As Cyprus Crisis Deepens, Wealthy Russians Are Ensnared

Much of that money, it so happens, flowed through Cyprus.

His rapid rise was as typical for a Russian oligarch as is his deep dependence on Cyprus for offshore banking. Working in part through Cypriot trusts, Mr. Rybolovlev, a former doctor, sold his gigantic potash fertilizer mining conglomerate after a tumultuous and lucrative run as owner and spirited the money abroad. Then the good times rolled.

In 2008, Mr. Rybolovlev, now 46, bought a Florida mansion from Donald Trump for $95 million. At the time, this was the most ever paid for a private residence in the United States. Almost as an afterthought, he complained it was in such poor repair that it could not be inhabited.

A few years later, Mr. Rybolovlev bought the most expensive apartment ever sold in New York from the family of the former Citigroup chairman Sanford I. Weill, paying $88 million for the penthouse at 15 Central Park West.

“Anyone who is a Russian oligarch and wants to make sure that, over the long term, his assets are protected wants to make sure those assets are out of Russia,” said David B. Newman, a partner at Day Pitney, a New York law firm representing Mr. Rybolovlev’s estranged wife, Elena, in a long-running divorce case. “If you are a friend of the government, you do very well, but if that relationship turns — and this can happen quickly — you want to be out of Russia.”

Today, this common practice among wealthy Russians like Mr. Rybolovlev — using Cyprus to worm their way into the global financial elite and to protect themselves if they should fall out of favor with the capricious President Vladimir V. Putin — has drawn the Russian government deeply into the negotiations for a bailout of Cyprus’s banking system, whether officials there like it or not.

Russian money flowing into Cypriot banks dwarfs the island’s $25 billion economy. About 25 percent of Russian foreign direct investment moves through Cyprus, according to an estimate by Morgan Stanley, frequently in a “round-trip” process that serves to lubricate the Russian economy. Cypriot entities, often owned by rich Russians, lent $40 billion a year to Russia from 2007 through 2011.

With a fortune estimated at $9.1 billion by Forbes magazine, Mr. Rybolovlev has reasons to worry about his status at home. But he is also the largest Russian investor in the Cypriot banking sector, which has given him a huge stake in preventing its collapse. As far back as July, Mr. Rybolovlev was negotiating to help recapitalize the Bank of Cyprus, according to Alithia, a newspaper based in the Cypriot capital, Nicosia.

At the same time, while Mr. Putin might not mind seeing Mr. Rybolovlev suffer a bit, he has an interest in protecting Russian wealth held abroad because of the role it plays at home and the opportunities it presents to expand Russian influence. If no bailout from the European Union is forthcoming and Cypriot banks collapse, the risk to Russian companies and oligarchs, some of them much closer to Mr. Putin than Mr. Rybolovlev is, would be far graver than the potential loss of deposited funds to the 9.9 percent “stabilization tax” originally proposed by the European Central Bank. At a minimum, capital controls could freeze all funds now in Cyprus.

The stakes are particularly high for wealthy Russians: Moody’s, the rating agency, has estimated that Russian deposits in banks and loans to Cypriot companies total $70 billion, or about 4 percent of Russia’s gross domestic product. Some 42 percent of the value of Cypriot bank deposits is in accounts with more than half a million euros.

As is typical for Russian oligarchs, Mr. Rybolovlev set up corporate trusts in Cyprus with breezy-sounding names like Aries and Virgo. These were little more than post-office boxes monitored by lawyers. But those trust accounts owned vast, gritty mining enterprises deep in the Russian hinterlands and filled up with countless riches as worries about global food shortages in the last decade sent fertilizer prices sky-high.

Tentative Accord Reached to Raise Taxes on Wealthy

While the Senate moved toward a vote on legislation to avoid the so-called fiscal cliff, the House was not going to consider any deal until Tuesday afternoon at the earliest, meaning that a combination of tax increases and spending cuts would go into effect as 2013 began. If Congress acts quickly and sends the legislation to President Obama, the economic impact could still be very limited.

Under the agreement, tax rates would jump to 39.6 percent from 35 percent for individual incomes over $400,000 and couples over $450,000, while tax deductions and credits would start phasing out on incomes as low as $250,000, a clear win for President Obama, who campaigned on higher taxes for the wealthy.

“Just last month Republicans in Congress said they would never agree to raise tax rates on the wealthiest Americans,” Mr. Obama said at a hastily arranged news briefing, with middle-income onlookers cheering behind him. “Obviously, the agreement that’s currently being discussed would raise those rates and raise them permanently.”

