Cyprus Bailout: Does It Hurt Russia More Than It Hurts Cyprus?

On Monday evening, the European Commission-International Monetary Fund-European Central Bank troika and the government of Cyprus finally came to an agreement on a bailout of its financial system. The troika would give Cyprus 10€ billion ($13 billion), and Cyprus would raise 5.80€ billion ($7.54 billion) via a 40% levy on all financial deposits above 100,000€ ($130,000). That's up up from 9.9% in the proposal floated last week that was rejected 36-0. While this may seem — and indeed, is — startling, the agreement does not touch deposits below 100,000€, which prior proposals had aimed to levy upon as well. The resultant agreement, despite the perceptions of popular protesters, then leaves the average Cypriot fairly unaffected. Those that would be hurt by the deal would be large, generally foreign depositors — who comprise 37% of all deposits. Of those, 60%, or 22% of total deposits, are held by Russian investors. Predictably, both the Kremlin and the private sector there have stridently objected to the plan.

Last week, Prime Minister Dmitry Medvedev called the plan comparable "to decisions made at a certain period of time by Soviet authorities, who did not stand on ceremony when it came to people’s saving," comparing the levy to Lenin-era expropriations. Meanwhile, the benchmark Micex index of stocks on the Moscow Stock Exchange posted its steepest decline since last May last week after Cyprus proposed the bank levy, and the new proposal, with its higher proportions, is sure to cause an even worse performance.

"The major haircuts and freezing of deposits over 100,000 euros is clearly worse for Russia than the originally proposed Cypriot bailout," Bank of America analysts wrote in an email on Monday. Meanwhile, Russians are currently scrambling to get their deposits out of the country, or at least reduced.

Cyprus has served as a major off shore haven for Russian funds, which has led Medvedev to call the deal "the stealing of what has already been stolen," but it has also served a greater purpose for the advancement of Russian goals. Along with the money has come an influx of Russian expatriates, and while concerns over what shall become of them are rampant — "When the Russians leave who is going to stay at the Four Seasons for $500 a night?" said Feodor Mikhin, the owner of a shipping line — along with them has also come the direct influence of the Kremlin.

Last February, a Russian cargo ship laden with arms was allowed to continue virtually unimpeded to Syria, in an episode one columnist called a sign of Cyprus's "embarrassing subservience" to Moscow. Cyprus, whose prior President Demetris Christofias left office at the beginning this month, was a member of the Communist Party and helped Cyprus begin to become a "gimp state for Russian gangsta finance," a Russian exclave in Europe. As I mentioned last week, gas giant Gazprom had offered to privately bail out Cyprus in return for exclusive gas rights in a bid to further its influence. Cyprus turned down the deal, and although the Kremlin was mulling the idea of its own bail-out as late as last week, the government has accepted the troika's proposals.

With that move, Russia stands poised to lose its interests in Cyprus — its money, its influence, even the symbol of a European foothold. The deal places the bulk of the burden upon foreign Russian investors, who shall be made to lose 40% of their deposits in some cases, and in the case of the failed Laiki Bank, all of them. The Cypriot GDP will undoubtedly nosedive some 20% by the estimates of Societe Generale, and in rebuilding its economy Cyprus will have to turn West for guidance. In that scenario, which appears to be what will become reality, Russia shall be left out in the cold.