UPDATE 1-Cyprus plan risks banking system collapse -Russian EU envoy

Tue Mar 19, 2013 7:48am EDT

BRUSSELS, March 19 (Reuters) - Russia's envoy to the European Union likened a proposed tax on Cypriot bank deposits on Tuesday to forceful expropriation and said it could lead to the collapse of the Cypriot banking system.

The bank deposit tax, part of a bailout for Cyprus agreed by the euro zone on Saturday, "seems similar to forceful expropriation", , Vladimir Chizhov told reporters in Brussels, in a video conference from Moscow. "The principle ... is wrong."

"This decision is dangerous because of possible social repercussions in Cyprus and it is dangerous in terms of triggering possible domino effects in euro zone countries," he said, speaking through an interpreter.

"And there is another threat. When the banks open, people will rush to withdraw their deposits - that's another threat - and then the whole banking system can collapse," he said.

Russians account for much of the billions of euros held in Cypriot banks by foreign depositors. It banks are heavily exposed to the island.

Although it is not formally on the agenda, Chizhov said he expected the Cyprus issue to be raised in talks between the Russian government and the European Commission in Moscow on Thursday and Friday.