Billions of dollars in Russian business transactions via Cyprus are on hold because of the shutdown of the country’s financial system as bankers and lawyers work feverishly to salvage the deals.

While the island is home to billions of dollars in Russian deposits, it is believed to be more important as a hub for investment and trade in Russia. Last year around $120bn in Russian investment transactions went through Cyprus, which offers better tax treatment for capital gain and dividend payments, according to the Russian central bank.

David Wack, M&A lawyer at law firm Squire Sanders, said he had been forced to put on hold five Russia-related transactions going through Cyprus, totalling “in the billions”, which he was seeking to restructure using different jurisdictions such as Luxembourg.

“If we cannot restructure these deals then there will be losses,” he said.

Russia’s banks are thought to be particularly exposed to contagion risk from the Cyprus crisis. Experts believe the most vulnerable is VTB, the second largest state bank in Russia and the only main Russian bank to have a licensed subsidiary bank in Cyprus: Russian Commercial Bank, with assets of $13bn in 2011, according to Moody’s, or about 5 per cent of VTB’s total assets.

“Investors have worried about VTB for some time. It’s not an overweighted stock by any means, this doesn’t help,” said a western banker in Moscow.

In its first comments to the press, VTB played down the risk to its operations, telling the FT that the bank’s losses from the proposed deposit levy would only total “several tens of millions of euros”.

The bank warned, however, that the proposal “threatened the financial stability of Europe and the world”. If the measure passed, “VTB would be forced to re-examine its business development strategy in Cyprus”.

A person close to VTB said its Cypriot subsidiary held less than €2bn in client deposits – or less than 2 per cent of the total deposits of VTB Group – contributing about 3 per cent to VTB group’s consolidated net profit.

Cyprus’s reputation as a haven for financial services may not recover from the threat of a tax of up to 9 per cent on deposits demanded by eurozone leaders over the weekend to help finance the proposed €10bn bailout package, Mr Wack said, calling the terms of the bailout “draconian”.

“Even if they back off the proposed deposit levy, our clients are rattled and are going to look at other options in the future,” he added.

“There are a lot of these back-to-back transactions where Cyprus is used as a conduit, and there is now what is known as settlement risk,” said Tim McCarthy, an asset manager at Valartis in Geneva.

“I will stop trading with Russian brokers, or any brokers for that matter, who use Cyprus trading hubs until the dust settles,” he said.

However, Mr McCarthy said estimates for losses to Russian business on the island were likely to be overblown. “There are huge numbers just flying around, and no one has had any hard numbers because Cypriot banks are not even open yet,” he said.

After selling off on Monday amid pessimism over the bailout plan, Russian bank shares were given a reprieve by the markets on Tuesday amid uncertainty over whether a proposed €5.8bn tax on deposits would proceed.

Analysts said they thought the market had by and large priced in the danger to Russia’s largest banks on Monday when shares in Sberbank, Russia’s largest bank, fell almost 4.5 per cent, and VTB, the second largest, fell 6.5 per cent.

Alexei Simanovsky, deputy chairman of Russia’s central bank, told journalists on Tuesday that Russia’s banking system would not face any imminent threat of contagion, although “individual players may have negative consequences”.

Vladimir Savov, head of equity research at Otkritie Bank in Moscow, said that while a deepening of the crisis in Cyprus could not be excluded, for the moment the damage was thought to be limited to deposits. Credit rating agency Moody’s put the total for Russian corporate deposits on Cyprus at $19bn last year.

“So far no one is talking about loans or capital controls,” said Mr Savov. “We are talking about deposits. Banks themselves do have their own deposits in Cyprus – more than $10bn. Of course it’s a negative thing but in the grander scheme it’s not that material.”

Russian policy-makers struggled to find a silver lining in the crisis in an apparent effort to divert the media from gloomy headlines.

“It is a good chance for the Russian banking system to fight for new depositors, new clients. And demonstrate that our banking system is stable,” Igor Shuvalov, deputy prime minister, told reporters during a trip to the Russian city of Kazan.

“For Russia, in the mid-term perspective, this [opens] good opportunities …Russia will gain more than it will lose. For Russia this is a chance to demonstrate its more predictable rules for treating investors,” he said.

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