Rehanna Jones-Boutaleb asks whether, by refusing to lead the bailout, Russia has lost out, and what this means for its notoriously shaky relationship with the EU?
On Saturday 23 March 2013, former Kremlin advisor Alexander Nekrassov warned that a large levy on wealthy Russian depositors in Cyprus would result in retaliation: “then, of course Moscow will be looking for ways to punish the EU.” Such a levy has now been passed, and an eleventh-hour deal has left Russia on the sidelines.
Alongside the likes of flamboyant Russian billionaire Mikhail Prokhorov, many feel that Russia has squandered a golden opportunity by refusing to lead the Cypriot bailout. The island is, of course, a well-known Russian tax haven. More foreign direct investment comes into Russia from Cyprus than any other source. Many speculated that Russia stood to gain access to Cypriot offshore gas deposits and a warm-water port, yet with the new deal, Cyprus’ spell as a centre for Russian money has come to a close and much of this money will become frozen through capital controls.
However, stepping on the EU’s toes would have come at a much heftier price for Russia. Cypriot assets carry strings attached, such as potential territorial disputes with Turkey, and an aggressive reaction to the crisis could only have harmed Russia’s political currency. For all the talk of revenge against the EU, Putin has every reason to avoid a geopolitical spat. The EU remains Russia’s largest trading partner and Moscow continues to depend on revenues from gas sales to Europe.
To risk this relationship for the sake of wealthy Russian depositors and unconfirmed volumes in Cypriot gas fields would have risked disaster, especially as Putin’s “de-offshorisation” program has sought to encourage Russian citizens to hold their assets closer to home. Capital flight from Russia has already exceeded the annual forecast for 2013, and Dmitry Medvedev has even voiced the idea of creating an offshore zone in the Far East. While much has been made of Putin and Medvedev’s opposition to the initial Eurogroup deposit levy, it is hard not to view this as hollow rhetoric aimed at defusing pressure from wealthy depositors.
When the time came, Cyprus’ finance minister Michael Sarris left Moscow empty-handed and Putin walked away from the table. The negotiations may have bought time for serious Russian funds to be evacuated from Cyprus. Although Moscow certainly blames the EU for shortchanging its interests in Cyprus, this tension in Russia’s EU relationship will likely be contained.