Why Russia refused to bail out Cyprus

by Ian Bremmer

Financial Times
March 26, 2013

There has been all sorts of hysteria surrounding Cyprus.

First, it was Cyprus’s potential eurozone exit and the contagion that would cause. Next it was the prospect of a Moscow-led bailout that would transform Cyprus into a Russian beachhead. Then there was talk of revenge, with a former Kremlin adviser, Alexander Nekrassov, warning if there were a large levy on wealthy Russian depositors, “then, of course Moscow will be looking for ways to punish the EU.”

Such a levy has now come to pass. An 11th hour deal spearheaded by Germany has left Russia on the sidelines—and wealthy Russian depositors in Cyprus’s two largest banks holding much of the bag. By not leading the bailout, Russia had a lot to lose: with more foreign direct investment coming into Russia from Cyprus than from any other country, the island is Russia’s most important tax haven. The Cyprus bailout effectively ends Cyprus’s stint as a hub for Russian money—and leaves much of that money frozen via capital controls. There was plenty to gain by stepping in: in return for Russian assistance, Cyprus was offering access to offshore gas deposits or a warm-water port. (Russia’s main point of access to the Mediterranean sea is through ports in Syria — an investment that appears increasingly shaky.)

All of this underscores how unwilling Moscow was to lead. Indeed, Russia will continue to be far less likely to get involved than is widely assumed.

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