From a private note written by Mrs. Natalya ORLOVA, Chief Economist, Alfa-Capital who kindly authorized me to reproduce it. The content of this note does not necessarily reflects the position of the Alfa-Capital group.
- Cyprus banks have $90bn of retail and corporate deposits, 30% of which ($27bn) belong to foreigners, mainly Russians and British.
- Russian deposits in the Cyprus banking system are assessed at $20bn, which is around 2% of retail and corporate deposits in the Russian banking
system. This does not appear to be a significant amount.
- Cyprus was mainly used for transactions rather than saving: according to Global Financial Integrity, in 2011 Cyprus received $120bn of “investments” from Russia, but its investments to Russia were $130bn. A transaction freeze is thus the key risk for Russian banks and companies, with the potential effect hard to estimate. Moody’s estimates Russian banks’ losses from a Cyprus default and transaction freeze at $30-40bn.
- The Cyprus crisis does not seem to being generating a great deal of nervousness within the Russian banking sector. Two areas of risks are under discussion. The first is the impact on banks’ prop book transactions. Some treasury-related transactions (purchases of currency, bonds, etc.) are conducted through Cyprus subsidiaries. These accounts will be subject to the deposit haircut, but the amount of these transactions on average is very small (can range from $2-3m to $30-40m per large Russian bank). The second area is the loans to Russian companies registered in Cyprus. It is believed that only 10% of Russian capital flows to Cyprus remains on the country’s banking accounts while 90% is usually transferred to other countries, usually in Europe (for example Switzerland). Also, usually loans issued by Russian banks to Russian companies registered in Cyprus are de facto transferred to their corporate accounts in Russia with the same banks. For this reason it is unlikely that the moratorium on banking transactions in Cyprus will have as negative an impact as Moody’s research suggested. Russian bankers generally believe that these loans will be serviced from the companies’ accounts in other countries or in Russia.
- We believe Vladimir Putin and CBR Chairman Ignatiev made it clear that Russia will not bail out Cyprus as Russian capital in Cyprus is mainly illicit. Ignatiev estimated that illicit capital outflow from Russia was around $30bn per year in the last 4 years. While Putin stated today that the introduction of a deposit haircut is a dangerous decision, we do not believe Russia will have an interest in joining the group of creditors at this stage.
- The approval of a haircut on deposits today would be the best case scenario, which may help to limit the risk of turmoil on the financial markets. If the parliament delays or rejects the haircut, it will dramatically increase the cost of the Cyprus crisis, ruin the IMF’s and Merkel’s credibility and increase the risk of a contagion effect on other Eurozone countries.