The Flinchum File

Thoughtful Economic Analysis and Existential Opinions
Subscribe to the Flinchum File
View Archives

Russia’s Cypriot Subsidiary?

In 1992, I was in Switzerland on business, staying at the elegant Hotel des Bergues in Geneva, where I met a man who wanted me to invest with him in starting a bank in Cyprus.  More amused than interested, I listened to him explain an almost wild-west environment for banking in that tiny island nation.  Having served on the Texas State Depository Board during the S&L collapse, I knew it would not end well for Cyprus, and it hasn’t.

There are several things about Cyprus that worry me.  Other EU nations got into trouble the old-fashioned way, by promising entitlements they couldn’t afford.  But, that was the least of their problems in Cyprus.  Their banks made big investments in bonds issued by Greece, another sickly EU member.  The question is not whether that was a smart investment — the question is why were they making large, concentrated bets that were un-hedged.  Obviously, the regulators were asleep or lazy or corrupt.

More worrisome, Cyprus became a depository for dirty money from the Russian Mafia, Russian oligarchs, and corrupt Russian officials.  When the Cypriot government agreed to tax/confiscate 9.9% of the deposits over 100,000 euros (which has since been rebuked by their Parliament), the Russian government threatened to withhold natural gas supplies from Germany, the chief advocate of the severe loan conditions for any loan to Cyprus from the EU.

Now, we see the Cypriot foreign minister is in Moscow for “as long as it takes” to negotiate an additional loan plus “other arrangements.”  Russia is in a position to turn this little island into a political satellite and a renegade international financial center for the corrupt.

Most worrisome, it might be in the best interests of Russia for Cyprus to leave the EU and the euro, but at what cost to the European Union?  So far, stock markets worldwide have shrugged their shoulders at this possibility, but for how long?