NICOSIA - The Cyprus Parliament's initial rejection of the terms of the European Union bailout plan is bad news for Russia.

The opposition to the required taxes on bank deposits means the risk is rising of a long-term freezing of corporate assets in Cyprus. Meanwhile new proposals for taxes on depositors in the island could erase major portions of existing deposits.

This mess seems to be a direct consequence of the failure of unofficial talks between the EU, Russia and Cyprus in 2012. Cypriot banks have been used as a financial haven and launderer for Russian companies, and Russian deposits make up nearly 40 percent of the money in Cypriot banks.

The Russian government is clearly very concerned about the Cyprus crisis, but did not support the recommendations of the EU, which included taxes on bank deposits, small and large. President Vladimir Putin called the EU plan, “unfair, unprofessional and dangerous,” while Prime Minister Dimitry Medvedev dubbed the required taxes: "confiscation."

In spite of the harsh words about the bailout’s tax conditions, for many Russian businesses the proposed 9.9% tax on deposits over 100,000 euros might not be the worst-case scenario. In fact, the prospect of serious banking problems in Cyprus that could last for weeks is a much more serious threat for many businesses.

Finance Undersecretary Sergei Shatlov seemed to be the only person in Moscow willing to comprehend the EU’s logic, and he has spent the past week trying to explain to Russian business people that the taxes were both unavoidable and ultimately fair -- at least if one were to levy taxes on interest earned on deposits, rather than the full deposit amount.

Also of concern is the fact that if such proposed taxes are enacted, Russian companies will be making significant contributions to the Cypriot economy. Most of the small deposits in Cypriot banks -- which under the latest, rejected proposal would have been exempt from the tax -- are held by citizens of Cyprus, Greece or Great Britain.

"Gray" money

There is more British-owned money in Cypriot banks than Russian money, but most of that money is held by private citizens in small accounts. Russian deposits, on the other hand, are in large sums and would be more vulnerable to taxation. Russian stocks have fallen in the face of the Cypriot crisis, while British stocks have not.

The Cypriot Finance Minister visited Moscow this week, but his requests for a 5 billion euro loan - which had already been sought once in 2012- were again denied.

Out of the approximately 68 billion euros in Cypriot banks, some 27 billion euros are held by Russian citizens and businesses. The reaction to the Cyprus bailout proposal has been by far the strongest in Russia, with strong words coming not only from Putin but from other politicians as well, some comparing Germany’s financial terms to the confiscation of Jewish-held bank accounts in Nazi Germany.

German politicians, for their part, have said that German taxpayers should not be supporting illegal Russian bank accounts in Cypriot banks.

But at the end of the day, it’s not clear who will really suffer in Cyprus, either from taxes or from accounts being frozen. Vladimir Gidirim, from the Moscow office of Ernst & Young, says that clients are usually interested in incorporating companies or holding structures in Cyprus, not in warehousing their money there. Indeed, Cypriot banks are mostly used as a transfer-point for money.

A consultant familiar with Russian corporations’ financial dealings in Cyprus explains that “Companies don’t keep money in Cyprus. But most of the money is, at best, ‘gray’ money. So if bank accounts are frozen, it is an open question whether those companies will be able to protect those deposits, because they will need to prove where the money came from.”