The Cyprus-Crisis Culture Clash
On the surface, the Cyprus crisis was about money, but actually it was the result of conflicting political cultures: European, Greek Cypriot and Russian. The fissures exposed during the March 2013 crisis will leave a legacy of mistrust and enmity far beyond the eastern Mediterranean island that staged the drama. The underlying problem was that Europe had accepted a non-European entity (Cyprus) into its institutions and then failed to enforce upon it Europe’s standards of financial governance. Russian money became fuel for the catastrophe, but was not itself the cause. Money laundering and bank insolvency are both deplorable but are not the same thing.
Greek Cyprus (aka, Republic of Cyprus, as the Turkish north is not directly involved in this story) is a distinct political culture from mainland Greece. The Hellenic Republic is Greek and Balkan, while the Republic of Cyprus is Greek and Levantine. This is a distinction with a major difference. Greece was the Bad Boy of the European Union for a quarter-century, but Athens genuinely sought a European identity and vocation. The prime ministers during the country’s financial crisis, George Papandreou and Antonis Samaras, both worked hard to behave as responsible Europeans. If Papandreou had been as ethnocentric as most of his predecessors, he would have defaulted on his country’s sovereign debt early on and left the French and German governments to bail out their respective banks. Greek political leaders broadly accepted that their country’s crisis was the consequence of its own fiscal profligacy.
In contrast, Nicosia never treated its European citizenship as more than a convenience. Greek Cypriots consider themselves “European”—indeed, they regard their island as the birthplace of European civilization—but did not exchange their Levantine business model and practices for European standards when they joined European institutions. They believed they could have it both ways, manipulating their European partners while maintaining what the Germans call a “casino economy.” Until the very last moment, Greek Cypriots—from the streets to the presidency—anticipated a full bailout from Brussels and Frankfurt as theirs by right. No other Eurozone government approached the Troika (European Commission, European Central Bank, IMF) with such nonchalant self-confidence and indifference to accountability.
Two events set the stage for the transformation of Greek Cyprus from an island backwater into a thriving international financial brothel: first, Egyptian President Gamal Abdel Nasser’s expulsion of foreign communities from Egypt after 1956; and, second, the Lebanese civil wars. These developments dislodged Alexandria and Beirut as the regional financial entrepots, which they had been time out of mind. There weren’t many viable candidates to fill that role. Athens in those days was provincial and non-English speaking. Nicosia (along with Limassol and Larnaca) was even more provincial, but it offered the attractive combination of British commercial law and Levantine enforcement.
Then the disruptions caused by the 1974 division of the island into Greek and Turkish sectors reduced the Greek south to a haven for offshore business, a kind of Dubai in miniature. Cyprus provided not just accommodating financial services but also an ideal legal environment for shell companies, flag-of-convenience shipping, weapons and narcotics trafficking, and tolerance of Soviet bloc espionage. (Cyprus also turned a blind eye to various British and American activities conducted from the two British Sovereign Base Areas on the island.)
Among the myriad financial clients attracted to the island during those years was the KGB and its financial affiliate, the Soviet foreign trade bank Vneshtorgbank. For Soviet covert finances, Nicosia served its region as Vienna did central Europe. Thus it was natural that post-Soviet Russian oligarchs would take their loot there for laundering and investment. Obviously, Cyprus was only one of many such financial nodes around the world, but it proved especially popular with Russians because of its proximity, climate, beaches, and lifestyle and Orthodox Christian fraternity.
It bears emphasis that much of the so-called “Russian” money on Cyprus was in fact Russophone, as plenty of the funds came from Ukraine, Serbia, Armenia, Bulgaria, Georgia and Central Asia, as well as from traditional sources outside the former Soviet space. Russian money in time became the largest component of foreign funds on Cyprus, but the “casino economy” was in place and thriving before Russia even had oligarchs.
Russian financial activities on Cyprus took two distinct forms. First was what might be thought of as overt money laundering. Most Russian businesses, including those in the state sector, routinely employ offshore banking to obtain the range of financial services unavailable at home. To this end, VTB (formerly Vneshtorgbank) established an affiliate on Cyprus, the Russian Commercial Bank, in 1995. VTB is the second-largest financial institution in Russia and a parastatal entity. It moved onto Cyprus to service other Russian parastatal entities, of which Gazprom is only the most prominent.