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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 law is moot, meaning the tax avoidance of, say, Amazon.com (AMZN) , as condemned by U.K. politicians (see this article The Guardian ), is in the same system as Russian mafia money, Arabian petrodollars and Latin American drug dollars.

It's not whether small depositors are safe in Cyprus, or anywhere else. It's whether governments have any way to control the ultrawealthy, regardless of wealth's source, and whether those wealthy people and corporations are part of the global social contract. Even whether they can be made part of it.

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.