Russian financial ties complicate Cyprus rescue efforts

January 12, 2013

TAKIS TSAFOS AND ULF MAUDER

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Cyprus remained untroubled for years by rumours linking its banks to questionable deposits from Eastern European strongmen and criminals. But now that it needs billions in aid from the rest of the European Union, the rumours are standing in the island nation's way and triggering a range of new problems. Twenty years ago, it was Serb leader Slobodan Milosevic and the money he was allegedly laundering through Cypriot institutions.

Today the focus is on Russian oligarchs, mafia and corrupt officials, who have reportedly stowed 26 billion dollars in Cyprus. Cyprus saw its economy thrown off kilter by the collapse of the Greek economy. Nicosia is seeking a bailout of some 18 billion euros (24 billion dollars) from the European Union. But because of its strong ties to Russia, EU countries and Germany especially are leery of extending a helping hand.

Politicians in Berlin have said they are not prepared to help as long as Cyprus' banking industry lacks transparency. Chancellor Angela Merkel was in Nicosia Friday as Moody's downgraded the Cyprus' credit rating by three notches to Caa3. The mood is tense in Nicosia. Finance Minister Vassos Shiarly said there is only enough money to sustain the economy until the end of March.

No one has the political strength to force reforms until a new president is elected in February. "We have informed the EU representative that there is no money laundering here. The Cypriot banks are transparent. Anyone can check," says an aide to Shiarly. But analysts are sceptical. So are experts in Moscow, who say the Cyprus is too reliant on the inflow of Russian money to be seriously interested in transparency. Russia has ruled out coming to the rescue. "Cyprus is a European Union country," President Vladimir Putin said during a visit last month.

Russia has helped in the past. In 2011, when Nicosia's finances became tight, Moscow made available a 2.5-billion-euro loan at an interest rate of 4.5 per cent over about four years. When Cyprus requested a new 5-billion-euro loan in July, Moscow didn't answer the call. The strong ties date back to the 1960s, when Cyprus was an active member in the Non-aligned Movement and Moscow has lent Nicosia backing in its continuing stand-off with Turkey.

Thousands of Cypriots have studied in Russia, including outgoing President Dmitris Christofias. Russian is commonly spoken along the island's southern coast and large swathes of the economy are buoyed by Russian business. Russia sees Cyprus as a kind of gateway to the EU. But that contributes to the continuing rumours of Russian money laundering. A retired diplomat living in Cyprus describes it as "a treasure trove for the tabloid press."

Germany is remaining firm in its demands upon Cyprus. Merkel wants to see more privatisation, austerity and structural reform in the banking sector. However, while Cypriot politicians are in campaign mode, none of that is likely to happen. When Merkel met with conservative Nikos Anastasiadis, considered a favourite to win the presidential election, he laid all the blame for the current problems on Christofias.