Black Sunday on Cyprus Hill

Cyprus did vote to confiscate 4 to 20 percent of uninsured deposits, following up on yesterday’s post.

As the NYT reports,

Under the plan, savings under 100,000 euros would not be touched — a rollback after a controversial plan last week to tax insured deposits was rejected by Cyprus’s Parliament, amid outrage among ordinary savers and widespread concern that a precedent had been set for governments anywhere to tap insured bank savings in times of a national emergency….

The finance ministers and the troika on Saturday were still calculating how much money those deposit-tax alternatives would raise for the government.

“The good news is that banks were shut last week, and so depositors couldn’t cut up their money into smaller accounts to avoid any tax,” said one European Union official, who spoke on the condition of anonymity. “But it’s sure that depositors did do this before, so this needs to be assessed.”

At the insistence of the central bank, lawmakers also voted on Friday to impose capital controls to limit withdrawals and bank account closings once Cyprus’s banks reopen. The current plan is to reopen them on Tuesday morning, after a nine-day emergency holiday meant to prevent a classic run on the banks.

As the passage makes clear, it seems that “ordinary savers” were spared the tax, while high value deposits will be taxed. This almost certainly means that Russians and other foreign savers will be hurt, while Cypriots will not be.

(Or at least not in the same way. They will be of course hurt by the fact that their country is collapsing. But they will not be hurt by the policy measure, which is what an investor-state panel would look at. And, for reasons I’ve mentioned elsewhere, judges within Europe are likely to look to the totality of who is hurt and harmed by a financial crisis, while broader investment lawyers might look more at the  challenged measure exclusively.)

Accusations are already flying that the bailout is anti-Russian. Given the exemption for small deposits, concerns could arise that Cyprus violated the national treatment portion of the Cyprus-Russia investment treaty, which reads:

Article 3

Treatment of Investments

1. Each Contracting Party shall ensure in its territory for the investments made by investors of the other Contracting Party and for the activities in connection with such investments, fair and equitable treatment which would exclude the use of discriminatory measures that might hinder management, maintenance, use, enjoyment or disposal of the investments.

2. The treatment referred to in paragraph 1 of this Article shall not be less favourable than that granted with regard to investments and activities in connection with investments by its own investors or investors of any third state.

3. Each Contracting Party shall reserve the right to make or maintain exceptions in accordance with its own legislation from the national treatment granted in accordance with paragraph 2 of this Article.

4. The most favoured nation treatment granted in accordance with paragraph 2 of this Article shall not apply to benefits that the Contracting Party is providing or will provide in the future:

– as a result of a common market, a free trade zone, a customs or economic union;

– under the agreements between the Russian Federation and the states, which had earlier formed the Union of Soviet Socialist Republics;

– on the basis of an agreement to avoid double taxation or other arrangements relating to taxation issues.

This is a slightly different formulation than other treaties, in some ways more forgiving; in other ways less so.

On the one hand,this treaty is less flexible in that U.S. treaties tend to only require national treatment for investors “in like circumstances.” This gives a whole lotta wiggle room to respondent governments to make cases why not all depositors are alike. Here, national treatment is broadly required.

On the other, this treaty is more flexible than others in that it preserves a right to make and maintain exceptions that have discriminatory effects. In fact, EU depositors can be treated better than non-EU depositors, and there is a broad taxation carve-out from most-favored nation rules. Exactly how broad these exceptions are, and whether they can be interpreted so broadly so as to make the obligation essentially meaningless, would be contested by the parties to a dispute.

CORRECTION AND CLARIFICATION on 3/27: The Russia-Cyprus treaty was signed but did not enter into force. So, Russians wanting to go after Cyprus will have to claim a nationality from a treaty that is in force… like the Cyprus-Greece treaty, which IAReporter says is already being used for a similar purpose!