Cyprus Turns to Moscow: Scenarios for a Russian Role in the Bailout

By in Moscow

Cypriot Finance Minister Michalis Sarris leaves the Russian Finance Ministry in Moscow on Tuesday after the start of talks over possible aid for crisis-plagued Cyprus. Zoom
AFP

Cypriot Finance Minister Michalis Sarris leaves the Russian Finance Ministry in Moscow on Tuesday after the start of talks over possible aid for crisis-plagued Cyprus.

Cyprus on Tuesday rejected the terms of a bailout package offered by Brussels and is now turning to Moscow for help. Russian President Vladimir Putin may charge a very high price in exchange for aid for the nearly bankrupt euro-zone country.

The inhabitants of Limassol, Cyprus, sometimes like to call their city "Little Moscow" because of the number of Russian businesspeople residing there. Southern Cyprus is home to the holding companies of numerous Russian oligarchs. Now, because the parliament in Nicosia rejected the terms of the European Union's bailout package for the country, Cyprus' government is looking for assistance in Russia, a country from which countless billions have flowed into the Mediterranean island nation over the years.

Cypriot President Nicos Anastasiades spoke with Russian President Vladimir Putin on the phone on Tuesday evening. And Finance Minister Michalis Sarris arrived on Tuesday night in Moscow and began meetings on Wednesday. Sarris is negotiating with the Kremlin over possible Russian support, though the talks have produced little so far. The leaders of a state that is a member of both the EU and the euro zone is now turning to Russia for help. It would be hard to imagine a more uncomfortable situation for the Kremlin.

What's Moscow 's position in the Cyprus crisis?

Like Greece, Cyprus holds a special status among EU countries in Russia. Many Cypriots and Greeks belong to the Orthodox Church, which maintains extremely close ties to the Moscow Patriarch. Archbishop Chrysostomos II of Cyprus has also asked Patriarch Kirill, the religious head of the Russian Orthodox Church, to put in a good word for Cyprus with Putin.

Even with such high-level support, it is unlikely that Sarris will be facing easy talks in Moscow. Russian Finance Minister Anton Siluanov is upset because, although representatives of the euro zone had agreed to consult the Kremlin on the Cyprus issue, the EU didn't consult with Moscow about the bailout package or the mandatory bail-in that would seize funds from most bank accounts in the country, particularly those of Russians. Siluanov's predecessor, Putin confidant Alexei Kudrin, even spoke of an "element of disrespect."

Does Russia have reason to fear the Cyprus crisis?

The answer is yes and no. In addition to British investors, Russians are the largest account holders on the island. It has been reported that not even the government in Moscow has a solid grasp on the exact figures. But various estimates place the amount of Russian investor deposits in Cyprus at between $20 billion and $40 billion. Russia's state-held Sberbank estimates that Russian depositors would ultimately have provided 40 percent of the €5.8 billion Brussels had hoped to raise by taking those who held accounts with Cypriot banks. The media in Moscow is already speculating over a possible contagion and that the crisis might spill over into Russia, saying that the two countries' banking systems are connected "like Siamese twins."

It's an exaggerated fear. It's true that an escalation of the Cyprus crisis or a default would hit Russian banks hard. The bank being named most this week is state-held VTB, which has a subsidiary in Cyprus. But given that the country has currency reserves of $530 billion, both the Russian state and economy appear to be strong enough to be able to weather even the total loss of all Russian deposits in Cyprus.

What does Russia want to achieve?

First, it wants to limit damage to Russian investors. Unlike former President Boris Yeltsin, Putin holds himself at a certain distance from the oligarchs. But Alexei Mukhin, a political analyst and head of the Center for Political Information, says the Kremlin still takes their interests into account and that it also tries to safeguard their investments. Putin has "no interest in creating additional adversaries," he says.

Second, Moscow wants to use the crisis to burnish its image. The Kremlin would like to position Russia as an anchor of stability in the crisis and as a financial safe harbor -- an image it wants to foster both in the foreign policy arena and for domestic audiences. This week, the Russian media seem to be trying to outdo themselves with swan songs for the European Union. The talk is of "Euro Bolshevism," and even opposition columnist Yulia Latynina has written of "European parasites feeding on Cyprus and Russia." And as Europe threatens to become suffocated by its debt burden, the Kremlin can point to its own economic and financial successes. Thanks to a hefty stream of revenues from gas and oil sales, Russia enjoyed a budget surplus in 2012 of 0.8 percent of gross domestic project. The country also has a sovereign debt ratio of less than 10 percent of GDP.

Will Russia help Cyprus?

The chances are that it will. Moscow already provided the government in Nicosia with a €2.5 billion loan last year, and Cyprus is hoping for an agreement to extend the terms of that loan until 2021 as well as a €5 billion increase in the credit line. However, Moscow is likely to impose conditions in exchange for its support. Such a loan, however, would increase Cyprus' debt load to an unsustainable level -- exactly what Brussels had been trying to avoid with the savings account levy.

Russian President Vladimir Putin: Will he seek greater control of Russian companies operating in Cyprus in exchange for aid? Zoom
AFP

Russian President Vladimir Putin: Will he seek greater control of Russian companies operating in Cyprus in exchange for aid?

What kinds of conditions is it likely to impose?

Greater transparency. Russia wants to obtain more information about the Russian money and firms located on the island. Dozens of billions are pumped into the island year after year from Russia, only to be promptly recirculated and reinvested back home. With close to $50 billion, Cyprus was Russia's largest foreign investor in 2010. By comparison, investments from Germany that year totalled just $21 billion.

Cyprus is a popular place for Russian oligarchs and criminals for whom the island is a tax haven and a place where they can launder money. Numerous large Russian corporations have officially registered satellite companies on the island, and the Kremlin would like to change that.

Gas: In exchange for Russian support, Moscow may demand that state-owned Gazprom be given rights to exploit potentially lucrative natural gas fields off the coast of Cyprus.

Control of Cypriot companies: Russia may demand that Russian companies be given access to state-owned companies Cyprus may seek to privatize.

Military presence: Russia would like to pursue ambitious plans for its own Mediterranean fleet, but only has access to a single harbor in the region: a small Navy base in Tartus, Syria. The possibility that Russia might demand tighter military cooperation in exchange for financial aid cannot be ruled out.

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1. British bases in Cyprus
vernony 03/20/2013
The British Cyprus bases are a powerful Western presence in the East Mediterranean, and are quite often used by the USA. They are a peaceful, but an ever present threat, where Western interests are endangered in Arabia I could imagine that President Putin would not be beyond mentioning that he doesn't like those bases on Cyprus. In fact it would be a good thing to have Russian bases there instead ! Borrowed money does not come without strings !
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