Banking crisis on Cyprus became the major concern for Russian leaders during last two weeks. Both Putin and Medvedev several times publicly commented the situation around the island. Kremlin-controlled TV-channels even broadcasted the emergency session of the Cyprus parliament, constructing from the island’s story an important myth and even a tragedy for all Russian TV-viewers.
Nevertheless, Russia refused to bail out Cyprus. No surprise, since possible cumulative losses of the Russian state from 10% deposits cut would have been much less than additional 6 bln euros Cyprus needed to receive financial aid from EU.
The Cyprus crisis was exploited by Kremlin’s propaganda for several reasons. First, the story of a financial disaster in a faraway land helps to distract citizens from domestic issues. Second, the collapse of Cyprus offshore economy fits well with the Putin’s strategy of economic self-isolation.
Financial tragedy turned into a comedy after Medvedev’s serious proposal to found an offshore on the Russia’s Far East Kuril islands. Alas, the prime-minister fails to understand that low taxes were neither the only nor the most important reason for Russian business to register on Cyprus. Above all, Russian businessmen run to Cyprus and other jurisdictions in order to protect their property rights that can’t be fully guaranteed in Russian courts. Besides, Russian companies, including state-controlled monopolies, need flexible instruments in order to structure their M&A deals. Cyprus inherited its law system from Britain, and the island’s juridical system, unlike its banks, still works well. In order to see Russian companies returning home, the Russian government needs to restore the independence of courts and parliament, improve the corporate law and create friendlier business environment. Until it happens, Russian companies will depend on the news from offshore havens.
