Jacob Heilbrunn

Europe, Russia, and the Mess in Cyprus

If you were a stolid burgher living in prosperous Bavaria who had conscientiously salted away his savings over the past several decades, would you really want to hand them over to Greece, Portugal, and even Cyprus? That's the conundrum facing the technocrats who are striving mightily in Brussels, Frankfurt, and Berlin to hold together the rickety contraption known as Europe. Now that Cyprus--which is more like a city-state than a country, with its one million inhabitants--needs a big bailout, the unresolved tensions of the European unification are becoming increasingly acute.

It seems like every few months Europe confronts a fresh crisis and then muddles through. But this time the Cypriots are putting up more resistance than usual to the financial engineers in Brussels and Berlin. What's more, there's a Russian connection that is also causing more than a bit of consternation among the Eurocrats. Cyprus is, at bottom, an old-fashioned kind of place--a country where you can park billions earned licitly or illicitly and figure, with a pretty high degree of confidence, that no pesky inspectors from the international community will be able to snoop around and discover the amount stashed away. Now that Switzerland is getting more transparent, Cyprus looks to be one of the last redoubts of a great banking tradition.

Which is why Russian president Vladimir Putin is having conniptions over the notion that a tax will be imposed upon deposit holders in Cyprus as an integral part of the bailout package. He's making the uncomfortable discoverey that Russia, too, is not immune to the European banking crisis. Putin says it would be "unfair, unprofessional, and dangerous" to impose a 9.9 percent tax on accounts worth over 100,000 Euros--a move that could cost Russian investors billions. For all we know, Putin himself may have stashed away a goodly amount in Cyprus. There is a solution: he could simply have Russia back its own bailout and buy Cyprus outright, turning it into an appanage of Russia. This would take Brussels off the hook and provide Moscow with a convenient banking station abroad. Putin wouldn't have to demand that the Cypriots learn to read and write Cyrillic, but he would certainly be within his rights to have the flag of the Russian federation flying over the island nation. In addition, Russian suzerainty would be another way of taking a swipe at the Cyprus-loving British, with whom Putin has frosty relations. 

For now, it looks as though Cyprus and its 56-member parliament will reject the bailout package sanctioned by Brussels. The plucky Cypriots don't want to pay what amounts to a tax on their own debt. Who can blame them?

But at the same time, it's more than a little peculiar that Europe would be so eager to rescue Cyprus. As the Frankfurter Allegemeine Zeitung points out, Cyprus is of negligible importance. It accounts for 1.2 percent of the European Union's economic activity. Whether a contagion would really spread from Cyprus to the rest of Europe that afflicts its banking system is dubious. Berlin, for one, would probably be better off letting Cyprus sink.

At the moment, Cyprus is on bank holiday. But the moment its bank do open, the chance of a run on them is dauntingly high. There is one plus to the crisis. At least the chance of renewed conflict between Greece and Turkey over the nation is low. Greece doesn't have the money to go to war, Turkey is preoccupied with Syria, and, by now, who other than Russia would really want to possess it?

Image: Wikimedia Commons/Cyprus Investment Promotion Agency. CC BY-SA 3.0.