriot parliament rejects the latest bail-out plan and more of the burden extends to larger (likely Russian) depositors.

The impact on Russia, Ash says, might even boost the currency.

Interesting, in terms of capital flight, whether this latest move brings a reversal of capital flight from Russia, which we estimate at $40 billion per annum, at least for the past decade. Arguably the latest Cyprus news could actually be a rouble positive!


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