The Supreme Court sealed the fate of the Cyprus off-shore area

Moscow, June 7 – Prime. The experts say that the decision of the Supreme Court of Cyprus, which had ruled unacceptable the complaints of the depositors against the writing-off of money from their deposits in the Cyprus banks last spring, practically terminated the period of Cyprus’s newest history, when it used to be a serious banking power and an attractive off-shore jurisdiction. Some of those experts state that the decision itself has no significant impact, while the others call it “the point of no return”.

The Supreme Court of Cyprus last Friday dismissed the claim against the writing-off of money from deposits in the Cyprus banks. The Court also ruled that such claims were subject to private law and not to public law, and as such can be considered as civil lawsuits. The decision caused a sharp reaction of hundreds of depositors and lawyers, who were waiting beside the Court building and many of whom represented Russian and British companies. Now they may attempt to file their claims with civil law courts, but this is very time-consuming.

A bad example is catching

Sergey Alexashenko, Director of macroeconomic research of the HSE, points out: “This moment is a turning point. The Cyprus authorities, in the broad sense of the word, have formed their position, and I believe it is unlikely that someone will be able to win anything in courts in the future. A global precedent is thus made”.

Mikhail Barschevsky, Envoy Plenipotentiary of the Government of the Russian Federation to the supreme court instances, shares this point of view. M.Barschevsky said to Prime Agency: “A precedent has been created that is very dangerous for other countries, because this is, in fact, a state requisition of bank capitals of depositors. This is generally called lawlessness. If Cyprus is not punished by the so-called fate for this, other countries, experiencing similar budget problems, may be enticed likewise”. He added that he had long since transferred his savings to the Russian banks.

S.Alexashenko explained that, in that situation, large depositors were actually considered creditors of the banks. He prognosticates: “Therefore, if all creditors participate in the recapitalization of the bank, this means that the depositors too will. I think this will become a standard instrument. This does not mean it will be applied every day, but I will not be surprised if other countries do this too”.

The end of the off-shore

Igor Nikolaev, Director of the department of economic analysis of the FBC company, notes that the decision should not be overestimated as it was expected. He points out: “Since this step was expected, it was hard to imagine that the Supreme Court of Cyprus would say that all that had been illegitimate and had to be turned back”.

Practically all experts concur with him and stress that employment of Cyprus as a financial center after the adoption in March of the deposit “tax” decisions would be a strange and reckless measure of the investors. Andrey Manko, analyst of RIA Rating, says: “The decision by the Supreme Court of Cyprus was completely expected. One can hardly imagine that the difficult decision of writing off deposits would be revoked. This court judgment contains virtually no economic reasons, only political ones. Thus, nothing has changed for the Cyprus economy since March. The Cyprus off-shore practically does not exist anymore”.

The consideration of the case by the Supreme Court of Cyprus could have been the last hope for someone, according to Nikolay Kascheev, director of the analytical department of Promsvyazbank, the subsidiary of which, OJSC Promsvyazbank, operates at the island, but the majority has obviously accepted the authorities’ decision as inevitable. He says: “The decision makes no crucial changes. Of course, the damage to the trust to Cyprus banks and state is colossal, but this is an accomplished fact. Certainly the sale of its problematic banks to global players would have been the best way out for Cyprus, but it is unlikely at this point in time”.

The money do not hurry back to Russia

I.Nikolaev is of the opinion that the money that is being taken out of the Cyprus financial system will hardly be invested in Russia, taking into account the high risks. The expert says: “The flight of capital (from Cyprus – ed.) will continue. Cyprus is clearly not the safe haven, and assets may be requisioned here. Will (the capital – ed.) go to Russia? No, it will not, because Russian economy is a high-risk economy, there are safer places”. He adds that tax burden is growing in Russia, the economy growth tends to slow down, and further toughening of tax administration is probable.

Evgeny Yasin, research supervisor of the HSE, reminds that that money was transferred out of country a long time ago and was mainly used abroad. He states: “Of course, rarely the money came back to Russia, it purchased resources for ventures, and then we got some effect”.

According to S.Alexashenko, the depositors should now construct their savings strategy with much more care. He explains: “The approach is this: if you are a small depositor and you have 10000 dollars, you do not need to be acquainted with the specifics of banking business, and if you have 100 millions – you are an investor, and this is your objective”.

I.Nikolaev says that the task of conserving funds is now easier than investing them into development. From the viewpoint of such conservation, there are countries, where the medium-term situation is more or less stable (for example, Luxembourg, Andorra, other small European countries, some Eastern Asian states, Hong Cong), but from the viewpoint of investment and efficiency – such countries are very few. Europe is practically out of the question, the situation in the USA is also not clear enough, China is slowing down. I.Nikolaev concludes that conserving is a bit easier than increasing.

There is hope, but a very small one

On the other hand, the Cyprus depositors still have a chance to win their money back in court. Evgeny Zhilin, Associated Partner of the Law Firm "YUST", says that they can yet obtain compensation for the written-off funds in Stockholm court or in the European Court on Human Rights.

E.Zhilin said to Prime Agency: “Two ways remain. The first one is to go to the European Court on Human Rights, since a violation of property rights guaranteed by Protocol No. 1 to the European Convention of 1950 on protection of human rights and main freedoms is obvious. Another way – in the cases, when the depositors are from the countries, which have investment protection agreements executed with Cyprus – is to go to the international jurisdictional bodies stipulated by those agreements, including the Stockholm Arbitration. In this case, the chances of success are much higher than in the national Cyprus courts”.

The Supreme Court started considering the case on April 23, over 3 thousand depositors of the banks Laiki and Bank of Cyprus filed suits. The claimants and their attorneys called the “clipping” theft of their property. The court ruled unacceptable the depositors’ allegations that the decision by the government and the central bank of the country was non-constitutional.

The entire story began last summer, when Cyprus asked the EU and the IMF for financial assistance. Its problems were caused by the partial debt restructuring of the neighboring Greece. The EU approved the assistance package for the island on March 16, but it was rejected by the Parliament – the deputies, as well as the protesting citizens of the island, did not agree the forced writing-offs of the bank deposits. In order to stabilize the financial system, Cyprus was forced to initiate extraordinary banking holidays and then to limit capital movements. The markets of the entire world were in turmoil, Cyprus was unable to get Russia to agree to take part in the financial assistance, which was counted upon by the euro zone as well as by the island itself.

After that, on March 25, the EU adopted the second variant of the assistance package, which removed the general one-time writing-offs of the deposits, but stipulated liquidation of the second largest bank of the island – Laiki, transfer of its “good” assets and deposits of up to 100 thousand euros to the largest bank of the country – Bank of Cyprus and restructuring of the latter. Writing-offs now are only planned for the deposits in those two banks, but only from the deposits of over 100 thousand euros. On March 26, Cyprus enacted strict limitations on baking activity and cash withdrawals in order to avoid mass flight of capitals form the financial system. Even though those measures have been alleviated several times already, Cyprus maintains a generally exceptionally strict control over the movements of capital.

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