Lawmakers in the divided island nation vetoed a European Union–backed "bail-in" agreement earlier this week that would have pumped $13 billion into Cyprus while levying a tax of between 6 and 10 percent on accounts held in the Mediterranean island country. The controversial tax would have raised $7.5 billion, with the remaining $5.5 billion of the total to be supplied by the European Union and International Monetary Fund.
But with that deal now dead, the Cypriot government has ordered the local banks closed as it tries to devise a new bailout plan by Monday—the deadline by which the European Central Bank has threatened to cut off funding to Cyprus in a move that would effectively kill the offshore tax haven’s banking sector.
One thing Cyprus is not suffering from as it scrambles to right itself is an absence of lawyers. The head of the national government, President Nicos Anastasiades, is an attorney and founder of Nicos Chr. Anastasiades & Partners, a firm based in Limassol, the country’s second-largest city. (Limassol is affectionately known as "Limassolgrad" to some Russian expatriates, who have reason to come up with such nicknames. Russian citizens and corporate entities hold between one-third and a half of all bank deposits in Cyprus.)
The Am Law Daily was unsuccessful in its attempts to determine through Anastasiades—a center-right leader elected in February to steer the country away from insolvency—and another highly placed government lawyer, newly appointed minister of justice and public order Ionas Nicolaou, whether the country is relying on outside legal advisers as it tries to cobble together a palatable financial rescue plan. Email messages sent to their respective government addresses did not yield responses, nor did a similar request sent to government spokesman Christos Stylianides.
Other top Cypriot lawyers not responding to requests for comment on their possible roles in the bailout talks included Andreas Neocleous—a former politician and founder and managing partner of Cyprus’s largest firm, Andreas Neocleous & Co—and Charalambos Carlos Paschalides, the head of the corporate department at Antonis Paschalides & Co, a firm founded by his father, a former Cypriot minister of commerce, industry, and tourism.
One of the main causes of Cyprus’s current crisis is an overexposure to Greek debt on the part of the country’s banks. The second-largest of those banks, Cyprus Popular Bank, has retained London-based Skadden, Arps, Slate, Meagher & Flom international arbitration partner Bruce Macaulay to press investment treaty claims against the Greek government.
The Nicosia-based bank—which has targeted Greece as part of an effort to secure the $2.2 billion recapitalization it needs to keep operating— hired Skadden last November for the suit against the Hellenic Republic. (According to our previous reports, Greece’s own $173 billion bailout last year landed key roles for several global firms, including Skadden.)
Reuters reported Thursday that Cyprus Popular Bank—also known as Laiki and formerly called Marfin Popular Bank—had enacted restrictions on ATM withdrawals amid reports that the bank itself might be shut down for good unless emergency measures are taken to avert a default. The news prompted bank employees to scuffle with police outside the Cypriot parliament.
One lawyer not on hand amid the chaos in Cyprus: Cleary Gottlieb Steen & Hamilton corporate finance partner Lee Buchheit, a sovereign debt expert dubbed the "fairy godmother to finance ministers in distress" last week by The Guardian. (The British newspaper noted that Cyprus was on Buchheit’s itinerary during a trip to Europe earlier this year.)
While a Cleary spokeswoman confirmed to The Am Law Daily that the firm is not involved in Cyprus’s efforts to attain fiscal stability, Buchheit—who helped make Cleary millions last year through his lead role advising the Greek government on its debt negotiations—has weighed in on the Cypriot saga.
In a white paper released this week, Buchheit and Duke Law School professor G. Mitu Gulati—a former Cleary associate who worked with Buchheit on sovereign debt matters during his stint at the firm—argue in favor of converting uninsured deposits in Cypriot banks above 100,000 euros (or roughly $128,987 at the rapidly fluctuating exchange rate) into bank certificates of deposit, commonly known as CDs. (Reuters’s Felix Salmon has a further analysis of the position advanced by Buchheit and Gulati.)
Lurking in the background of Cyprus’s woes is Russia, whose citizens and companies stand to lose billions should their version of the Cayman Islands collapse.
Cyprus’s status as an offshore tax haven—and the unappetizing prospect of forcing taxpayers in other European countries to fund a rescue plan that aids non–EU member Russians—has led other members of the E.U., chiefly Germany, to back the "bail-in" plan that would tax Cypriot bank depositors.
The BBC reports that Russian banks had stashed $12 billion in the financial institutions in Cyprus as of the end of last year, with corporate deposits totaling some $19 billion. Those figures swell further when savings in Cyprus from former Soviet republics such as Kazakhstan and the Ukraine are taken into account, Yuri Botiuk, a litigation partner and head of the Russia and Ukraine practice at British firm Pinsent Masons, said in an interview with The Daily Telegraph.
Not surprisingly, Russian Prime Minister Dmitry Medvedev and other leading Russian politicians have been openly critical of the E.U. plan to tax Cypriot bank depositors.
Earlier this year Cyprus’s former finance minister, British Cypriot banker Vassos Shiarly, defended the country against allegations that it is a haven for money laundering. Dimitry Afanasiev—the chairman of Russia’s largest firm, Egorov Puginsky Afanasiev & Partners, which The American Lawyer profiled in 2007—often advises Russian companies on investments in Cyprus. Afanasiev told The New York Times this week that it was wrong to assume that a levy on the country’s bank depositors would only hurt oligarchs.
"Most of these [Cypriot banking] clients are small businesses and middle-class entrepreneurs—they’re not the oligarchs," Afanasiev said during a separate interview with the Voice of Russia. "The oligarchs keep their money in London or Switzerland or other places. The people who are being hardest hit at the moment on bank deposits in Cyprus are the middle-class Russian entrepreneurs who saved up enough money to buy a little house by the sea, to send their kid to perhaps an English school in Cyprus."
Lawyers with Cypriot firms like Chris Vassiliades, a name partner at Vassiliades & Co, and Thomas Keane, a cofounding partner of Keane Vgenopoulou & Associates, have said in recent interviews with other media outlets that whatever their net worth, Russian depositors will flee Cyprus for other jurisdictions if the country’s financial institutions reopen for business next week without a debt deal.
Cyprus does have two things the Russians want: a warm weather port for its navy and exploration rights to potentially billions in offshore oil and gas assets. Russian energy giant Gazprom—which was once chaired by Medvedev, himself a lawyer by training—has refused to comment publicly on whether it has offered Cyprus a private bailout in a funds-for-assets exchange.
Another, albeit more far-fetched capital raising opportunity for Cyprus, a country divided since 1974 into Greek and Turkish regions, would be to sell recognition of the politically isolated Turkish Republic of Northern Cyprus to Turkey, which for centuries has been engaged in competition with Russia for regional influence.