By Lidia Kelly and Douglas Busvine
MOSCOW, March 21 Cyprus is in talks with Moscow
on raising billions of euros in investments from Russia as an
alternative to imposing a tax on Cypriot bank deposits, hoping
to lift the barrier to an EU bailout.
Finance Minister Michael Sarris, in Moscow for a second day
of talks on Thursday, said Cyprus' banks and its offshore gas
riches were areas in which Russia could invest.
"The banks are the ultimate objective in any support we
get," Sarris told Reuters. "There are no stumbling issues -
there is just work to be done."
Political and financial sources say Russian state
development bank VEB could be used as a vehicle to raise up to
5.8 billion euros ($7.5 billion) in new funding secured against
real assets that could later be sold off.
That is the sum Nicosia needs for the 10-billion-euro EU
bailout to go into force without having to impose a hefty tax on
bank deposits - much of which are Russian money.
The Cypriot parliament on Tuesday threw out a package that
would impose the 9.9 percent levy on deposits of more than
100,000 euros, in a move unprecedented in the history of the
Sarris said he was also seeking to extend an existing 2.5
billion euro bailout loan from Russia, and lower the interest
rate it pays to 2.5 percent from 4.5 percent.
Additional Russian funding could help keep Cyprus within
borrowing limits that would let the International Monetary Fund
back a rescue.
"It seems to me there is a potential deal structured so the
loan is turned to equity over time, in a way that would be
compatible with the IMF's requirements," said Jacob Nell, an
economist at Morgan Stanley in Moscow.
Precedents include Russia's own 'loans for shares'
privatisation scheme of the 1990s, where investors funded Boris
Yeltsin's teetering government in return for a pledge of assets
that later created the fortunes of its billionaire oligarchs.
Russia has also provided similar secured financing to its
ex-Soviet neighbours, Ukraine and Belarus, after they fell into
Finance Minister Anton Siluanov said talks with the Cypriot
delegation in Moscow would continue. The European Central Bank
has set a Monday deadline for Cyprus to raise billions of
dollars or face losing emergency funds and inevitable financial
It was unclear whether the Moscow talks would lead to an
agreement or merely marked an attempt by Nicosia to extract less
onerous terms from Brussels. But a significant side deal between
Cyprus and Russia should not be ruled out.
DEVELOPMENT BANK TO LEAD?
VEB - short for Vnesheconombank - is not a regulated bank,
but functions more as a financial-industrial group representing
the interests of the Kremlin.
Its balance sheet of around $100 billion could support such
an operation where Russia's large state banks - Sberbank
, VTB or Gazprombank - would find themselves
hitting prudential limits on their exposure.
"All the large Russian banks have denied any possibility of
bailing out Cyprus - VTB, Sberbank, Gazprombank," said Eugene
Tarzimanov, a senior credit officer at Moody's in Moscow.
"I haven't heard anything about VEB."
VEB did not comment but said it had no exposure to Cyprus.
Russian energy firms, led by state gas export monopoly
Gazprom, are interested in offshore gas reserves that
Cyprus estimates at 60 trillion cubic feet. But the strategic
lure of the largely untapped reserves may not be supported by
hard economic logic.
"Even if Cyprus has the scale of resources they hope for,
they face major technical and marketing challenges ahead," said
Bill Farren-Price, of UK-based consultancy Petroleum Policy
"The devil is in the detail - but it looks like a stretch to
collateralize a 6 billion euro loan against unproven offshore
Discussing the possible structure of a deal, a senior Moscow
lawyer said Russia could provide 6 billion euros to fund a
securitized pool of Cypriot offshore gas, land, real estate and
banking assets that could later be sold off in an orderly way.
"I think it's a politically acceptable solution," said
Dmitry Afanasiev, chairman of Russia's largest law firm, Egorov
Puginsky Afanasiev & Partners. "Then private investors can end
up owning the securities and it will in effect drive the
economic growth of Cyprus."
The vehicle could securitize the assets and then become
publicly owned, allowing Russia to exit, preferably at a profit,
over a period of about four years, he said.
Afanasiev sits on the board of UC Rusal, the
world's largest aluminium producer that is controlled by
billionaire Oleg Deripaska, one of Russia's billionaire tycoons
with close ties to the Kremlin.