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Russia to the Rescue? Why Moscow May Bail Out Cyprus

by | March 21st, 2013 | 09:54 am
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Suddenly, Russia has become a central player in the Cypriot financial crisis. On the very evening after the Cypriot parliament rejected a proposed levy on bank deposits that the Cypriot president had previously accepted as a condition for a bailout package of €10 billion, Finance Minister Michael Sarris flew from Nicosia to Moscow. The next day, March 20, he met with Russia’s Finance Minister, Anton Siluanov, and First Deputy Prime Minister Igor Shuvalov. Their discussions were described as fruitful but only introductory. Also Cyprus Energy Minister George Lakkotrypis flew to Moscow, and so have representatives for Cyprus’s crisis-ridden Popular Bank. Is it realistic for Russia to bail out Cyprus? Why and how would it do so? There are actually many reasons why Russia may assist Cyprus.

  1. Cyprus is of outsized financial importance to Russia. Russian individuals and corporations have €30 billion to €35billion in the countries’ financial institutions, but annual flows between Russia and Cyprus are several times larger. Cyprus has specialized on being Russia’s financial intermediary with an advantageous double-taxation agreement, a low corporate profit tax of 10 percent, English law, discretion, and all kinds of financial services for Russians. Russia has every reason to safeguard the continued functioning of its primary financial intermediary. Moreover, forensic bookkeeping in failed Cypriot banks could bring all kinds of undesirable information about illicit activities and money laundering by Russia to the surface. The damage of such disclosures overshadow any direct cost to Russia of the bank levy, which would presumably be €3 billion.
  2. No EU member is closer to Russia than Cyprus. The island nation does not belong to the EU Schengen visa area and utilizes its special status to allow Russians to enter their country without a visa. Cyprus is effectively seen as Russia’s member of the European Union. It can be trusted to defend Russia within the European Union. Probably 50,000 Russians live in Cyprus, which has 800,000 citizens. Thousands of Russians are Cypriot citizens, including several big oligarchs. Cyprus’ outgoing president was educated in Moscow. Like Russians, the Greek Cypriots are overwhelmingly orthodox Christians. Arguably Cyprus is Russia’s best friend.
  3. A Russian bailout of Cyprus would be very popular in Russia. Many members of the elite would lose some money and risk unpleasant exposure if Cyprus defaulted. The Russian media are up in arms over the bank levy and the Cypriot parliamentary vote is perceived as support for Russia’s position. Valentina Matvienko, chairwoman of the Federation Council the upper chamber of the Russian parliament, stated: “We are happy that the voice of Russia has been heard and that it was possible to block such an arbitrary decision.” For the last year, Putin has been fiscally irresponsible, catering to workers and consumers with a mixture of nationalism and popular state intervention and spending programs. Ever since the embarrassing Duma elections in December 2011, he is campaigning for the electoral support he has lost.
  4. Russia can easily mobilize the financial resources required with its international reserves of $530 billion, and President Putin would not mind spending large amounts of money in a sudden deal. Most spectacularly, the president spent $40 billion of public money when poorly managed state oil company Rosneft bought the outstandingly well-managed private oil company TNK-BP in late 2012. Such an action shows his willingness to spend huge amounts of public money for dubious benefits, so the balance between public costs and private benefits is not very important.
  5. It is critical to have a top-level dealmaker acting fast. The only plausible dealmaker is President Putin himself. In order to get to access to Putin, President Nicos Anastasiades needs to go to Moscow. Only the two presidents can make a deal of this significance. But the Kremlin does not require any additional procedures such as parliamentary votes. Money can most easily be taken from one or several of the big state corporations.
  6. The key problem is to find relevant and sizeable assets that Russia can secure sufficiently fast. Gas licenses and a naval base have been mentioned, but neither can be seized fast and safely. The natural alternatives would be the two Cypriot biggest banks, Popular Bank and the Bank of Cyprus, which are both in trouble. The two big Russian state banks, Sberbank and VTB, could buy one each. They love buying banks in trouble both at home and abroad. Sberbank has just bought a big bank in Turkey, one in Ukraine, and half a dozen Central and East European banks through a failing Austrian bank. VTB also bought a big bank in Ukraine and has a subsidiary in Cyprus. Since these big banks would formally make the deal, it could be done instantly with the involvement only of Putin, and the two bank chiefs concerned (German Gref and Andrei Kostin). Speculation in Moscow is so intense that on March 20 both VTB and Gazprombank officially denied that they have plans to buy Cypriot bank shares.

It is difficult to predict how this crisis will be resolved. There is no good option, and there are always complications. The biggest problems for a Russian scheme would probably be Cyprus’s relation to the European Central Bank and the potential anger of German Chancellor Angela Merkel and other hardliners in Europe toward Cyprus. Yet, a bailout with these basic features would be hallmark Putin and reflect his values, and on this issue he is undoubtedly getting strong advice to act from wealthy, smart, and daring Russian businessmen.