Cyprus: From the Eu presidency to the Russian bailout

After less than a month from the termination of the EU Council Presidency, Cyprus is regarded with suspicion in the European Union.

In 2012, the left-wing government in Nicosia announced it would need international help to keep the country afloat, after rating agency Fitch downgraded Cyprus’s credit rating to junk status. Fitch justified its decision with the heavy exposure of Cypriot banks to bad Greek debt.

 And herein lies the problem. Large parts of the bailout that Cyprus is asking from the EU and the International Monetary Fund (IMF) would be used to recapitalize Cypriot banks, almost €11 billion of the €17 billion aid package the country needs. Potential creditors in northern Europe, namely Germany, are balking at the idea. The problem, according to Germany’s bipartisan politicians, lays in a confidential report compiled by Germany’s external secret service, the Bundesnachrichtendienst (BND). Last November, German media quoted the BND as saying that Russian citizens had deposits of €26 billion in Cypriot banks, more than the country’s GDP. According to the report, Cyprus facilitates money laundering by generously granting citizenship to wealthy foreigners. Up to 80 Russian oligarchs gained access to the common European market this way, the BND says.

Cyprus vehemently rejects these accusations, pointing out that all European legislation on banking and business regulations have been enshrined in Cypriot law, too. On Tuesday 22 January, Panicos Demetriades, governor of the Central Bank of Cyprus, insisted in an op-ed in the Financial Times that his country has more measures against money laundering in place than other eurozone nations.

An EU bailout can be envisaged, stated the German Finance Minister Wolfgang Schaeuble in Brussels, if there is “a danger for the stability of the eurozone as a whole. This has to be met. We will see”. It is a doubt shared by European leaders. On 22 January, a meeting of eurozone finance ministers postponed any decisions about a Cypriot bailout until March.

The head of the European Central Bank (ECB) has clashed with Germany’s finance minister over Cyprus, arguing that failure to bail out the tiny island nation could endanger the wider euro zone, the weekly Spiegel magazine reported on Sunday 27 January. ECB president Mario Draghi rebuffed German Finance Minister Wolfgang Schaeuble’s view that Cyprus is not “systemically relevant” and that its bankruptcy would not pose a threat to the survival of the euro zone, Spiegel reported without citing sources for its report. Draghi told Schaeuble during a gathering of euro zone finance ministers that Cyprus’s two largest banks have an extensive network of branches in Greece and that customers’ worries over the safety of their deposits could quickly wreck a fragile calm that has returned to that crisis-ridden country. “A Cypriot bankruptcy would undo the positive news which has recently led to a calming of the mood in the euro zone”, Spiegel quoted Draghi and his colleagues as telling Schaeuble.

As always, there is never an alternative to a bailout. “It’s essential that everybody realizes that a disorderly default of Cyprus could lead to an exit of Cyprus from the Eurozone,” said Olli Rehn, European Commissioner for Economic and Monetary Affairs. “It would be extremely stupid to take any risk of that nature”.

What didn’t make it into the press release was that ECB President Mario Draghi, bailout-fund tsar Klaus Regling (ESM), and Olli Rehn, all three unelected officials, had formed a triumvirate to gang up on Schaeuble.

In the meantime, general elections in Cyprus on February 17th could bring a change of government, with polls suggesting that the Communist AKEL party might have to hand over the presidency to the center-right Democratic Rally party. Its leader, Nicos Anastasiades, would then have to negotiate the bailout conditions.

Today, Reuter reported that Cypriot President Demetris Christofias said the island nation had assurances from Russia that it was ready to assist in a European Union bailout of Cyprus. The help could come in the form of an extension to a 5-year 2.5 billion euro loan. On 15 January, a German official was quoted telling that “the position of the German government is that it would be welcome if Russia extended its aid to Cyprus, as it has done in the past.” Russia already helped Cyprus to avoid bankruptcy in 2011 with a €2.5 billion loan for its banks, which had to stomach huge losses on loans to Greece. Another Russian contribution or an extension of the repayment deadline for the 2011 loan would lower the sum which Cyprus needs to borrow from eurozone countries.

Cyprus’s fortune, however, is its location. It is the easternmost island in the Mediterranean and of considerable strategic importance. Cyprus is like a huge aircraft carrier situated in front of Turkey, Syria, Lebanon, Israel and Egypt. In addition, huge offshore fields of gas and perhaps oil have recently been discovered in Cypriot territorial waters.

Cyprus is also the place where the Arab Spring meets the Eurocrisis. The Syrian port of Tartus hosts Russia’s only naval base in the Mediterranean. The impending fall of the Assad regime in Syria is forcing Russian President Vladimir Putin to look for an alternative to Tartus — leaving him with only one option: Cyprus.

Politically and economically, Russia and Cyprus are already tied closely together. Cyprus’s President, Demetris Christofias, is the leader of the Cypriot Communist Party. He met his wife during his studies at the Russian Academy of Sciences in Moscow in the 1960s. When Russia became “capitalist,” the ties between the two countries became even closer. Thousands of wealthy Russians have put their “black money” in Cypriot banks. Although Cyprus joined the eurozone in 2008, its banks have almost no clients from other EU countries. With the exception of Greece, with which the Greek-speaking Cypriots share close cultural and historic ties, Cypriot banks cater almost exclusively to Russian oligarchs. As a consequence, tiny Cyprus is Russia’s largest foreign investor.

Paolo Raffone