Economy / George Grevett

From Russia With Love?

Cypris President Dimitris Christofias

Cyprus today hinted that it was seeking a €5 billion loan from the Russian authorities to bolster its bank’s capital levels before a key regulatory deadline at the end of June. This assistance would follow on from the €2.5 billion of support given in 2011 from the Kremlin which the island nation has been fully dependent on, having been effectively shut-out of capital markets.There had been signs over the past couple of days that Cyprus would formally request financial aid from the current Eurozone bail-out fund, the EFSF, but this has yet to materialise, although it has not entirely been ruled out by the Cypriot authorities who claim to be “considering all available options”.

Cyprus is under pressure to recapitalise its banking sector, particularly Popular Bank, which requires a capital injection of €1.8 billion this month in order to satisfy the conditions of European regulators. A rights issue underwritten by the Cypriot government is planned to start this Friday and will place further stress on state finances if, as expected, private participation is low.

A bailout, which looks an increasing certainty, poses an interesting conundrum for the Cypriot authorities. Accepting an EFSF package from its European partners would likely tie the small Mediterranean nation in to austerity conditions akin to those imposed on the other peripheral Eurozone economies. Furthermore it is presumed that any Russian assistance would be free of fiscal conditions which would be favourable but may come subject to other agreements likely to arouse suspicion in Europe and beyond.

For Russia, a country a flushed with Euro denominated reserves, this could be a targeted investment with potentially lucrative returns. It has been reported that Russia has an interest in developing a deep water naval capability in this strategic location as well as tapping into the reported sizeable natural gas reserves in the waters surrounding Cyprus. Nevertheless such a deal would raise alarm with European officials and the wider global community who would be wary of Russian involvement on European soil in such a capacity.

For Cyprus however, it finds itself at the heart of an interesting situation, namely now seemingly to have engineered competition for bailout funds between two major economic powers. This could have the result of securing financial assistance from the EFSF on more favourable terms than its peers as a result of the leverage it may now have with the European authorities over the possible interference from Russia. Any such agreement has the potential to spark fury within the current EFSF recipient nations where austerity is widely seen as the medicine which is killing the patient.

What is evident is that the issue of financial assistance for Cyprus, a relatively trivial amount, may now fast be moving up the list of priority items for Eurozone leaders. Adding this to the upcoming elections in Greece, the lack of detail around the Spanish bank bailout and today’s questions over the sustainability of Italian public debt, it is clear that the day of reckoning is fast approaching for the Eurozone.

George Grevett 14/06/2012

picture source: Olivier Hansen


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