Democrats also secured a full year’s extension of unemployment insurance without strings attached and without offsetting spending cuts, a $30 billion cost.

As negotiators tied up the last points of dispute, officials said that the two top Democrats on Capitol Hill — Senator Harry Reid of Nevada and Representative Nancy Pelosi of California — had signed off on the agreement. In an effort to win over other Democrats uneasy with the proposal, Vice President Joseph R. Biden Jr., who had bargained directly with Republican leaders, traveled to the Capitol on Monday night for a 90-minute meeting with his former Senate colleagues.

“I feel very, very good,” Mr. Biden said after the meeting. “I think we’ll get a very good vote.”

In one final piece of the puzzle, negotiators agreed to put off $110 billion in across-the-board cuts to military and domestic programs for two months while broader deficit reduction talks continue. Those cuts begin to go into force on Wednesday, and that deadline, too, might be missed before Congress approves the legislation.

To secure votes, Mr. Reid also told Democrats the legislation would cancel a pending congressional pay raise — putting opponents in the politically difficult position of supporting a raise — and extend an expiring dairy policy that would have seen the price of milk double in some parts of the country.

Anticipating Senate approval of the deal, Speaker John A. Boehner late Monday said the House would “honor its commitment to consider the Senate agreement if it is passed. Decisions about whether the House will seek to accept or promptly amend the measure will not be made until House members — and the American people — have been able to review the legislation.”

The nature of the deal ensured that the running war between the White House and Congressional Republicans on spending and taxes would continue at least until the spring. Treasury Secretary Timothy F. Geithner formally notified Congress that the government reached its statutory borrowing limit on New Year’s Eve. Through some creative accounting tricks, the Treasury Department can put off action for perhaps two months, but Congress must act to keep the government from defaulting just when the “pause” on pending cuts is up. Then in late March, a law financing the government expires.

And the new deal does nothing to address the big issues that Mr. Obama and Mr. Boehner hoped to deal with in their failed “grand bargain” talks two weeks ago: booming entitlement spending and a tax code so complex that few defend it anymore.

Jennifer Steinhauer and Robert Pear contributed reporting.

Senate Passes Tax Increases on Wealthy Americans

The deal, worked out in furious negotiations between Vice President Joseph R. Biden Jr. and the Republican Senate leader, Mitch McConnell, passed 89 to 8, with just three Democrats and five Republicans voting no. Although it lost the support of some of the Senate’s most conservative members, the broad coalition that pushed the accord across the finish line could portend swift House passage as early as New Year’s Day.

Quick passage before the markets reopen on Wednesday would be likely to negate any economic damage from Tuesday’s breach of the “fiscal cliff” and largely spare the nation’s economy from the one-two punch of large tax increases and across-the-board military and domestic spending cuts in the New Year.

“This shouldn’t be the model for how to do things around here,” Mr. McConnell said just after 1:30 a.m. “But I think we can say we’ve done some good for the country.”

Mr. Biden, after a late New Year’s Eve meeting with leery Senate Democrats to sell the accord, said: “You surely shouldn’t predict how the House is going to vote. But I feel very, very good.”

The eight senators who voted no included Marco Rubio, Republican of Florida and a potential presidential candidate in 2016, two of the Senate’s most ardent small-government Republicans, Rand Paul of Kentucky and Mike Lee of Utah, and Senator Charles E. Grassley of Iowa, who as a former Finance Committee chairman helped secure passage of the Bush-era tax cuts, then opposed making almost all of them permanent on Tuesday. Two moderate Democrats, Thomas R. Carper of Delaware and Michael Bennet of Colorado, also voted no, as did the liberal Democrat Tom Harkin, who said the White House had given away too much in the compromise. Senator Richard C. Shelby, Republican of Alabama, also voted no.

The House Speaker, John A. Boehner, and the Republican House leadership said the House would “honor its commitment to consider the Senate agreement.” But, they added, “decisions about whether the House will seek to accept or promptly amend the measure will not be made until House members — and the American people — have been able to review the legislation.”

Even with that cautious assessment, Republican House aides said a vote Tuesday was possible.

Under the agreement, tax rates would jump to 39.6 percent from 35 percent for individual incomes over $400,000 and couples over $450,000, while tax deductions and credits would start phasing out on incomes as low as $250,000, a clear victory for President Obama, who ran for re-election vowing to impose taxes on the wealthy.

