6/27/2012

Debt tests strong ties between Cyprus, Russia


Πηγή: The Vancouver Sun
BY JONATHAN MANTHORPE
June 27 2012

When Cyprus - one of the smallest countries in the European Union's common currency eurozone - realized last year its economy was heading for the cliff edge, it ran for help to its best friend.

No, despite its membership in the EU, the Nicosia government's most reliable source of support is not the European Central Bank. Nor is it the euro life raft Germany. It isn't even the International Monetary Fund.

It is Moscow. And Russia, as it usually does with Cyprus, readily obliged. Late last year Moscow gave Cyprus a three-year loan equivalent to $3.1 billion at a below-market interest rate of 4.5 per cent to help it service its debt.

But the Cypriot banks went seriously overboard in recent years investing in bonds being issued with grandiose interest rates by their ethnic cousins in Greece.

Well, these days a multimillion-euro Greek bond and two dollars will buy you a cup of coffee.

Cyprus needs the equivalent of $2.3 billion by the end of this month to prop up its ailing banks.

It may need $12 billion in all to refloat its economy, but if that money comes from Europe there will likely be harsh austerity measures attached.

So the first instinct of the Nicosia government's president Demetris Christofias, a Russian-speaking Moscow university graduate and the only Communist government leader in the 27-member EU, was to go back to Moscow for a handout.

But not only has Moscow shown an unusual lack of enthusiasm to give further help to the Mediterranean island nation, there's a good deal of resistance in Cyprus to accepting further Russian aid.

Further Russian loans would give Moscow too much of a grip on the Cyprus economy, goes the argument. And much of that resistance is coming from the huge number of Russians living among the island's 1.1 million people.

Estimates of the number of Russians who have chosen Cyprus as their sun-drenched sanctuary from Moscow officialdom vary widely, from a few thou-sand up to 50,000 or even 100,000.

Parts of Cyprus's largest city, Limas-sol, look like Russian city districts with the benefit of year-round sun.

There are Russian restaurants, food stores, even shops selling fur coats, and many of the signs are in the Russian Cyrillic alphabet. There are Russian schools and a Russian radio station.

While the size of the Russian population may be fluid, what is beyond doubt is that there are well over 10,000 Russian companies registered in Cyprus to take advantage of its 10 per cent corporate tax, the lowest in the EU, and that the island's financial services industry accounts for about half the country's gross domes-tic product.

For the Russians, Cyprus is a welcoming tax haven and safe depository for their wealth at uncertain times back home. But when the expatriate Russians do have confidence in the economy back home, an amusing flow occurs that often mystifies people not aware of the Russia-Cyprus link.

Cyprus often pops up in statistics as the largest foreign investor in Russia and seldom drops lower than third in the table. This, of course, is all escaped Russian money, which often flows into Cyprus banks at rates of billions of dollars a month, being channelled back home when prospects look good.


Despite Cyprus's status as a haven for Russia's skittish billionaires, Moscow finds it advantageous to maintain strong relations with the Nicosia government. Moscow was one of the first governments to establish diplomatic relations with Cyprus after its independence from Britain in 1960.

And Russian support for the Nicosia government has been constant and dependable, including at the United Nations Security Council. This has been especially important for Nicosia after Turkey invaded Cyprus in 1974, divided the island, and created lasting friction.

Russia also finds Cyprus a useful ally in the Middle East, where Moscow has few friends, and as a profitable listening post and operations base for its intelligence agencies.

That utility was demonstrated dramatically in mid-2010 when U.S. authorities arrested 10 members of a Russian spy ring masquerading as Americans.

The 11th man and the ring's paymaster was a Russian who had adopted a Canadian identity, Robert Christopher Metsos, and a Canadian passport.

Money for Metsos to disburse to the spy ring was funnelled through Cyprus, where he was arrested in early July at the request of the U.S. Justice Department.

But when Metsos was brought to court he was granted bail - some-thing never given accused foreigners because of the risk of flight - and he promptly disappeared.

It is hard to avoid the conclusion that a deal was done between court officials and Russian diplomats.


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