Cyprus rejects article claiming possible bailout would mainly help Russian money launderers

NICOSIA, Cyprus – Cyprus' government on Monday dismissed a German media report that claims a financial bailout for the island nation would primarily benefit Russians who have stashed billions in ill-gotten gains in its banks.

Government spokesman Stefanos Stefanou rejected the article by German news magazine Der Spiegel, which cited the conclusions of a classified German intelligence service paper, as an attempt to sully the country's reputation as an international investment center.

Stefanou said Cyprus has enacted effective anti-money laundering laws that adhere to European Union law and which have earned plaudits from, among others, the International Monetary Fund.

The Spiegel article said that Germany's foreign intelligence agency (BND) estimates Russian deposits in Cypriot banks amount to over €20 billion ($25.55 billion), more than Cyprus' €18 billion in national GDP. The BND also accused Cyprus of facilitating money laundering by making it easy for Russians to obtain citizenship.

Stefanou said Russians prefer to deposit money in Cyprus mainly because of advantages offered by its banking system. For example, Cyprus has a treaty with Russia that avoids double taxation on investments and its corporate tax rate is 10 percent, one of the lowest in the EU.

Asked to comment on the Spiegel article, German Chancellor Angela Merkel's spokesman Steffen Seibert said that the government on principle never discusses intelligence matters.

Cyprus is still negotiating its potential bailout with the so-called troika — the European Commission, the European Central Bank and the IMF.

"The discussion is currently moving forward with moderate speed," German Finance Ministry spokesman Martin Kotthaus said. He insisted that having a Cypriot bailout agreement before the end of the year "will be difficult."

Stefanou said Cyprus is now waiting for word on when the troika officials will visit the country for a final round of bailout negotiations.

Finance Minister Vassos Shiarly said the government has nearly met a troika demand to cut spending and raise revenue by €975 million over the next three years and that only a few issues remain to be ironed out. They include privatizing profitable, state-owned companies and supervision over the country's co-operative banks.

The main point of contention between Cypriot and troika officials is how much Cypriot banks need to recover from €4.5 billion in losses they took on Greek government debt and bad loans.

Parliamentary Speaker Yianniakis Omirou said that the troika estimates the needs of the Cypriot banking sector — which holds assets eight times the size of the country's economy — to hover at around €12 billion ($15.57 billion), twice as much as Cypriot officials believe. That's on top of the approximately €4.5 billion the country needs to service its debt and pay its bills until 2016.

Cyprus has been unable to borrow from international markets for more than a year. A Cypriot request for a €5 billion ($6.39 billion) loan from Russia — twice the amount Moscow gave Cyprus as a rescue loan last year — has so far gone unanswered.

The exact sum Cypriot banks will need won't be known before early next year when investment firm PIMCO and auditors Deloitte finish combing through the lenders' books. Shiarly said not having an exact figure won't keep the government from getting a bailout deal swiftly.

Although Shiarly said the government has enough cash on hand to pay public sector salaries for the next couple of months, state coffers are drying up fast. Moreover, prolonging the uncertainty over a bailout deal will tighten the noose around ailing domestic businesses and further drain confidence in the economy. That would be bad news for a country where unemployment has ballooned to 13 percent and the economy is projected to contract by some two percent this year.

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Juergen Baetz in Berlin contributed to this story.