You’ve heard about the latest EU member-state to get in line for bailout assistance, right? It’s small, but it’s financial needs are anything but. It’s Cyprus. But it’s also a beggar with a difference, namely a rather too-close relationship to Russia.
Germany’s Die Welt has a great run-down of the situation on that Mediterranean isle, so far-flung that it might as well be considered Middle Eastern. But no, as of 1 May 2004 Cyprus has been an EU member-state, as of 1 January 2008 in the Eurozone. And as of a week ago last Sunday it is EU Council president! This despite all the international intrigue swirling around it, as sketched in this Die Welt piece, which reads like something out of a spy novel.
First of all, it’s in big financial trouble, specifically with its banks. The total of their assets amounts to way more than the country’s GDP – nine times as much, in fact, although Cyprus is hardly the only EU member-state in this predicament. Experts estimate it needs some €10 billion to recapitalize them. There’s an interesting twist here: one big source of those banks’ losses (€4.2 billion worth) was the partial default already agreed for Greek sovereign debt, of which those banks held quite a lot. So we see here a knock-on effect whereby getting one EU debtor partially off the hook then plunges a fellow member-state into trouble.
The Cypriot government (representing, of course, only the southern, or Greek, half of the island) has been rather imaginative in dealing with this problem, for it first turned to Russia. Already late last year it gained a €2.5 billion loan from the Russian government, and it is negotiating for a further €5 billion. You may wonder what an EU member-state is doing looking outside the EU for sources of funding like that, and indeed high EU officials are wondering the same thing. These include Commission President José Manuel Barroso, who struck a petulant note at ceremonies this last weekend in Nicosia marking the EU presidency hand-over to complain about this.
Why would Russia want to provide Cyprus with such loans? Well, for one thing, you’ll find quite a few Russian (and Ukrainian) people and companies on the island, attracted by its mere 9% corporate tax and by the sturdy secrecy policies of those same banks that are now in trouble. But there’s a new element in the mix: gas deposits under the seabed to the south of the island, still within its territorial waters, which could turn out to be substantial. One US firm (Noble Energy – surely a corporate misnomer if there ever was one) has been doing exploratory drilling since last year.
Turkey Won’t Be Ignored
But it gets even more complicated! Remember that there is a Turkish puppet government still in control of the northern half of the island, including half of Nicosia itself. Just like the Greek Cypriots to the South, it feels that by rights it should control the whole island – and therefore be able to dispose of those new gas deposits. The Turkish government, its big brother, is therefore threatening to boycott any firms that get involved in their exploitation. Since Turkey is a key player in a new pipeline being built to transport natural gas deposits from the Caspian Sea area to Europe (and thereby to bypass Russian control), this stance is having quite an effect and has so far scared off interest from any of the major energy multinationals. Then again, there are rumors that the Russians have nevertheless demanded or will demand exclusive access to at least one of the gas sectors in return for the money that they loan.
It’s enough to make one’s head spin. I guess what stands out for me is the fact that Cyprus is right now taking over the EU Council presidency and thereby responsibility for quite a lot of what is supposed to get done by EU institutions over the next six months. Talk about bad timing: EU presidency, yet at the same time the latest to beg from the Eurozone bail-out table, while it also hedges its bets with an approach to Russia, with which the EU has not the most friendly relations. Oh, and the Cypriot president, Dimitris Christofias, studied in Moscow in his youth and was once a devoted Communist!