Economic instability in Cyprus is causing some firms to re-evaluate relationships with Russian brokers that use the island as a tax-friendly route to Russia, despite the minimal impact the uncertainty will have on equity trading.
Cyprus is currently exploring options to help steady its economy after political leaders rejected an EU deal that would have recouped some losses through a one-off levy on bank deposits.
Cyprus is now seeking ways to raise €7 billion in order to receive a further €10 billion loan from the EU and International Monetary Fund. Options for doing this may include the establishment of a state investment fund and special bond issue, or to seek extra funding from Russia, which already holds around US$70 billion worth of loans and deposits in Cyprus.
International investors that want exposure to Russia typically deal with the Cypriot subsidiary of a Russian broker so they are not subject to double capital gains taxation.
“Cyprus is a significant financial route into Russia and this is naturally raising concern among firms who access the Moscow Exchange via Cyprus-based Russian brokers,” said Carl Johan Wallin, global head of sales for DMA Direct, a Sweden-based agency broker that specialises in access to Russian markets.
He added that Russia’s ties to a struggling Cyprus would also dent the country’s efforts to turn Moscow into an international financial centre. Part of this plan included the merger of Russia’s two main stock exchanges, MICEX and RTS, last year to form the Moscow Exchange, in addition to a number of market structure changes.
“Russia is attempting to grow confidence in its market through a number of reforms and adjustments that will make it similar to other western markets,” added Wallin. “We are seeing some really good progress by the Moscow Exchange but this will be a setback for many of the local Russian brokers with a significant piece of their business coming via Cyprus.”
Russia-based brokers have confirmed they are getting more questions from clients about their exposure to Cyprus and have spent time explaining how their business is affected.
“Some international clients have enquired about the impact of the crisis in Cyprus on our operations, given that many of our cash and derivatives clients book trades with our subsidiary in that country,” said Damian Bunce, CEO of Renaissance Capital’s electronic trading group. “However, once we explained that we have no exposure to Cyprus, and that client collateral is held with a bulge-bracket investment bank, their concerns have been assuaged and all our clients continue trading with us.”