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Cyprus and Russia Did Not Just Break Up
On March 19, Michalis Sarris, Cyprus’ finance minister, flew to Moscow for emergency talks aimed at saving the island’s outsized banking sector from collapse. In exchange for a loan extension and new financial aid, the story goes, Sarris offered Russia trade preferences in the energy sector, gas exploration rights, and controlling shares in Cypriot banks. Two days later, he left Moscow empty-handed. Up against a wall, on March 25, Cyprus and the EU agreed on a bailout package that will help pay the country’s bills but will also deduct billions of euros from the savings accounts of wealthy Russians and leave billions more of Russian assets frozen in Cypriot banks.
To many Western observers, Moscow’s unwillingness to take Sarris’ initial offer appears to be a huge strategic blunder. It seems inexplicable that Cyprus’ most heavily invested economic partner -- and the largest source of foreign deposits in the island’s banks -- would refuse a deal on such apparently favorable terms. All the more confusing is Moscow’s apparent decision to forego a chance to solidify its strategic foothold, given Russia’s geopolitical ambitions in the eastern Mediterranean.
There are three likely explanations for Russia’s behavior. First, it is not clear that there was ever a credible deal on the table. Second, Russia did not believe that a last-minute agreement could change Cyprus’ fate. And third, Russian losses from the collapse of the Cypriot banking sector will not be catastrophic. Put simply, Moscow’s decision to turn down a deal with Nicosia was in Russia’s long-term interests.
Cyprus’ current troubles were triggered by the eurozone debt crisis. The island’s banks accumulated a host of toxic assets from their Greek branches and lost much of their capital during the restructuring of Greek debt. As a result, total bank liabilities are five times larger than the nation’s GDP -- a ratio almost four times the EU average. Without an independent monetary policy or the financial means to pay down the deficit and save the banks, Nicosia requested a 17.5 billion euro bailout from Brussels earlier this month.