Haris Georgiades’s day started with a protest and ended with a party.
On the morning of Nov. 20, the finance minister of Cyprus attended a Bank of Cyprus Pcl shareholder meeting at which Josef Ackermann, a former head of Deutsche Bank AG, was elected chairman as several hundred protesters complaining about the loss of their savings tried to force their way in.
Later, Georgiades changed into jeans for a screening at a movie theater in Nicosia of “Fury,” a World War II tank epic starring Brad Pitt. The Moet & Chandon was flowing, as Victor Kislyi, the 38-year-old Belarusian founder and chief executive officer of Wargaming Pcl, mingled with members of the board of Hellenic Bank Pcl, in which Wargaming owns a 26 percent stake.
Almost two years after a banking crisis on the divided Mediterranean island threatened the existence of the euro, an unusual array of investors, including U.S. billionaires Wilbur Ross and Daniel Loeb; Viktor Vekselberg, Russia’s second-richest man; and Kislyi are buying stakes in Cypriot banks, Bloomberg Markets will report in its March issue. Ross and Vekselberg are backing Bank of Cyprus, the country’s biggest lender, while Loeb’s Third Point Hellenic Recovery Fund owns 27 percent of Hellenic Bank.
The flurry of activity marks a renewed interest in the country after a 10 billion-euro ($11.3 billion) rescue by the European Union and the International Monetary Fund deflated a financial industry that had ballooned to seven times the size of the country’s economy.
While banks are still hobbled by capital controls and nonperforming-loan ratios in excess of 50 percent, the investors share a conviction that Cyprus, an EU nation closer to Beirut than Brussels, is on the cusp of a recovery after what the IMF called one of the largest banking collapses on record.
Loeb is betting the best way to invest in that recovery is through Hellenic Bank, the island’s second-biggest lender, which didn’t require a bailout or seize customer deposits.
“We are a small bank, but we are the only systemic bank that has not been bailed in or bailed out,” says Irena Georgiadou, the bank’s 38-year-old chairwoman, sitting in an office at Hellenic Bank headquarters in Nicosia on the day of the screening, talking over the peal of church bells. “We are maybe the right proxy for the recovery of Cyprus.”
Cyprus, the second-smallest economy in the 19-nation euro zone, with a population of 1.1 million, is poised to expand 0.4 percent this year, the IMF estimates, after shrinking 3.2 percent in 2014.
“It’s making a much faster rebound than the much bigger crisis economies of Greece, Portugal, Spain and Italy,” says Christian Schulz, senior economist at Berenberg Bank in London. “It’s more likely than the other southern European crisis countries to do what Estonia and Latvia did: take the pain up front, do the reforms necessary, helped by the fact that they are small.”
At the crossroads of the Middle East and Europe, Cyprus has been overrun for centuries by empires and armies: Assyrians, Persians, Greeks led by Alexander the Great, Venetians and, for three centuries, the Ottoman Empire, the precursor of modern-day Turkey. The country gained independence in 1960 after almost a century of British colonial rule, only to erupt into violence between Greek and Turkish Cypriots.
A Turkish invasion following an Athens-backed coup seeking to unite the country with Greece led to a division of the island in 1974 that’s still in effect. Banking, along with tourism and shipping, buoyed economic growth after the division.
The island’s reputation as a financial center was boosted during the Lebanese civil war from 1975 to 1990, when wealthy Middle Easterners abandoned Beirut for Nicosia. After the fall of the Berlin Wall, Russian and eastern European businesses moved to Cyprus, which offered low corporate tax rates, a legal system based on British law and strict bank-secrecy rules.
Wargaming was one of them. Kislyi began developing online games with his college friends while studying physics and computer science at Belarusian State University in Minsk in 1995. In 2010, a year before incorporating his business in Cyprus, he tapped a lucrative seam with “World of Tanks,” in which multiple players destroy virtual replicas of mid–20th century Soviet, German and U.S. armored vehicles.
