Moscow by the Sea *Exclusive

By EWI BLOG | by Rachel Ehrenfeld & Ken Jensen
Thursday, March 21st, 2013 @ 9:44PM

Print Friendly, PDF & Email

Cyprus’s crisis may have been prevented had the Cypriot banks used the billions of dollars they laundered for the Russians to buy assets other than Greek sovereign bonds.

Good thing Cyprus Central Bank governor Panicos Demetriades did not lose his sense of humor; “In an interview with Russian business daily Vedomosti, [he] said the amount of Russian deposits in Cyprus was lower than previously thought, putting the figure at between €5bn and €10bn –

“depending on how you count it”.

The levy on Cyprus’s depositors scheme was bound to fail as it has. The plan would have taken 9.9 percent of the deposits over 100,000 euros and 6.5 percent of lesser deposits.Cyprus’s parliament has rejected the idea.

The scheme was odious in that it would have allowed Cyprus to maintain its ability to attract offshore money it can’t back if put in banks, Russia would continue to have a Cypriot laundromat.

With the failure of the levy comes the real reckoning. The EUhas given Cyprus until Monday to find a way to replace the 5.8 billion euros that would have come from the savings levy. If that can’t be done, the bailout is off and Cyprus’s banks fail. Banks are closed until Tuesday, in the meantime, Laiki, the second largest lender on the Island, has limitedwithdrawals to 260 euros.

If the bailout fails to occur, Cyprus may have to drop out of the euro zone, which makes the zone’s already shaky situation even worse. Geoffrey Norman raises the possibility that what happens in Cyprus will seal the fate of the euro.

“Great catastrophes can begin in unlikely places.  Bismarck famously predicted that the great European war would likely be ignited by ‘some damned foolish thing in the Balkans.’ Could the collapse of the euro and, even, the EU be triggered by the bailout of the banks of some island in the Mediterranean?”

Whatever bad happens to the economic order in Europe would affect the United States adversely as well. Levying direct tax on depositors could spread from Cyprus to Europe and across the pond  and to the U.S.

While the above is appalling, it gets really interesting (and serious) when examining “Plan B” for Cyprus to get the wherewithal to pay its 5.8 billion euro share of the bailout.

One rumor has it that party leaders had agreed to create a ‘solidarity fund’ that would bundle state assets as the basis for an emergency bond issue. Moreover, the fund would included nationalized private pensions. How could such bonds be valued for sale?

The other, more serious tack mentioned has Cyprus looking to Russia for its bailout.  Finance Minister Michael Sarris is in Moscow talking to his counterpart Anton Siluanov.  Sarris is purportedly looking for “possible Russian investments an extension of an existing 2.5 billion euro loan.” Siluanov reported, however, that Cyprus had no plans to borrow more money from Russia and add to its debt.  Nonetheless, on Monday, the Russian Finance Ministry said Cyprus was looking for an extra 5 billion euro loan. Clearly, the Russians aren’t eager to be simply helpful. There is some talk that either or both the Russian state development bank (VEB) and, more ominously, Gazprom could become involved.

Last week, Gazprom apparently offered to bail out Cyprus.  The GreeceReporter said that “Russian energy giant Gazprom has offered the Republic of Cyprus a plan in which the company will undertake the restructuring of the country’s banks in exchange for exploration rights for natural gas in Cyprus’exclusive economic zone, local media reported.”

Rather than looking at events regarding Cyprus as a crisis for the Cypriots and the Western economic system to which the country belongs, it is actually just as reasonable to look at it as a golden opportunity for Russia and a way to pave its possible reentry into more things Middle Eastern.

Moscow-based economist Jacob Nell has said “It might be possible for part of this loan to be convertible over time to equity in Cypriot assets, such as privatized state assets and hydrocarbon rights. There are precedents in Belarus and Ukraine for similar deals involving Russia.” The deals Nell was referring to involved agreements with Russia’s ex-Soviet neighbors in which debts owed to Gazprom were swapped for assets.” These deals have been taken by many as a signal that Ukraine’s and Belarus’s independence have been totally compromised.

The serious matter here is not so much Russian influence on Cyprus (which is already substantial) but the entry of a significant Russian stake in the newly developing Levantine gas fields, which are a matter of hot contest among any number of regional powers, including Israel. Today, as expected, Turkey announced its objection to such as deal.

The general reporting on the Cypriot-Russian talks have things not going well.  Moscow broker Peter Westin has said that “Russia is likely to wait and see what the euro zone does first. Russia is likely to wait for the Europeans to come through with the money, and then step in if they think it’s not enough.” Perhaps. But Russia may be holding out until after the EU bailout fails to get the best deal it can with the Cypriots.

The EU may have had a point in suggesting that depositors in Cyprus banks bear part of the cost of the bailout.  After all, Cypriot banks have been holding tremendous amounts of money, far in excess of what would be the case for a country with just over a million people and with a government unable to guarantee such deposits. The great bulk of that money is Russian, and most of it is dirty and should be used to help with the bail out.

The Russians, however, found the idea of a levy on depositors unfair to … Russians.  Accordingly, they favor making the EU save Cyprus’s banks, as their depositors have “done nothing wrong.”

According to Reuters, “Russian Prime Minister Dmitry Medvedev, who meets a European Commission delegation in Moscow [today], said the bloc had behaved ‘like a bull in a china shop’. He likened EU proposals, which would force Russian customers to contribute to the rescue of Cypriot banks, to Soviet-era expropriations.””

Medvedev surely would have no objections to Russia’s expropriating Cypriot national assets.”Moscow on the Sea,” as Cyprus has become known, will soon see thousands of Russians joining the 30,000 already living in the Island.

The likely winners of the EU and IMF bailout mismanagement will be the Russians. They’ll end up with Mediterranean gas, a even larger laundromat than before. In addition, they’ll gain an island to serve as the new warm water base to replace their bases at the Syrian ports of Tartus and Latakia.

Further Reading:

WSJ: ECB Threatens to Cut Off Cypriot Banks

DER SPIEGEL ONLINE: Search for ‘Plan B’: ECB Sets Ultimatum as Cyprus Moves toward Deal

DER SPIEGEL ONLINE: End of an Era: Cypriot Financial Sector Faces Collapse  

GUARDIAN UK: Cyprus to keep banks shut into next week as it seeks deal to avert disaster. Ministers continue negotiations with EU, IMF and Russia as suspicions grow that Kremlin is pressing for stakes in gas fields

FT: ECB issues ultimatum to Cyprus

WASHINGTON POST: Cyprus bailout deadline set for Monday

ECONOMIST: The bail-out of Cyprus: We’d rather not. 

BLOOMBERG: German Bunds Pare Advance on Report of Cyprus Deposit Guarantees  

Categories: ACD/EWI Blog, ACD/EWI Exclusive

On The Campaign Trail

Check the dates and see when we're in your town!