The Real Deal With Cyprus

NEW YORK ( TheStreet) -- The Cyprus bailout story wasn't supposed to be about Cyprus.

It was supposed to be about Russian gangsters using Cyprus as a tax haven. The story behind Cyprus has been lost in translating the story about Cyprus.

Fact is, the world's wealthy have created an economic system separate from the ability of governments to tax, and they use it to maintain control of the world's economy in fewer and fewer hands. In this system, money is money, and laws lack teeth. Therefore, charges of tax avoidance against Amazon.com ( AMZN) by U.K. politicians (see this article The Guardian) is treated the same as Russian mafia money, Arabian petrodollars and Latin American drug dollars.

The question here isn't whether small depositors are safe in Cyprus or Madrid or Peoria. It's whether governments have suitable means to control the ultra-wealthy, regardless of the source of that wealth. And by extension, whether those occupiers of the One Percent and their shell corporations are part of the global social contract.

Most of these tax havens, by the way, are loosely attached to the U.K., which once had a protectorate over Cyprus, as this page at Cypnet.co.uk describes.

Wikipedia notes that the Island of Jersey, where Amazon claims to do its European business, is an English Crown Dependency. The Cayman Islands is a British Overseas Territory with Queen Elizabeth II on its money.

The nominal independence of Jersey and the Caymans are a convenience to the world's wealthy. They are under the protection of the U.K. Cyprus' standing as a tax haven is, I believe, descended from this British heritage.

According to a Moody's report quoted by RT.Com, the Russian news network, Russians have $31 billion in Cyprus banks, almost 30% of total deposits. The money is there because Cyprus has a corporate tax rate of 10%, compared with Russia's 20%.

It's also there, as Douglas Gartman implied on CNBC, because Russian mobsters use Cyprus to launder their money. "You don't mess with the Russian mafia," he said when interviewed about the crisis.

Despite all this money, Cyprus banks are broke. As Philip van Doorn wrote for us, they need about $13 billion, but they don't have bondholders who can take the hit. The European Stabilization Mechanism wants more than half its money down, roughly $8 billion, and the "tax" was designed to fund that insurance.

This was no surprise to Felix Salmon, whose piece on this we ran recently. He said the Cyprus banks were broke months ago.

This fact wasn't known to the people of Cyprus until recently, but it should be no surprise. Cyprus is next to Greece, and many Cypriot investments are in Greece. Cyprus joined the EU only in 2004 and the eurozone in 2008, Wikipedia writes.

The way Cyprus' European bankers saw it, depositors had a choice between having no money and having roughly 90% of it, with an implicit guarantee, which would if explained that way be a very good deal. The "tax" would buy the insurance.

But that's not how it was reported. Salmon called it a "precedent," implying it could spark panic withdrawals across Europe. He's most troubled by the idea that the tax hits small depositors.

In working to save the levy this week, Cypriot lawmakers tried to address Salmon's concerns, aiming their tax more squarely at the Russians. The latest proposal drops the tax on deposits up to 20,000 euros, about $27,000. The Sun reports some Russians were apparently tipped off and took out more than $3 billion in the days before the levy was announced.

And Cypriots themselves took to the streets, as The Guardian writes, apparently unaware that, without the EU insurance guaranteeing 90% of their money is safe, they'll likely be left with nothing.

Although the big lesson for most analysts is that Cyprus shouldn't have been brought into the euro, or that the euro shouldn't exist, the larger lesson is that of instability caused by money that is on the run from the law. Whether we're talking about criminal law, civil law or "just" tax law, the question for me is whether the world will be ruled by law, or by money.

At the time of publication, the author had no investments in Cyprus.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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