The company, which says its games have 110 million registered users, reported profit of 24.6 million euros on sales of 234 million euros in the first six months of 2013, the last period for which it has released results.
While Wargaming’s business was booming, Cyprus was sinking. The restructuring of Greece’s 200 billion euros of privately held debt in 2012, the largest such move in history, left the island’s banks, big holders of that country’s sovereign bonds, with 4.5 billion euros in losses.
Germany, which had contributed the most to saving indebted euro-zone states, balked at bailing out rich Russians with money in Cyprus. Russia, which had given Cyprus a 2.5 billion-euro loan, declined to throw another lifeline.
That’s when the European Central Bank and the IMF told Cyprus the only way it would get the money it needed for a bailout was to seize deposits at the two largest banks and convert the funds into equity, the first time such a tactic had been used in the euro zone.
In March 2013, Bank of Cyprus acquired most of the assets and loans of Cyprus Popular Bank Pcl, then the second-biggest lender, and seized almost half of the savings of 21,000 customers. Shareholders of both banks were almost wiped out.
The deposit seizure at Bank of Cyprus affected Wargaming, which recorded an impairment charge of 8.2 million euros. Restrictions were imposed on moving money abroad, the only such capital controls in the euro area and still in place, leaving Russian and other depositors with money captive in Cypriot banks.
Kislyi, who declined to be interviewed for this story, echoed the concerns of many about the fate of Cyprus as a business and offshore center when he warned in a July 2013 speech to Wargaming shareholders that if the country’s economic woes led to higher taxes, his company might move to a more attractive jurisdiction.
Then the Americans arrived. Loeb, 53, known for his vitriolic critiques of executives of Sony Corp., Yahoo! Inc. and other companies in which he acquired stakes, had bought Greek sovereign bonds on a bet shared by only a few that the euro area would continue to support the country. Third Point Offshore Fund, his firm’s biggest hedge fund, rose 21 percent in 2012 on the investment.
In April 2013, Loeb, a former distressed-debt analyst at Jefferies Group LLC and high-yield-bond salesman at Citigroup Inc., started Third Point Hellenic Recovery. In November of that year, the fund made its first and only banking investment in either Greece or Cyprus, acquiring a stake in Hellenic Bank and diluting control of the Church of Cyprus, which had co-founded the lender in 1976 to help finance an economic recovery after the Turkish invasion.
It was the first foreign direct investment in the country since capital controls had been imposed and, along with a similar infusion of capital from Wargaming, enabled the bank to avoid taking state aid or seizing customer deposits. Loeb and a spokesman for the fund declined to comment. Shares have fallen 24 percent from the date of his investment on Nov. 1, 2013.
Not being tainted by the stigma of a bail-in is “definitely a key driver of business” for the bank and one reason Wargaming invested 40 million euros, says Vangelis Georgiou, 45, the video-game company’s general manager, sitting in a 19th-century house with ceramic-tile floors that serves as the firm’s headquarters.
The building, where palm trees tower in the courtyard and employees are locked in combat on their laptops, is a short distance from an 11-story skyscraper that Wargaming bought for 11.8 million euros in January 2014. Still shrouded in green netting and scaffolding in December, and festooned with banners announcing the company’s new global headquarters, it’s the clearest sign that Kislyi’s concerns about Cyprus have abated.
Hellenic Bank’s share of the island’s deposits increased in the second quarter of 2014 to 12.6 percent from 11.8 percent in 2013, compared with a drop to 25.5 percent for Bank of Cyprus, according to central bank data. At the end of September, the share had risen to 13.4 percent.
With those deposits, Hellenic Bank aims to expand as lending growth recovers, says Georgiadou, the first woman to run a commercial lender in the country.
“We have the liquidity, we have the support of the shareholders, the capital and the ambition, and we want to be the bank that will finance this recovery,” she says.
The bank also has a mountain of nonperforming loans to work through: 56 percent of its total loans as of Sept. 30, up from 46 percent at the end of 2013. It reported losses of 124.8 million euros for the first nine months of last year amid falling property prices and a contracting economy.
