Hit By the Levy Cyprus Mulls Citizenship Offer for Russians

After being forced to impose a levy on bank deposits above 100,000 euros under the terms of its bailout, Cyprus is looking for ways to preserve the country's attractiveness to foreign investors. The government may soon offer EU citizenship to Russians hit by the one-time tax.
Two Russian businessmen smoke from hookahs inside a restaurant in Limassol.

Two Russian businessmen smoke from hookahs inside a restaurant in Limassol.

Foto: © Yorgos Karahalis / Reuters/ REUTERS

Cypriot President Nicos Anastasiades has a new idea for winning frightened investors back to his country. He wants to offer Cypriot citizenship to foreigners who have lost more than €3 million ($3.91 million) as part of Cyprus' one-time forced levy on bank accounts. The president made the announcement in a speech to Russian businesspeople in Limassol on Sunday.

Anastasiades said his government is currently drafting a number of measures to limit the "damage to the Russian business community." And it was no coincidence that the president gave the talk in Limassol, Cyprus' second biggest city, which is often referred to by the nickname Limassolgrad because of the large number of Russians living there.

Rating agency Moody's estimates that Russian customers have deposited a total of €31 billion ($40.5 billion) in Cypriot banks. Those holding accounts with deposits in excess of €100,000 on the island will soon be hit with a one-time deposit tax that could reach as high as 60 percent in some instances, as part of the terms agreed with the European Union for the country to obtain a bailout package and avert bankruptcy. Experts believe the move will strongly diminish the country's attractiveness for investors and that its economy will shrink dramatically.

Given the visa restrictions imposed on Russians, obtaining citizenship from an EU member state could indeed be an attractive proposition -- one from which Anastasiades would like to profit.

In addition to the potential citizenship offer, the government is also seeking to create other measures to help keep the country attractive to investors, including tax incentives for existing or new companies that conduct business in Cyprus. Anastasiades said the measures would be agreed by his government during two days of consultations this week.

At the end of March, the euro-zone member states and the International Monetary Fund agreed to a €10 billion bailout package for the crisis-plagued country. The German federal parliament, the Bundestag, is expected to vote on the aid package on Thursday. And German Finance Minister Wolfgang Schäuble has indicated the bailout, which requires the approval of all national parliaments in the euro zone, will be passed. "I anticipate a broad majority in the Bundestag as well as broad support from the opposition," Schäuble told the Neue Osnabrücker Zeitung newspaper.

Bail-Ins Could Become EU Norm

Cyprus' forced levy, or "bail-in," of bank account holders proved extremely controversial across Europe, but it could become more common in future bailouts. Germany's Süddeutsche Zeitung newspaper reported this weekend on an internal European Commission strategy paper indicating that the EU's internal market commissioner, Michel Barnier, is preparing a law that would tap bank investors and account holders in the future before any aid would be provide by the permanent euro bailout fund, the European Stability Mechanism (ESM). The proposal establishes a hierarchy for who would be hit first when liquidating a bank: shareholders and creditors first and then depositors with more than €100,000 in their accounts. A bank stability fund that each EU country is now being called on to establish would also be tapped. ESM would then only participate in a bailout as a last resort. The EU legislation is expected in June.

Still, some have warned that that the Cyprus model of making people with deposits greater than €100,000 help pay for bailouts could frighten investors away from the euro zone. "This will lead to a situation in which investors invest their money outside the euro zone," Luxembourg Finance Minister Luc Frieden recently told  SPIEGEL.

dsl -- with wires
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