Cyprus Refuses to Be Drawn Into Russia’s Orbit

For now, Europe is the only power able to extend a lifeline to Cyprus’ economy.

After the European Union agreed to a financial rescue of Cyprus on Monday, the Netherlands’ Jeroen Dijsselbloem, who chairs the group of eurozone finance ministers, announced, “We put an end to the uncertainty for Cyprus and the eurozone.”

Yet much of the uncertainty was created by the bloc’s unwillingness to bail out Cyprus altogether and the possibility of Russian involvement in its rescue.

Monday’s deal, which includes the liquidation of the Mediterranean country’s second largest bank and a tax on deposits over €100,000, followed a proposal from the European Union and the International Monetary Fund that was voted down unanimously in the Cypriot parliament last week. It would have enforced a levy on all Cypriot bank deposits in addition to €10 billion in international financial support.

Germany, which has bore the brunt of bailing out weaker states in the periphery of the European currency union and was unwilling to bend the rules, insisted on such tough conditions for Cyprus’ rescue, prompting the island’s government to turn to Russia for help instead. Because of its lax tax laws, Cyprus has been a favored destination for Russian money for years.

Close proximity to Russia and a range of tax privileges made it a suitable location for Russian companies and oligarchs to park billions of dollars. The European decision to tax bank deposits in Cyprus might have caught the Russian government “redhanded.” However, the Kremlin’s interests aren’t necessarily aligned with those of the oligarchs who have been using the island as a money laundering paradise for years.

If President Vladimir Putin had blocked the Cyprus deposit levy, he would have protected the assets stranded there by his oligarch associates and even boosted his popularity among middle-class Russians who would be the levy’s main victims. But much more important for Putin would have been the personal prestige of helping to avert a global financial crisis and outwitting European leaders to secure Cyprus as a geopolitical prize and client state.

Despite Cypriot finance minister Michalis Sarris’ attempt to extract support from Moscow, though, the island’s rescue has been resolved entirely within the European framework. And Sarris later clarified that he never sought a new Russian loan, rather an extension of existing ones and maybe investment in Cypriot natural gas. He strongly denied that there had been any proposal from the Russian side for Cyprus to leave the European Union or enter Putin’s Eurasian Union alternative.

Scenarios that predicted or hoped that Cyprus might exit the euro in favor of the ruble proved wrong and shortsighted. It seems the only one able to extend a lifeline to the Cypriot economy and its banks was, is and will be Europe.

Until last week, many right-wing or opportunistic voices in Cyprus and Greece hoped for deeper Russian involvement with presumably fewer of the “patriotic” investments in Greek bonds that were encouraged by the European Union and then brought Cyprus to ruin. Russia’s ultimate hope would be to evolve a similar relationship to a self governing offshore entrepôt in Cyprus as China has established with Hong Kong and Singapore.

As of now, the potential rewards of a closer relationship with Moscow don’t outweigh the risks of leaving Europe, especially in such a turbulent period. Russia might want to establish a permanent naval or military presence in the Mediterranean in the long term but this is not feasible at present.

The presumed geopolitical gamble did not take place. Putin did not draw Cyprus into a new zone. European unity is safe — for now.