Just after the vote, Mr. Obama called for quick House passage of the legislation.

“While neither Democrats nor Republicans got everything they wanted, this agreement is the right thing to do for our country and the House should pass it without delay,” he said.

Democrats also secured a full year’s extension of unemployment insurance without strings attached and without offsetting spending cuts, a $30 billion cost. But the two-percentage point cut to the payroll tax that the president secured in late 2010 lapsed at midnight and will not be renewed.

In one final piece of the puzzle, negotiators agreed to put off $110 billion in across-the-board cuts to military and domestic programs for two months while broader deficit-reduction talks continue. Those cuts begin to go into force on Wednesday, and that deadline, too, might be missed before Congress approves the legislation.

To secure votes, Senator Harry Reid, the Senate Democratic leader, also told Democrats the legislation would cancel a pending Congressional pay raise — putting opponents in the politically difficult position of supporting a raise — and extend an expiring dairy policy that would have seen the price of milk double in some parts of the country.

The nature of the deal ensured that the running war between the White House and Congressional Republicans on spending and taxes would continue at least until the spring. Treasury Secretary Timothy F. Geithner formally notified Congress that the government reached its statutory borrowing limit on New Year’s Eve. Through some creative accounting tricks, the Treasury Department can put off action for perhaps two months, but Congress must act to keep the government from defaulting just when the “pause” on pending cuts is up. Then in late March, a law financing the government expires.

Jennifer Steinhauer and Robert Pear contributed reporting.

Tentative Accord Reached to Raise Taxes on Wealthy

While some senators pushed for a quick vote on legislation to avoid the so-called fiscal cliff, the House was not expected to consider any deal until Tuesday at the earliest, meaning that a combination of tax increases and spending cuts would go into effect in the first days of 2013. If Congress acts quickly and sends a deal to President Obama, the economic impact could still be very limited.

Under the agreement, tax rates would jump to 39.6 percent from 35 percent for individual incomes over $400,000 and couples over $450,000, while tax deductions and credits would start phasing out on incomes as low as $200,000, a clear win for President Obama, who campaigned on higher taxes for the wealthy.

“Just last month Republicans in Congress said they would never agree to raise tax rates on the wealthiest Americans. Obviously, the agreement that’s currently being discussed would raise those rates and raise them permanently,” Mr. Obama crowed at a hastily arranged news briefing, with middle-income onlookers cheering behind him.

In a  development that pushed lawmakers closer to a resolution, Senate Republicans said negotiators also agreed to put off $110 billion in across-the-board cuts to military and domestic programs for two months while broader deficit reduction talks continue. Those cuts begin to go into force on Wednesday Jan. 2, and that deadline too might be missed before Congress approves the deal.

The nature of the deal ensured that the running war between the White House and Congressional Republicans on spending and taxes will continue at least until the spring. Treasury Secretary Timothy F. Geithner formally notified Congress that the government reached its statutory borrowing limit on New Year’s Eve. Through some creative accounting tricks, the Treasury Department can put off action for perhaps two months, but Congress must act to keep the government from defaulting just when the “pause” on pending cuts is up. Then in late March, a temporary law financing the government expires.

And the new deal does nothing to address the big issues that President Obama and Speaker John A. Boehner hoped to deal with in their failed “grand bargain” talks two weeks ago: booming entitlement spending and a tax code so complex few defend it anymore.

Though the tentative deal had a chance of success, it landed with a thud on Capitol Hill. Republicans accused the White House of “moving the goal posts” by demanding still more tax increases to help shut off across-the-board spending cuts beyond the two-month pause. Democrats were incredulous that the president had ultimately agreed to around $600 billion in new tax revenue over 10 years when even Mr. Boehner had promised $800 billion. But the White House said it had also won concessions on unemployment insurance and the inheritance tax among other wins.

Still, Democrats openly worried that if Mr. Obama could not drive a harder bargain when he holds most of the cards, he will give up still more Democratic priorities in the coming weeks, when hard deadlines will raise the prospects of a government default first, then a government shutdown. In both instances, conservative Republicans are more willing to breach the deadlines than in this case, when conservatives cringed at the prospects of huge tax increases.

“I just don’t think Obama’s negotiated very well,” said Senator Tom Harkin, Democrat of Iowa.

But as night fell over Washington on New Year’s Eve, senators seemed worn down and resigned. “Everybody by this time is angry, but sooner or later this has to be resolved,” said Senator Orrin G. Hatch of Utah, the ranking Republican on the Senate Finance Committee.

