By Hamza Hendawi
RUSSIA’S financial crisis has forced three financial institutions led by the Cyprus Development Bank to put on hold plans to set up a joint bank in the Russian Black Sea region of Krasnodar, banking sources said yesterday.
News of the delay come at a time when Russia’s troubled economy and the plunge of its currency, the rouble, may be starting to take their on toll on Cyprus, where some 5,000 of the 34,000 offshore companies registered are Russian.
The island is also expecting a record 200,000 Russian tourists to visit this year, a target which could now be in some doubt due to Moscow’s financial woes.
The Cyprus Development Bank, the European Bank for Reconstruction and Development (EBRD) and Russia’s Inkombank submitted an application to the Central Bank of Russia last April to establish the Investment Bank of Kuban with a paid-up capital of $10 million.
The Nicosia-based Cyprus Development Bank was to contribute half the capital, while the two other banks were to provide $2.5 million each.
The banking sources, speaking to the Cyprus Mail on condition of anonymity, said the Russian Central Bank, as part of its policy to support the rouble, had requested that they convert the $10 million to roubles. The three banks had no objection to complying with the request at the time, but this has now changed.
“The processing of their application had gone as far as the last-step point whereby the three partners had to pay the $10 million,” said one banking source familiar with the project.
“But there is no way that they are going to see their money exchanged for roubles now. So, they decided to put everything on hold for the time being, but they have no intention of withdrawing the application,” said the source, quoting officials from the three banks involved.
The proposed Investment Bank of Kuban is needed to channel and facilitate investments for the Russian region of Krasnodar, something in which the state-owned Cyprus Development Bank is playing a major part.
The bank has been involved in charting development in Krasnodar for about four years and is actively promoting the area to investors and manufacturers from Cyprus and elsewhere in Europe.
The sources, however, said the rouble’s crisis might have a silver lining and play a role in attracting manufacturers to invest in Krasnodar, exploiting the diminished value of local raw materials and labour.
News that plans for the joint bank were on hold coincided with the emergence yesterday of mixed signals from Russia on its month-old economic crisis.
President Boris Yeltsin spoke of things getting back to normal, but ordinary Russians continued to demonstrate a lack of faith in the economy by dumping roubles for dollars.
The rouble lost some 30 per cent of its value yesterday alone, as banks ended several days of squeezing up official rates. That left it at 14-16 per dollar on the street, less than half what it was a month ago.
Already the month-old crisis in Russia has led to a freeze in high-level negotiations to renew a double taxation avoidance treaty, which is vital to the island’s offshore sector. The two sides last held talks on the treaty at ministerial level in July. That round was inconclusive and a second round which had been scheduled for this month is now in doubt due to the crisis; it is not expected to resume before a new government takes office in Moscow and the dust of the past four weeks of upheaval finally settles.
Accounts held at Russian banks, meanwhile, have been frozen since shortly after the crisis began, leaving the activity of the five Russian offshore banking units operating on the island, which include the large Inkombank, vastly diminished.
The impact of the Russian crisis on the flow of tourists from Russia has yet to be gauged. Officials at the Cyprus Tourism Organisation said at the outset of the crisis that the predicament of the rouble was not likely to affect the number of Russians holidaying on the island, since they were mostly wealthy with incomes and savings in foreign currencies.
However, in view of the fact that the crisis has worsened over the last four weeks, this may no longer be the case, although no figures are yet available on whether Russian bookings have been cancelled.