Georgiadou, a former PricewaterhouseCoopers accountant and chief financial officer of Cyprus-based online-betting firm Megabet Ltd., has firsthand experience of how banks were sacrificed to save the economy. As an adviser to then–Labor Minister Georgiades during the March 2013 crisis, she says, she burst into tears when they learned the only choice was to seize deposits after the government failed to get funds from Russia.
“We were thinking there must be something somewhere, some button to press to fix everything,” she says.
Now that she’s running Hellenic Bank, there’s still no magic button. The bank’s fate rests on an economic recovery, and that depends in part on what happens to Greece, Cyprus’s biggest trading partner, and Russia, which still looms large in the country, even after many wealthy Russians lost their savings there. Service exports to Russia, mostly tourism, account for more than 20 percent of Cyprus’s total, a figure that probably will fall as fewer Russians travel abroad after a 46 percent drop in the value of the ruble against the dollar last year.
“With the depreciation in the ruble, there is certainly some further pressure on whether Cyprus can come out of recession,” says Bank of Cyprus CEO John Hourican.
In December, Russian President Vladimir Putin, citing the seizure of deposits in Cyprus and Western sanctions imposed after his country’s annexation of Crimea, urged Russian businesses to repatriate funds from abroad. That could hurt Hellenic Bank, where Russian deposits account for 24 percent of the total, according to an investor presentation. It could also have a devastating effect on the island’s economy, the IMF says.
Greece, where unemployment remains above 25 percent and the election of Prime Minister Alexis Tsipras has revived talk of an exit from the euro zone, doesn’t offer better prospects, though Cyprus banks are less exposed now to Greek debt.
“Important partners of Cyprus are all — in particular, Greece — not the kind of country you want to bet your recovery on, but Russia is clearly the biggest, most imminent risk,” says Schulz, the Berenberg Bank economist. “Russia is definitely the Achilles’ heel there.”
The island’s division also is a continuing risk. The discovery of offshore natural gas deposits — cited by investors, including Ross, as a selling point for Cyprus’s long- term outlook — is complicated by tensions with Turkey. Unification talks between the two sides of the island, which make up the nation that belongs to the EU, were called off in November after Turkey dispatched ships to search for gas in Cypriot waters.
Even if Hellenic Bank withstands these shocks, it will have to contend with a bigger competitor. Bank of Cyprus, backed by Ross and Vekselberg, reported a profit of 76 million euros in the first nine months of last year. Ackermann, 66, the new chairman, is a formidable presence in the European banking industry.
“Very few of these severely impacted banks return to profitability as quickly as did Bank of Cyprus,” says Ross, 77, who made money investing in Bank of Ireland Plc.
Vekselberg and Ackermann declined to comment.
Bank of Cyprus, where about half the loans are souring, still has much to do to restore confidence among customers who lost their savings. Just as Hourican was telling shareholders at the annual meeting in November that his company had to “recover the lost trust between the bank and society,” police were holding back protesters.
“You seized my savings,” one of them shouted. “Now you want to seize my house?”
Georgiadou is betting Hellenic Bank can capitalize on steering a different course.
“Hellenic Bank managed to find investors,” she says. “It was a time when Cypriots were lining up outside banks, taking out their money, and there you go, you have private investors, they see the macro story, they see the balance sheet, and they put real money in the bank.”
The investments by Loeb and Kislyi, while they may have saved Hellenic Bank, are a bittersweet blessing for Chrysostomos II, the archbishop of the Church of Cyprus. His church, once one of the island’s biggest investors, has seen its stake in Hellenic Bank dwindle to 3.6 percent and dividend income from Cyprus banks dry up, forcing cutbacks in social and philanthropic programs.
“They wanted to punish the old shareholders,” says Chrysostomos, 73, sitting in front of an icon of a stern Christ in a cavernous palace in Nicosia. “That’s why I’m no longer interested in the chapter called banks.”