Russia’s role as global creditor grows
2011-09-21 10:44:49
When the finance minister of Cyprus announced earlier this month that the island was close to agreeing to a €2.5bn ($3.4bn) emergency loan from Russia, he called the deal “a friendly agreement with no strings attached”.
Whatever the conditions, the proposed deal would mark a significant step for Moscow in its growing role as an international creditor, while reflecting the importance of Cyprus as an offshore financial centre for Russia.
The island is favoured as a tax haven by many Russian businessmen. Indeed, so much Russian money goes through Cyprus that in 2010 the island registered as the third largest source of foreign direct investment in the Russian economy, at $9bn, just behind the Netherlands and the UK.
Cyprus is particularly important for the Russian securities trade. “If I am a Russian broker selling a Russian security to a British client, most likely I am doing it through Cyprus,” says Alexei Moisseev, chief economist at VTB Capital, the Moscow investment bank.
The possibility that the island could become the next domino in the eurozone crisis has pushed Russia into talks to rescue the Cypriot economy. Last week, Alexei Kudrin, finance minister, told journalists that negotiations would conclude within a month.
Talks could yet falter, as demonstrated by a similar plan to bail out Iceland in Oct 2008 with a €4bn loan. A year later, after Russia’s gross domestic product fell 8 per cent amid the global financial crisis, the loan was downgraded to $500m. Negotiations subsequently collapsed.
Russia has become a creditor of last resort to some crisis-hit countries of the former Soviet Union – albeit with political strings attached. A $2.15bn loan to Kyrgyzstan in Feb 2009 was agreed in exchange for Kyrgyzstan’s agreement to close a US air base. This quid pro quo fell apart: the air base continues to operate, and so far, only $450m of the loan has been paid.
Russia more recently acted together with the Eurasian Economic Community to lend Belarus $3bn, which was predicated on a promise to undertake deep economic reforms, including a pledge to sell $75bn in state-controlled companies over the next three years.
Many in Belarus fear that strategic assets like pipelines, refineries and Belaruskali, the potash producer, could end up in Russian hands as a result of state asset sales. So far no large privatisations have taken place. As Belarus’ enthusiasm for privatisation fades, so does Russia’s eagerness to continue lending: just $800m has been so far disbursed and Mr Kudrin said in July that Minsk “is not taking enough steps to exit from the crisis” and that the loan would be re-examined.
The nature of the deal with Cyprus is harder to guess – although the Kremlin would have an obvious interest in keeping the island afloat financially, given the Russian interests at stake.
There certainly seems to be little appetite from Moscow to participate in any broader eurozone bail out. A ministry of finance official who wished to remain anonymous says that at the moment, Russia has no position on lending to the eurozone, adding that it is "premature" to talk about buying distressed eurozone assets.
More will be clear following a meeting of finance ministers and central bank governors from the Bric countries on September 22 in Washington he said.
“Russia does not have that much money,” said a Moscow based economist with close ties to many top policymakers, who said he thought Russian participation in a financing agreement in Europe “unlikely.” “But we may contribute something” he said.