Cyprus's request for a bailout has created a political headache for German Chancellor Angela Merkel over concerns that wealthy Russians could be the chief beneficiaries, the weekly Der Spiegel reported, citing an intelligence agency report.
Cyprus is in talks with international lenders on the terms of a bailout expected to total €10 billion after its two largest banks incurred huge losses due to the Greek debt writedown earlier this year.
The scale of the aid is tiny compared to Greece and other struggling eurozone countries.
But a report prepared by Germany's intelligence agency (BND) on money laundering in Cyprus has laid bare the political risks involved, Der Spiegel reported yesterday (4 November).
"The report of the BND shows who will profit most of all from the billions in European taxpayer funds – Russian oligarchs, businesspeople and mafiosi who have parked their illegal earnings in Cyprus," the magazine said.
Cyprus is a popular offshore tax haven for Russian businesses seeking protection from their country's unpredictable investment climate.
But Cyprus, which joined the European Union in 2004, says it has strengthened its regulations over the past decade against money laundering and is in full conformity with international rules.
Der Spiegel, citing the "secret" BND report and European officials, said significant doubts persisted over Cypriot implementation of these regulations.
The BND report found that Russian nationals held some €21 billion in Cypriot bank accounts, the magazine reported, dwarfing both the emergency aid the euro zone is likely to provide and the country's total national output of about €17 billion.
Cypriot authorities do not provide a breakdown of bank deposits based on nationality, but Russians are believed to make up a large proportion of non-domiciled accounts.
Germany, the eurozone's largest economy, would provide more than €2 billion towards the expected Cypriot bailout. But Germans are angry about having to stump up billions of euros to rescue Greece and other heavily indebted economies.
Carsten Schneider of Germany's main opposition Social Democrats, which hopes to oust Merkel's conservatives in an election due next year, said his party would only vote in parliament in favour of aid for Cyprus on certain conditions.
He said Cyprus must be ready to adjust its low corporate tax rate and crack down further on money laundering.
Germany's lower house of parliament, the Bundestag, has to approve the payment of financial aid for eurozone countries.
Cyprus, which joined the EU in 2004 and became a eurozone member in 2008, holds the EU presidency through 31 December.
The entire island of Cyprus is officially EU territory, but the country is divided. Turkey, an EU candidate, doesn’t recognise the Republic of Cyprus and has occupied the northern part of the island since 1974.
The Turkish intervention was a response to a coup d’état on 15 July 1974 by the Greek military junta and a move to unite the island with Greece. On 20 July the Turkish army invaded the island with 30,000 people. Three days later, a cease-fire was agreed and by then 37% of the island had been taken over by the Turks and 180,000 Greek-Cypriots had been evicted from their homes in the north.
Cyprus is heavily exposed to the Greek crisis and needs to salvage its banking system.
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