Gazprom Bail Out Of Cyprus: Offer Looks Dead On Arrival

Gazprom, the huge Russian energy company, has reportedly offered Cyprus an alternative to the controversial EU rescue package that would tax deposits in every Cypriot bank. The world’s biggest natural gas extractor presented the deal Sunday to Cyprus, although early reports indicate the offer might have already been rejected. The deal stipulated that Gazprom would finance the restructure of Cypriot banks for the rights to a significant portion of the country’s natural gas reserves.

The total cost of a complete bailout would be around 16 billion euros. But contrasted against the estimated 300 billion euros of Gas reserves in Cyprus, Gazprom stands to gain a lot from the island’s difficult position. The deal may seems absurd but Cyprus has it’s back against the wall. The alternative to the deal would be to accept an EU proposal that include a significant tax on every single bank deposit in Cypriot banks. The EU rescue package is even facing criticism from German conservative. It is unclear how the EU would respond to the fulfillment of Gazprom’s offer but there is already a shared sense of engagement in Europe about the terms of the EU proposal.

Some of the most outspoken critics of the EU plan come from Russia. President Vladimir Putin is quoted as having referred to the proposal as being “unfair, unprofessional and danger.” Putin’s Deputy Finance Minister, Anton Shatalov, also expressed concern about the proposal, recommending instead a levy be placed on the interest acquired by deposits and not the deposits themselves.

Russia’s concern of course has nothing to do with the fact that under the proposed plan Cypriots with bank deposit savings over 100,000 euros (roughly $129,000) will be taxed 9.9% and deposits with less than that will face a 6.7% tax. Instead, the anxiety arises because the same levy will also be imposed on the vast Russian deposits in Cypriot banks. Cyprus’s enigmatic bank system, with its lenient regulatory system and minor taxes, draws in massive deposits from Russian clients. Banks in Cyrus currently hold about $88 billion. Estimates show that Russians deposits might account for up to a fourth of that. The acquisition of Cyprus’s natural gas rights would promote even more Cypriot dependence on Russia.

Reports have begun to surface that Cyprus has already turned down Gazprom’s proposal opting instead to negotiate the current EU offer. The parliament was due to vote on the EU plan yesterday but ultimately delayed their decision. Banks were closed Monday because of a national holiday. But Cyprus’s Finance Ministry has announced a decision to extend the holiday two more days indicating that banks won’t be open until Thursday.