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Over the past few months, a lot of questions have been raised about the share  of Russian money flowing through Cyprus, not always legally,  and what effect this would have on an EU bailout for the island.

Now as EU leaders prepare to meet and discuss the bailout this  Friday, Moody’s raises two equally important questions: How at risk are Russian  banks and companies to problems in the Cypriot banking sector? And how likely  are Russian depositors and creditors to get their money back after an EU-managed  bailout?

Much of the Russian money that travels to Cyprus ends up coming right back to  Russia, with many Cyprus-based companies of Russian origin borrowing from  Russian banks and using the funds to reinvest back into Russia.

The problem for these companies would arise if as part of an EU bailout Cyprus introduced restrictions on  external payments, potentially causing those Cypriot-based holdings “to enter  into technical defaults, increasing risks for lenders”, warns Moody’s in a new  report.

“This is because cash flows used by these borrowers to repay their loans  originate from Russia and often go through Cyprus, to be later repaid to Russian  banks from Cyprus. In case of restrictions, Cyprus would simply block debt  repayments to Russian banks.”

The Russian lenders that have exposure to Cypriot-based borrowers include  Gazprombank, Nomos, Sberbank, Alfa and most notably state-owned VTB, whose  Cypriot subsidiary had a total of $13.8bn in assets and $374m in equity of $374  million at the end of 2011, Moody’s notes.

It is hard to overstate just how much exposure both Russian lenders and  Russian companies have to the Cypriot banking sector. Here are some  mind-boggling statistics from Moody’s:

  • Russian banks’ cross-board loans to Cypriot-based Russian companies totaled  $30-40bn at the end of 2012 – that is equal to 15-20 per cent of Russian banks’ capital base in Russia, and 5-6 per cent of their gross corporate loans.
  • Russian corporate deposits in Cyprus totaled an estimated $19bn at the end  of August – an amount that is equal to 7 per cent of all the corporate deposits  in Russia, excluding current accounts.

While Russian companies aren’t directly affected by the downturn in Cyprus  since much of the money is simply flowing in from Russia and right back out,  problems could arise if, as mentioned, Cyprus puts a moratorium on external  payments which could “block loan repayments to Russia, leading to some asset  quality pressure”, Moody’s says.

Furthermore there is the question of to what extent Russian groups will be  regarded as priority creditors when it comes to Cyprus repaying its debts, and  whether they will be forced to take losses, an outcome Moody’s believes is  possible

This from the ratings agency:

…In our opinion there is an elevated probability that the sheer size of  Cyprus’s anticipated debt load will eventually compel authorities to pursue  every avenue for debt reduction, including private sector losses on Cypriot  debt.

EU leaders may be meeting to discuss the bailout on Friday. But for Russian  creditors and corporates the real excitement could come later down the road

Financial Times

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