Jennifer Steinhauer and Robert Pear contributed reporting.

Economic View: For the Wealthy, a 28 Percent Tax Solution

In a nutshell, the fewer deductions and other “tax expenditures” we have, the lower the rates can be. That part is simple.

The problem is that cutting rates is more popular than closing loopholes, especially those like the mortgage-interest deduction that are used by millions of taxpayers. But there is a possible solution.

I call it the modified Reagan 28 plan, or just the “28 plan” for short. It is a simple framework for thinking about tax policy. Though I’ve named it in honor of Ronald Reagan, it is similar in many ways to the ideas proposed by the Bowles-Simpson commission, which is a good starting point for any serious discussion of tax reform.

My first premise is that we should devise tax policy from the top down. As everyone now knows, nearly half of American households do not pay any income tax, though they do pay Social Security taxes, sales taxes and so forth. And many households that earn enough to start paying some income tax are essentially on a flat-tax system, because few itemize their deductions. That means they mostly just pay a percentage of their income above the threshold where taxes kick in. So let’s think about how to tax the rich, then work our way down the income ladder.

For this discussion, let’s define a household as rich if its income exceeds $1 million a year. In fact, my plan applies only to the income such households earn above that threshold. And I can state my idea in just one sentence: All income above $1 million a year for a household will be taxed at 28 percent. There are no deductions, and all income, including capital gains and dividends, is included. President Reagan favored something like this approach. His 1986 tax plan also taxed dividends and capital gains at the same 28 percent rate, as would the Bowles-Simpson proposal.

While we’re at it, let’s make the corporate tax rate 28 percent, too, because our current rate is high by international standards. Oh, and the estate tax exemption? On amounts above $3.5 million for individuals, the rate would be, of course, 28 percent.

What would this plan accomplish? First, by establishing the same marginal rate on all income sources, the incentives disappear for shifting from one source of income to another. Although there is much discussion about how taxes affect people’s willingness  to work, most people don’t have much flexibility about how many hours they’re employed. For the rich, however, it can be relatively easy to switch income from a highly taxed category to one that is taxed at a lower rate. One reason that Mitt Romney’s taxes have been so low — he paid an effective federal income tax rate of only 14 percent in the two years for which he has disclosed his returns — is that venture capitalists have figured out a legal way for the incentive fees they receive to be treated as capital gains income, currently taxed at a rate of only 15 percent. If we tax all income at the same rate, these games will end.

But what about the argument that taxing capital gains and dividends at the same rate as ordinary income will discourage investment? I don’t find this claim convincing. People are willing to buy bonds issued by corporations even though the interest is taxed as ordinary income, and I don’t see why investors need a special tax break to induce them to put money in the stock market, which has historically paid high returns. One bonus from adopting this plan would be a short-term windfall to the Treasury from investors realizing their capital gains now, in order to pay the current, lower rate. (Also, I do think that capital gains taxes should be adjusted for inflation.)

Wouldn’t nonprofit organizations suffer if we eliminated the charitable deduction for the wealthy? There might be some effect, but notice that by reducing the marginal rate to 28 percent, the tax incentive to donate would already be quite a bit lower than at current rates of 35 percent or more. And if this political season has taught us anything, it’s that rich people don’t need a tax deduction to contribute to causes they believe in. (Political contributions are not deductible.)

We could pay for the reduction in the corporation income tax by broadening that base as well. There are many special deals — like subsidies to oil companies — that could be eliminated.

OF course, I haven’t said what would happen to the households in the middle, or what the taxes would be on the first $1 million for the rich, but the Bowles-Simpson commission offers a comprehensive plan that is in the spirit of my suggestion. One possibility is to scale back deductions smoothly, starting at household incomes above $250,000, and completely eliminate them for incomes above $1 million. That would leave the popular deductions fully in place for those earning less than $250,000. A more radical plan, curtailing deductions for this large group, is probably politically infeasible, at least for now.

And what if the resulting revenue falls a bit short of what we need to start trimming the deficit? I suggest that we get our gasoline tax more in line with those of the rest of the world. Gradually raising it to something like $1 a gallon would both bring in revenue and help reduce emissions. In the long term, we could set the rate as a percentage of the price at the pump. Maybe 28 percent?

Richard H. Thaler is a professor of economics and behavioral science at the Booth School of Business at the University of Chicago.