Author: Malcolm MacLeod
For decades, wealthy Russians have been avoiding their country’s high taxes by depositing their earnings in Cyprus, a small island in the Eastern Mediterranean. These Russian deposits, which steadily increased since the early nineties, inflated the net worth of Cyprus’ banks, creating a false sense of economic security that inevitably led Cyprus to spend beyond its means. Cyprus’ unsustainable public spending reached a crescendo in March when the nation fell victim to the same financial crisis that continues to plague Greece and Spain. As reported by the BBC, the resulting uncertainty and volatility have caused international rating agencies to downgrade the Cypriot economy to junk status. This stigma has made it impossible for Cyprus to borrow from international markets without some leniency from potential international benefactors.
Cyprus looked first to its allies in the Eurozone for aid, and the European Union responded with a 10 billion euros bailout. Seeking additional support, Cyprus offered generous economic concessions to its financial ally in the East, Russia, in exchange for Moscow’s help in restoring the Cypriot economy. Russia and Cyprus have yet to agree upon reasonable terms, therefore leaving Cyprus without essential recovery funds.
The Cyprus financial crisis demands America’s attention. How the nation responds within the coming years will have a great impact upon the Eurozone and, by extension, the global economy. Specifically, focus must be acutely targeted toward Russia’s role as both a contributor to the initial problem and as a potential facilitator of Cyprus’ economic recovery.
Beginning around 2011, the Cypriot government invested heavily in Greek bonds, a humanitarian response to the financial crisis in Greece, a country to whom Cyprus is closely tied. However Cyprus, a nation of only 1.1 million citizens, held investment liabilities equal to eight times its domestic net worth. In other words, Cyrpus invested more than it had into the Greek economy. Cyprus’ over confidence in its finances stems from its banking sector, which was flooded with Russian investments. For some time, wealthy Russian individuals and corporations have been using Cypriot banks as off-shore tax havens. These Russian deposits have accounted for nearly 50 percent of the assets stored between the Bank of Cyprus and Laiki, the nation’s most prominent banks, so there’s a lot at stake if their economy collapses.
Cyprus, presently incapable of repaying its international debt, was met with a positive response from the EU and a hesitant response from Russia. The EU has granted the Cypriots a bailout of 10 billion euros, contingent upon the Cypriot government raising 5.8 billion euros. Controversy arose from questions over who would raise this money. Initially, the EU suggested a plan that would seize ten percent of bank deposits of all sizes from Laiki and the Bank of Cyprus. This plan was met with public outrage – as the Cypriot people did not think it fair that they should take responsibility for the errors of their government – and it did not pass through Parliament. However, facing the threat of losing its place in the EU, Cyprus has made a decision that will, for the time being, strain its relationship with Russia. The accepted plan requires that Cyprus seize a percentage of all bank deposits over 100,000 euros, with a smaller reduction coming from uninsured, smaller deposits. Thus, the Russians who use Cyprus as a tax haven for their substantial assets will lose a significant percentage of their Cypriot investments. Essentially, the bailout burden will fall upon the Russian businessmen rather than the Cypriot citizens.
Cyprus has attempted to make amends for Russian losses, offering deals that would give Russia premier trading preferences in energy, gas and bank shares within Cyprus in exchange for further loans. In the meantime Russia has refused these offers which it has deemed unviable, choosing instead to bide its time as Cyprus looks to restructure its banking sector.
Russia has taken the firm stance of passive observer, as it waits to see if Cyprus can solve its own crisis. Not until it becomes explicitly advantageous to Russian interests will Russia proactively support Cyprus’ economic recovery. As of now, Russia’s interest in Cyprus emanates almost entirely from the losses sustained by Russian private investors who have accrued domestic economic benefits from their dealings in Cyprus. Until Cyprus can offer Moscow sufficient opportunities for national economic gains, the Russian government will remain quietly aloof.
Having relied so heavily on Russian investments in the past, Russia’s refusal to entertain Cypriot pleas for economic help will force Cyprus’ economy to rely primarily upon the EU’s relatively minimal support. Because Spain, Greece, Italy and other EU countries are suffering from such dire economic crises, the EU cannot afford to give Cyprus the financial support it needs to achieve full economic recovery. Therefore, the EU’s financial support of Cyprus beyond its initial bailout is finite, significantly increasing the necessity of Russian investments, both public and private. It is the combination of investments from Russian businessmen and from the Russian government that will define the scope of Cyrus’ economic recovery.
If Cyprus is able to successfully restructure its financial sector to reflect the actual capacity of its assets (i.e. not spending more than it has), it will be able to repay its debt and establish enduring and sustainable economic practices. If Cyrus can accomplish this feat, it will be able to pursue a much more equitable economic relationship with Russia and avoid the need for extreme concessions as a means to enticing Russian investment.
Mack MacLeod is an undeclared first-year. He can be reached at macleod@oxy.edu.
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