From Russia with Love? Cyprus seeks another Bailout

06.12.12

From Russia with Love? Cyprus seeks another Bailout

06.12.12
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Cyprus today hinted that it was seeking a €5 billion loan from the Russian authorities to bolster its bank’s capital levels before a key regulatory deadline at the end of June. This assistance would follow a €2.5 billion loan in 2011 from the Kremlin which the island nation has been fully dependent on having been effectively shutout of capital markets.

There had been signs over the past couple of days that Cyprus would formally request financial aid from the current Eurozone bailout fund, the EFSF, but this has yet to materialize, although it has not entirely been ruled out by the Cypriot authorities who claim to be “considering all available options.” Cyprus is under pressure to recapitalise its banking sector, particularly Popular Bank, which requires a capital injection of €1.8 billion this month in order to satisfy the conditions of European regulators. A rights issue underwritten by the Cypriot government is planned to start this Friday and will place further stress on Cyprus’s finances if, as expected, private participation is low.

A bailout, which looks likely, poses an interesting conundrum for the Cypriot authorities. Accepting an EFSF package from its European partners would likely tie the small Mediterranean nation in to austerity conditions akin to those imposed on the other peripheral Eurozone economies. Furthermore, it is presumed that any Russian assistance would be free of fiscal conditions, which would be favourable but may subject Cyprus to other agreements likely to arouse suspicion in Europe and beyond. For Russia, a country flushed with Euro denominated reserves, this could be a targeted investment with potentially lucrative returns. It has been reported that Russia has an interest in developing a deep-water naval capability in this strategic location as well as tapping into the reported sizeable natural gas reserves in the waters surrounding Cyprus.

Nevertheless, such a deal would raise alarm with European officials and the wider global community who would be wary of Russian involvement on European soil in such a capacity. For Cyprus however, it finds itself at the heart of an interesting situation, namely now seemingly to have engineered competition for bailout funds between two major economic powers. This could have the result of securing financial assistance from the EFSF on more favourable terms than its peers as a result of the leverage it may now have with the European authorities over the possible interference from Russia. Any such agreement has the potential to spark fury within the current EFSF recipient nations where austerity is widely seen as the medicine which is killing the patient.

What is evident is that the issue of financial assistance for Cyprus, a relatively trivial amount, may now fast be moving up the list of priority items for Eurozone leaders. Adding to this the upcoming elections in Greece, the lack of detail around the Spanish bank bailout and today’s questions over the sustainability of Italian public debt, it is clear that the day of reckoning is fast approaching for the Eurozone.

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