There has been all sorts of hysteria surrounding Cyprus.
First, it was Cyprus’s potential eurozone exit and the contagion that would cause. Next it was the prospect of a Moscow-led bailout that would transform Cyprus into a Russian beachhead. Then there was talk of revenge, with a former Kremlin adviser, Alexander Nekrassov, warning if there were a large levy on wealthy Russian depositors, “then, of course Moscow will be looking for ways to punish the EU.”
Such a levy has now come to pass. An 11th hour deal spearheaded by Germany has left Russia on the sidelines—and wealthy Russian depositors in Cyprus’s two largest banks holding much of the bag. By not leading the bailout, Russia had a lot to lose: with more foreign direct investment coming into Russia from Cyprus than from any other country, the island is Russia’s most important tax haven. The Cyprus bailout effectively ends Cyprus’s stint as a hub for Russian money—and leaves much of that money frozen via capital controls. There was plenty to gain by stepping in: in return for Russian assistance, Cyprus was offering access to offshore gas deposits or a warm-water port. (Russia’s main point of access to the Mediterranean sea is through ports in Syria — an investment that appears increasingly shaky.)
All of this underscores how unwilling Moscow was to lead. Indeed, Russia will continue to be far less likely to get involved than is widely assumed.
Economics explains some of this reluctance. Moscow is under real pressure, with a budgetary process that is only getting rockier, and rising unemployment. The notion of a Cyprus deal was never going to fly for the Kremlin, as it was largely perceived as throwing good money after bad. Rather, the Russians are — as the Chinese have been doing in Greece — waiting for select assets at a bargain price. It is a “buy low” approach and it is a safe bet that Cypriot assets will become more affordable.
There were also political motives staying Vladimir Putin’s hand. In his State of the Union address in December, Mr Putin emphasised his “deoffshorisation” program, declaring: “The offshore nature of Russia’s economy has become a household term. Experts call this escaping the jurisdiction. We need a comprehensive system of measures for the deoffshorization of our economy.” Against this backdrop, bailing out offshore accounts would have been quite awkward. The wealthy Russians who he would be bailing out are one of his most loyal constituencies: they are thorough Putinists, and the current political landscape offers them no other outlet for their allegiance. When it comes to broader domestic opinion, any other Russians who were actually paying attention to the issue likely approved of Mr Putin’s performance. He was vocal in his protests against any plan that would hit Russian depositors but when the time came, he walked away from the table.
But what about those Cypriot assets? They came with untenable strings attached. The Cypriot gas fields have unproven volumes and carry territorial disputes with Turkey, a headache Mr Putin does not need. A warm-water port in Cyprus could have led to a geopolitical spat with the EU, which he has every reason to avoid.
And it is that desire to avoid a deeper confrontation with the EU that makes any talk of Russian retribution at the EU’s expense highly unlikely. Yes, the relationship will be hurt -the Russian elite blames the EU for procrastinating before addressing the crisis and for shortchanging its interests — but the damage will be contained. As far as we can tell at this stage, the outcome could have been worse for Russia had all Cypriot banks been targeted, rather than just two. Russia’s largest trading partner remains the EU; Moscow is dependent on revenues from gas sales to Europe. The bottom line: Moscow has far more to lose than gain from aggressively reacting to the crisis. Mr Putin seems well aware of this, telling his government to begin talks on restructuring Russia’s €2.5bn loan to Cyprus.