Cyprus is to Russia what Mauritius is to India

The troika, which include the EU (read Germany), the IMF and the European Central Bank, have a deal that calls for the closure of the Laiki, Cyprus’s second largest bank, and the transfer of its healthy assets to the country’s largest financial institution, Bank of Cyprus. All bank deposits under 100,000 will be secured and guaranteed by the state.

GERMANY VS RUSSIA

Laiki’s non-performing assets will be rolled into a “bad bank” vehicle for disposal. Deposits above 100,000 which are not guaranteed by the EU will be frozen in both banks and a portion of this will be expropriated. Big investors will take a hit. The EU seems hoist on its own petard in a situation best described as trying to wing it through German control without German discipline. Any banker who claims this was a surprise has the world’s longest nose.

“This is a very complicated situation which has a long history,” said Erik Belfrage, former diplomat, banker and chairman of Consilio, Sweden. “Things are not as simple as they look and the next few weeks will be very interesting.”

The current crisis is not only about money. This is Germany and Russia going eye to eye in a strategic expansion of power, influence and prestige and the first one to blink could lose all three. The Russian government cannot let the EU run the entire refinancing of Cyprus’s banks, and the Germans cannot explain why they are saving banks in Cyprus which help Russian oligarchs. Turbulence is predicted for the new few weeks.

AN EQUAL PARTNER? NO!

Doddering Cypriot banks have been crippled by their exposure to the financial crisis in Greece. Cyprus was allowed to float on hot air while the country’s banking sector swelled to eight times its GDP. In 2011, Russia provided Cyprus with a 2.5 billion low-interest loan hoping that EUIMF would summon up the rest to bail out a eurozone country. They cried foul when the EU expressed inability to pump in 17 billion into Cyprus to avoid bankruptcy. Observers say if the EU really wanted Russian money for the bailout, they could have involved Moscow in the process from the beginning to arrive at a viable rescue plan.

Last week, the Cypriots rejected a pact that involved an up to 10% levy on all bank accounts and deposits, including from Russia. Much sabre rattling followed since. Russian President Vladimir Putin and PM Dmitry Medvedev accused the EU of acting to confiscate Russian property and money in Cyprus. They claimed the EU was pre-empting Russia’s plans to ask Cyprus to disclose information about Russian bank accounts as part of Putin’s plans to curtail corruption and illegal outflow of capital. Russia’s business community said their country should be treated as an equal partner with the EU in deciding the future of Cyprus’s financial system. EU was unimpressed.

THE LINKS ARE OLD

Cyprus is to Russia what Mauritius is to India – an offshore financial haven for Russian companies and wealthy individuals to avoid high corporate taxes at home and legalise billions obtained in kickbacks and unaccounted deals. Cyprus officially owns some 40% of the foreign capital invested in Russia. The Russian economy is largely controlled by shell-holding companies registered in Cyprus. “Foreign” EU investment gives them an additional protection from arbitrary stings by the notoriously corrupt Russian bureaucracy. The links are old. The Orthodox Church in Russia and Cyprus share a long history of traditions and customs.

“Cyprus has always had its ears open to instructions from Russia,” said an analyst. When the Berlin Wall fell and Russia embarked on a privatisation exercise, a handful of fast-footed people seized the opportunity to amass wealth. The budding oligarchs gained majority positions across an gamut of industries which they then resold in the open market for huge profits.

Russian oligarchs use Cyprus for their banking work and party in the French Riviera in what is seen as an in-your-face ridiculing of a cashstrapped Europe. There are indications of new and unexplored gas basins around Cyprus, which could give Russia – already a key supplier of energy to Europe – a stronger foothold in the Mediterranean basin. Further complications are expected when the ruble replaces the euro in Cyprus. An estimated 50,000 Russians live in Cyprus.

Europe’s fault-lines are back in focus. Germany is Russia’s key political and economic partner, but since Putin’s return ties between Moscow and Berlin have been cold. German Chancellor Angela Merkel has been a more critical partner of Moscow than her predecessors have been. Tuesday will tell us if Monday was too late, too little, or both.

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Chitra Subramaniam Duella is based in Switzerland and comments on international affairs.

First published in The Times of India.