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If the island’s government default on its debt obligations, Russian banks working with the Russian companies registered in Cyprus, might lose up to $53 billion, says a Moody’s report entitled “Russian Banks: Cyprus-Related Risks Could Lead to Moderate Credit Losses.”
Analysts see three types of risks that Russian banks are exposed to in Cyprus.
An important risk is the large amount of loans that Russian banks issued to Cyprus’ offshore companies.
According to Moody’s, the loans totalled $30-40 billion in 2012.
Eugene Tarzimanov, a Moody’s vice president senior credit officer and author of the report says “asset-quality pressures” could arise.
“The main contagion channel for Russian banks is their loans to Cyprus-based companies of Russian origin. We estimate that these loans totalled around $30-40 billion at year-end 2012, or around 15-20 per cent of Russian banks’ capital base.
“A potential Cyprus moratorium on external payments could block loan repayments to Russia, leading to some asset-quality pressures,” says Tarzimanov.
The second threat is associated with around $12 billion Russian banks placed with their Cypriot subsidiaries; and around $1 billion invested in the capital of their banking and non-banking subsidiaries in Cyprus.
“In case of bank defaults, deposit freeze or burden sharing with wholesale depositors, these companies could take losses on their deposits or lose the possibility to repatriate their funds. In turn, this will decrease their capacity to service bank debt back in Russia,” the report says.
The third risk is that Russian subsidiaries of Cypriot banks could face heightened credit risks, reputational damage and deposit outflows because of concerns related to their parent banks’ growing problems.
Cyprus is a favoured offshore centre for Russian big business, as it boasts low taxes and light regulation.
But Cyprus has experienced serious economic problems in light of the euro crisis.
Cyprus has been negotiating with the European Union and Russia on a 17 billion euro aid package that would recapitalise its oversized banking sector, but also service debt and government expenses.
The EU leaders are due to discuss the bailout this Friday.
Cyprus has also 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 per cent rate of interest.
Russia’s VTB – second-largest bank by assets, is particularly endangered – its subsidiary had a total of $13.8 billion in assets and $374 million in equity of $374 million at the end of 2011, according to Moody’s.
Other potential victims include Gazprombank, Nomos, Sberbank and Alfa Bank.