March 19, 2013

VLADIMIR PUTIN: Not So Happy About Cyprus.

Russia’s well-connected kleptocrats have the most to lose here, and it’s not surprising that they called their friends in the Kremlin at the first sound of this story breaking. It’s just not going to help them much in this case: Putin and his cohorts can wail and gnash their teeth all day long, but unless the Russian government is willing to pony up and pay to bail the depositors, the Kremlin has precious little leverage over this decision.

There’s also a chance that the tax will be revised further in ways Russia will hate even more. The Cypriot central bank governor is arguing that small savers should be exempted from the tax in accordance with EU-wide deposit insurance rules, which guarantee accounts under €100,000. That would likely mean an even bigger tax on the big fish. If this were to happen, expect more outrage from Moscow—again probably to no effect.

The troubles of Cyprus and Greece offered Russia a once in a generation opportunity to build its influence in the EU. These two countries are close to Russia in culture and religion, and Russia is broadly popular in both. Like Russia, they are worried about Turkey. Like Russia, they are deeply suspicious of the liberal West. A close alliance with these countries would give Moscow much greater leverage over the EU, and many in the EU would be prepared to accept that role—if Russia would bear the brunt of Greek and Cypriot debt problems.

Russia has made very little use of this opportunity, and the reason appears to be Russia’s economic weakness.

Take note.

UPDATE: Next, New Zealand? Just more reason for the GOP to offer anti-confiscation legislation now.

ANOTHER UPDATE: Eugene Volokh says that despite the headline, this isn’t really Cyprus-in-New-Zealand:

I might well be mistaken, and this is far outside my field, but is the New Zealand proposal that similar to the Cyprus one? As I understand it from the story, the New Zealand proposal is essentially a suggestion to abolish deposit insurance going forward — a proposal that would fit in the “crunchy” category endorsed by http://www.ft.com/cms/s/2/4529b44e-68b8-11da-bd30-0000779e2340,dwp_uuid=6f876a3c-e19f-11da-bf4c-0000779e2340.html#axzz2NoPXcDDk (“Soggy federal deposit insurance, coupled with the move towards a soggier interest-rate regime, has taken many of America’s thrifts and banks into the shadow of a systemic collapse.”), and that would require depositors to scrutinize bank accounts just as they do other investments, whether themselves or through intermediaries. That might not be a good idea; perhaps on balance deposit insurance is good, despite the moral hazard it creates. But it’s quite different from Cyprus, where the government is being pressured to renege on its existing insurance guarantees. Or am I missing something?

Good point. True, it differs from Cyprus’ approach in that it’s not retroactive. Offering only partial deposit insurance upfront encourages depositors to choose their banks carefully since, in reality, when you make a deposit in a bank, what you’re really doing is making a loan to the bank. Such an approach is, however, a two-edged sword since while it may encourage more policing of banks by depositors on the front end, once there’s doubt it makes a bank run more likely than full deposit insurance.