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Cyprus proves financial thorn for Russia

21 March 2013, 16:00 CET
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(NICOSIA) - Little Cyprus is proving a financial thorn in the side of giant Russia as the banking crisis on the Mediterranean island could impact the Russian economy.

Russians including wealthy tycoons hold between a third and a half of all Cypriot deposits and are believed to have more than $30 billion in private and corporate cash in the island's banks.

The crisis in Cyprus has also led to the blocking of the bank accounts of Russian government agencies, noted Jacques Sapir of Ecole des Hautes Etudes en Sciences Sociales in Paris.

Cyprus has ordered its banks to remain closed until at least Tuesday, while the European Central Bank is threatening to cut off funding if the country fails to clinch a bailout deal.

The small EU country is the largest investor in Russia and accounts for almost half of all foreign investments, said Sapir.

Economist Olena Havrylchyk said Cyprus was "famous for the phenomenon of 'return ticket'."

"Russian companies invest in Cypriot companies under Cypriot law, which immediately re-inject the equivalent amount in Russia, either to hide the identity of the owner of the funds, or to launder money," she said.

According to Sapir, "in 2012, 250 billion euros passed through Cyprus."

Lack of cash flow would hit the Russian economy.

"Considering the importance of funds that pass through Cyprus, it is possible that the Russians are forced to help the Cypriot banking system, as part of an agreement in which gas reserves would act as currency of exchange," he said.

He gave the example of the Russian airline Aeroflot, which holds an account in Cyprus to pay for fuel stops in Europe, and could end up unable to transfer from its account.

Russian Prime Minister Dmitry Medvedev on Thursday hammered current European proposals to solve the Cyprus crisis.

"A large number of our open public structures work through Cyprus. They now have money blocked for reasons that are unclear, because the source of that money is obvious. This money is declared everywhere. These include government structures," he said.

If Moscow seeks to aid Cyprus, it might take the opportunity to press for shares of the gas reserves in waters off the island.

"Greek Cypriots have been very careful not to grant a licence to a Russian-controlled consortium. Russia and the Republic of Cyprus have conflicting interests," said Hubert Faustmann, a political analyst based in Cyprus.

Cyprus plans to export natural gas to Europe within a decade and could compete with Russian dominance on markets like Germany. But it has now turned to Russia as a potential saviour from the harsh terms of the EU, he said.

Finance Minister Michalis Sarris travelled to Moscow to request an extension on a 2.5-billion-euro loan and to offer Russia "new investments."

According to an assessment by JP Morgan: "If Cyprus ultimately defaults and needs to leave the Euro area, its dependency on Russia is likely to increase dramatically."

Moscow could revive the idea of setting up a military base on the island, but "I don't think that will happen. This is a NATO territory... Cyprus would insulate itself completely," said Faustmann.

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