People
&Markets
Cyprus cleans up Russian image
-ONEYûLAUNDERINGûHASûBECOMEûAûSIGNIlCANTû
ISSUEûFORûlNANCIALûINSTITUTIONSûACROSSûTHEû
European Union this year.
Latvian bank ABLV closed down in February
after the US Treasury said it was used extensively
for money laundering. In September, DANSKE
BANK revealed its Estonian branch had been used
to launder €200bn between 2007 and 2015. And
in the same month INGûWASûlNEDûõMûBYûTHEû
$UTCHûAUTHORITIESûFORûANTI
MONEYûLAUNDERINGû
breaches too.
But one EU jurisdiction, Cyprus, once
notorious as a favoured destination for
people to move money out of Russia,
reckons it is getting to grips with the issue.
#ONSTANTINOSû(ERODOTOU ûONEûOFûTWOû
executive directors of the Central Bank of
#YPRUS ûSAIDûSIGNIlCANTûSTEPSûHADûBEENû
taken to clean up the banking sector’s image
since the country’s €10bn bailout by the IMF
and EU in 2013.
“The Cyprus economy has returned to
sustainable growth. This growth is broad-
based and not coming from any one sector.
Before the crisis we relied a lot on credit
expansion,” he said.
That had caused the banks to balloon, as non-
residents took advantage of the chance to park
money in euros. At its peak, banking assets
EQUALLEDûEIGHTûTIMESû#YPRUSûENTIREû'$0
As part of Cyprus’s bailout, large bank
depositors with over €100,000 were bailed in,
losing a proportion of their deposits. That saw
Cyprus Popular Bank wound down and its
smaller deposits transferred to BANK OF CYPRUS.
Since then lending has been curbed and
packages of non-performing loans have been
earmarked for sale. Bank of Cyprus announced
AûlRSTûSIGNIlCANTûTRANSACTIONûTOûSELLûõBNûOFû
NPLs to US investor Apollo in August.
“Before the crisis banking assets equalled
EIGHTûTIMESû'$0û7EûHAVEûSEENûDELEVERAGINGû
of two to three times and they are now 3.3
TIMESû'$0û4HATûISûAûMASSIVEûREDUCTION vûSAIDû
(ERODOTOU
h7EûHAVEûSEENûAûFAIRLYûSIGNIlCANTû
reduction in NPLs. And more NPL sales are
PLANNEDûNOWûTHEûlRSTûONEûHASûBEENûAGREEDv
The country has also quickly adopted anti-
money laundering measures, such as the
EU’s latest directive, and transformed
culture.
“It is now very hard to open a bank account
in Cyprus. A potential client has to meet face-
to-face with a bank within three months,” said
(ERODOTOU
That does not prevent directors of shell
companies carrying out this task on behalfof their underlying owners. The country also
plans to tighten this potential loophole too.
h7EûAREûCONSULTINGûONûTHEûDElNITIONûOFûSHELLû
companies with which banking relationships
should be terminated and the issuance of this
DIRECTIVEûISûIMMINENT vûSAIDû(ERODOTOU
“Amongst other measures and tests,
banks will require shell companies to say
WHOûTHEIRûUNDERLYINGûBENElCIALûOWNERûISv
These tactics appear to be working.
Russian money parked on the island has
declined markedly, and many bank accounts
have been shut.
“Russian clients now only make up 2% of total
bank clients. That is a huge decrease of 41% since- And 6% of total deposits are Russian, which
is 37% lower. In general more than 230,000 bank
accounts have been terminated.”
That said, Bank of Cyprus’s major shareholder
ISûANûAFlLIATEûOFû2ENOVAû'ROUP ûOWNEDûBYû
Russian oligarch Viktor Vekselberg, against
whom US authorities have imposed sanctions.
Cyprus is not obliged to comply with US
SANCTIONS ûBUTû(ERODOTOUûSAIDûITSûBANKSûDOû
so “on a voluntary basis”.
(EûCALLEDûFORûBETTERûCOORDINATIONûTOûlGHTû
AML globally as well as within Europe,
saying: “Those who want to money-launder
WILLûALWAYSûBEûTRYINGûTHEIRûBESTûTOûlNDûCRACKSû
and weaknesses in jurisdictions.”
Christopher Spink
India’s RBI rift threatens bond market
A bitter public spat between the central bank
and Narendra Modi’s government has dealt a
further blow to India’s fragile debt market,
following last month’s Infrastructure Leasing
& Financial Services crisis.
The rupee slumped to 74.10 to the US
dollar on Wednesday, within a whisker of
last month’s all-time low of 74.485, and the
10-year government benchmark yield
surged by 5bp to 7.88% amid reports that
Reserve Bank of India governor Urjit Patel
was considering resigning.
The currency and bond market later
recovered after the Ministry of Finance calmed
nerves with a statement declaring the RBI’s
independence was “an essential and accepted
governance requirement”. The ministry said
extensive consultations between bank and
government were taking place and said the
government “has never made public the
subject matter of these consultations”.
The tensions spilled into the open on
October 26 when RBI deputy governor Viral
Acharya warned in a speech that undermining
central bank independence could be
“potentially catastrophic”, in effect taking a
public stance against government pressure to
RELAXûMONETARYûANDûlNANCIALûPOLICIES
“The rift between RBI and the government
going public is a pretty big risk for India,” said
Shilan Shah from Capital Economics. “The
BREAKDOWNûBETWEENûTHEûTWOûDOESûNOTûREmECTû
well on the policy-makers.”BIG RISKS
Foreign portfolio investors have been net
sellers in the debt market for the past two
months, dumping Rs99.78bn (US$1.35bn) of
bonds in October alone, according to data on
.ATIONALû3ECURITIESû$EPOSITORYû,TD
The cracks in the relationship between
the central bank and the government, with
their uncomfortable echo of recent crises in
Turkey and Argentina, will further dent
CONlDENCEûINûDOMESTICûBONDS
In his speech to top industrialists, Acharya
had cited an earlier episode of government
interference with Argentina’s central bank
as an example of what could go wrong.
“Governments that do not respect central
bank independence will sooner or later
INCURûTHEûWRATHûOFûlNANCIALûMARKETS ûIGNITEûECONOMICûlRE ûANDûCOMEûTOûRUEûTHEûDAYûTHEYû
undermined an important regulatory
institution,” said the RBI deputy governor.
The dire warning was bound to unsettle
investors.
“This would dent some of the credibility
that India’s policy-makers have built up over
the last few years and cause the rupee to
trade weaker,” said Johnny Chen, portfolio
manager at NN Investment Partners.
(OWEVER ûDISAGREEMENTSûBETWEENûTHEû2")û
and the government of the day are not
unprecedented.
Still, the dispute has added pressure on the
bond market just as corporate issuers are
looking to regain access to funding after a
liquidity freeze following the IL&FS defaults.
Volatile yields have led some companies to
stand back. Last Thursday, RURAL ELECTRIFICATION
CORP scrapped an offering of Rs35bn (US$477m)
of 10-year subordinated bonds after it did not
get the desired pricing levels. On October 29, LIC
HOUSING FINANCE abandoned a triple-tranche
bond sale from which it had planned to raise up
to Rs57.50bn.
Krishna Merchant