Who Owns Cyprus and Georgia
04 April, 2013
For those who have been living in a cave for the last several weeks and may have missed it, Cyprus is in full financial meltdown. There are several reasons.
The first is that even though they are are in the EU and the Euro Zone, they have laws and habits that make it very easy for people who deposit money there to hide their identity behind shell companies. For this reason people with lots of money who want to get
that money out of the country and hide their identity, often choose Cyprus.

Where are there lots of those people? Russia. Generally people who start a successful business and make lots of money and live in places with pretty secure property rights, places like the United States, most of the EU, India, Brazil, are fine with everybody knowing they are rich and are sure that the government isn't going to come in and take the money. On the other hand, most of the people with millions in Russia have it because they in one way or another have been allowed by the Kremlin to take it from industries like oil, gas, or mining, where you don't have to actually do very much, just take some as the money as it comes out of the ground. And as we all know, Russia doesn't have secure property rights, nobody wants to leave millions in a bank in Russia where it can attract attention. Much of this money was in reality laundered. It would go from Russia, be packaged into shell companies that looked international and some would be reinvested in Russia as fake foreign investment.

So Russians poured money at the rate of about one hundred million US dollars each week day for the last several years. This created a giant pool of money in Cypriot banks that needed a place to go. Unfortunately it often chose Greek bonds that would promise to pay back at high interest rates. Well, that didn't work out so well and now the European Central Bank is supposed to pay back those banks because the Greek Government can't. But the ECB doesn't feel like paying back all those Russian oligarchs, so they aren't. The Kremlin is angry and European, particularly German, Russian relations are at an all time low. As usual when things aren't going well, the Kremlin has made matters worse by sending teams of prosecutors, tax inspectors and any other inspector they can think of to raid all vaguely internationally connected NGOs, including Transparency International Russia among many others. This typically unsuccessful attention deflection effort has made the EU even more angry.
So other than the typical schadenfreude we all feel when the Kremlin suffers this type of well deserved shame and oligarchs loose some money, what does this mean for Georgia?

Georgia is not a location where people who want to hide from tax authorities in other countries come to put their money. But it is a place where ownership of shell companies is common and very easy to arrange. At the same time the EU is about to get serious about beneficial ownership and could begin a process of making it difficult for countries that make it easy to hide behind shell companies to do business with the EU even if they are not destinations for tax cheats.

Georgia is one of those countries that under pretense of neo-liberalism and a lack of government regulation, has made it very easy for people with money to hide behind shell companies. Compared with the region, property rights are fairly secure in Georgia and may even significantly improve under the new regime. But there are still giant chunks of Georgia's economy that hide behind shell companies that conceal ultimate beneficial ownership. In the long run, and even from a purely domestic standpoint, it is bad in all cases for an economy to do this. But now is an unusually good time for Georgia to start passing laws to make it more difficult to hide ultimate ownership because the EU is going to start doing the same thing. This new transparency would protect Georgia from American concerns about Iranian investment as well as Georgian concerns about Russian investment or about rich Georgians sending money abroad, repackaging it as "international investment" and bringing it back to Georgia and it would over all build Georgia's international reputation.

Cyprus will soon be eclipsed in the news by other events, the bureaucrats from the EU in Brussels, The ECB in Frankfurt, and the IMF in Washington will soon show up and take over with the long boring work of policy implementation and alignment. But that will be a good time for Georgia to watch what is going on there, both as a warning and an example.