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Commentary: Russia's Treasure Island

By ARNAUD DE BORCHGRAVE, UPI Editor at Large   |   April 1, 2013 at 7:32 AM   |   Comments

WASHINGTON, April 1 (UPI) -- No sooner did Britain's Prime Minister Margaret Thatcher meet Mikhail Gorbachev in London for the first time in 1984 -- a year before he became Russia's No. 1 -- and described him as "a Russian we can business with," than the alarm bells rang among members of the Soviet Union's nomenklatura, the Soviet ruling class.

A year later, when Gorbachev became top Communist in the Kremlin and anti-Soviet guerrillas in Afghanistan began shooting down Soviet helicopters in Afghanistan with U.S.-supplied Stinger missiles, the alarm bells grew louder.

Gorbachev decided the Soviet guerrilla war he had inherited in Afghanistan wasn't worth it and the nomenklatura realized that sooner or later international communism would take a blow from which it probably wouldn't recover.

And already in 1986, three years before the Soviet army pulled out of Afghanistan, some of the wiser, aging apparatchiks of the nomenklatura decided to build secret rainy day funds abroad. They smuggled out priceless museum pieces, gold bars and diamonds.

Some art objects even had official export papers provided by officials on the take.

Like-minded contacts in the KGB understood how financial assets could be protected once smuggled out of the Soviet Union. They had been using sub rosa facilities for KGB activities for decades.

By the time the Berlin Wall collapsed in 1989, Soviet crime gangs had moved into West Berlin and from there they created global organized crime syndicates.

Cayman Islands facilities, used extensively for illegal transactions close to the United States, were too far for the new breed of Russian transnational crime bosses. They needed something closer to home and totally secure from Western snoopers.

The financial and economic rape of Russia generated an estimated $220 billion.

And that is how Cyprus became financial headquarters for a new class of Russian millionaires and then billionaires.

Cypriot lawyers helped them establish legitimate businesses in Nicosia and the seaside resort of Limassol. Some attorneys had a dozen shiny brass name plates of Russian companies on their office doors.

Following the end of the cold war, Russian mafia bosses in the French Riviera's most expensive hotels didn't even bother to look like prosperous businessmen. Black leather jackets, black pants, open neck white shirts with gold chains flashing sudden wealth, was the uniform of day and evening in those early days.

The Hotel du Cap Eden-Roc in Cap d'Antibes, the most expensive establishment on the entire coast, frequently had a majority of Russian Mafiosi in the dining room. They invariably picked the most expensive nectar on the list. In the early 1990s, a single bottle of Chateau Petrus Pomerol set you back $3,000.

The islands of Cyprus and Malta joined the European Union in 2004 and Nicosia remained the favorite banking center for now respectable Russian companies and transnational corporations. That is until they were suddenly whipsawed in a Europe-wide crisis triggered by Greece's collapse inside the European Union.

The Cyprus-Russia link is the dominant feature of the country's financial profile. Cypriot President Nicos Anastasiades has close ties with Russia. His law firm represents two Russian billionaires.

Most of the private jets that fly in and out of Nicosia's Larnaca International Airport are Russian-owned or chartered.

The crisis, long dormant in the wake of the better known eurozone Greek upheaval, shared the same roots. But German Chancellor Angela Merkel always thought -- and said privately -- that Cyprus was the European Union's ticking financial bomb.

And Cyprus is potentially more damaging than the recent crises in Spain, Portugal or Greece. The small island's banking collapse stemmed from the economic and financial equivalent of a one-trick pony. Banking is the mainstay of the economy.

And most of the money in Cyprus's banks is -- or was -- Russian.

In late 2011, Moscow authorized a $3.2 billion loan to Cyprus. This simply postponed the day of reckoning for Cyprus as a member of the European Union.

More recently, the Russian finance minister was told the only way to avoid a financial disaster was for Moscow to take over the Russian-owned Laiki bank, Cyprus's second largest, where Russians do most of their foreign banking. Moscow said nyet.

Backing and filling between EU headquarters in Brussels, the International Monetary Fund in Washington, and the Kremlin, while Cyprus banks remained closed, finally led to a solution that would slash the accounts of larger depositors.

The bailout has a $21.8 billion price tag or a haircut of 6.75 percent on all accounts less than 100,000 euros -- $128,000 -- and 10 percent on everything more than that line.

There were few tears among other Europeans who dismissed the crew cut as only hurting Russia's fast ruble crowd. No one is saying, "Let's sell Cyprus."

The poor in Cyprus had no access to their bank accounts for two weeks. They always thought banks couldn't fail in Cyprus because fresh Russian money was always circling the island looking for safe haven. In 2012, an estimated $250 billion in Russian transactions went through Cyprus's banking system.

A run on the banks as they reopened was blocked by limiting withdrawals to $384 per day per person and limiting transfers abroad to $6,400.

Those leaving the island could only take 1,000 euros -- $1,280 -- or the equivalent in foreign currency.

Authorities appeased angry customers waiting in line outside banks by announcing that restrictions on transactions would be lifted in a month.

Now Laiki will be absorbed by the Bank of Cyprus and some Russian deposits are expected to sail westward across the Mediterranean to Malta, another well established tax-dodging center.

The bigger ones still have Monte Carlo in the independent state of Monaco on the French Riviera.

© 2013 United Press International, Inc. All Rights Reserved. Any reproduction, republication, redistribution and/or modification of any UPI content is expressly prohibited without UPI's prior written consent.
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