* Russia has strong financial ties with Cyprus
* Default could freeze $19 billion in corporate deposits
* EU in bailout talks with Cyprus
MOSCOW, March 13 Russian banks and companies
exposed to Cyprus risk losing billions of dollars should the
island's government default on its debt obligations, Moody's
credit-rating agency said on Wednesday.
Cyprus is been negotiating with the European Union and
Russia on a 17 billion euros aid package that would recapitalise
its oversized banking sector, but also service debt and
Euro zone finance ministers have pledged to agree a bailout
for Cyprus by the end of March and have set a meeting for
Friday, but there are still no details on financing the rescue
Moody's said there is a high probability of Cyprus
defaulting, or at least the authorities being forced by the size
of the debt to "pursue every avenue for debt reduction,
including private-sector losses on Cypriot debt."
Russian banks had between $30-$40 billion in cross-border
loans to Cypriot companies tied to Moscow and around $12 billion
on deposit with Cypriot banks at the end of last year. There is
a risk that some $19 billion may not be recovered, Moody's said.
Cyprus is a favoured offshore centre for Russian big
business, thanks to its low taxes and light regulation. It ranks
as the largest source of foreign direct investment into Russia -
money that is largely Russian in origin.
Losing the possibility to repatriate the $19 billion - the
amount estimated by Moody's in corporate deposits at Cypriot
banks - could also affect the servicing of bank debt back in
Russia, Eugene Tarzimanov, author of the Moody's report, said.
"A potential Cyprus moratorium on external payments could
block loan repayments to Russia, leading to some asset-quality
pressures," Tarzimanov said.
Cyprus has asked Russia for a 5-year extension of an
existing loan of 2.5 billion euros that matures in 2016 as well
as a reduction in the 4.5 percent rate of interest.
Most of Russia's largest banks have some credit exposure to
Cyprus. VTB, Russia's second-largest bank by assets,
had $13.8 billion in assets and $374 million through its Cypriot
subsidiary, Russian Commercial Bank, at the end of 2011.
Cypriot President Nicos Anastasiades is to travel to Russia
to meet President Vladimir Putin in the coming weeks. One risk
to Russia's state banks identified by Moody's is that the
Kremlin may direct them to lend more to tide Cyprus over.
Euro zone officials have said that Russian investors were
interested in buying a majority stake in Cyprus Popular Bank
and increasing their holdings in Bank of Cyprus
- the two biggest banks on the Mediterranean island.
German officials, backed by the Netherlands and Finland, as
well as the International Monetary Fund, have pushed for
depositors in Cypriot banks, many of whom are Russian and
British business people, to help pay for the cost of the
Should all rescue plans fail, Russian loans, which
corresponded to 15-20 percent of Russian banks' capital base
last year, will suffer, Moody's said.
"In case of restrictions, Cyprus would simply block debt
repayments to Russian banks."