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20 September, 2012  ▪  Oleksandr Pahiria

A Time for Sheep to Graze

Greater Dependence on Russia is of No Good for Cyprus

While Russian tourists are enjoying the off-season in sunny Cyprus, spending their money in its restaurants and souvenir stores, officials in Nicosia sit tight waiting for an official response from Moscow to their June request for another aid package aimed at saving the local banking sector. Cyprus banks have been stormed by the financial crisis blowing in from Greece. The Presidential administration of Demetris Christofias is hoping for a EUR 5bn concessional loan, while last autumn the Kremlin provided the island with a EUR 2.5bn loan with an interest rate of 4.5 percent — much lower than the market rate. The expected loan is meant to support financial stability in the economy which is suffering from the restructuring of Greek financial institutions under the European Central Bank (ECB).

Unofficial data says the Kremlin has lately approved of a relevant “political” decision to allocate the loan. Recapitalization of the country’s second largest financial institution Cyprus Popular Bank requires at least EUR 1.8bn.

The Russian loan is much more convenient for Cypriot authorities than a financial assistance package from the European Union which comes with stringent requirements and implies thorough bureaucratic control from Brussels. Choosing between a long waiting list of EU debt-zone countries (consisting of Greece, Iceland, Spain and Portugal) longing for ECB and IMF assistance and the open-armed Russians, Nicosia is inclined to approach the latter. Cyprus will probably take advantage of both channels in its struggle with the crisis, but the Russian share of the public debt will likely be bigger. Experts predict that if  Moscow allocates the loan, the total Cypriot debt to the Russian Federation will be up to two thirds of its GDP, a figure that is dangerous to its national sovereignty.

DOUBLE AIMS

From the one hand, Moscow’s aims in assisting the republic are pragmatic, as it is trying to save the off-shore deposits of Russian oligarchs from a banking crash which would have significant repercussions. After the USSR collapsed, Cyprus became a tax haven for post-Soviet business elites (mostly from Russia, Belarus and Ukraine), who stashed millions in stolen money on the island. According to expert estimates, Russia currently supplies the country with around 25 percent of its bank deposits and a third of its foreign investment. Local investors usually establish off-shore companies in Cyprus to profit from the low 10 percent corporate income tax.

On the other hand, Vladimir Putin’s Russia seems to be trying to profit from the eurozone crisis and limited Western presence in the Eastern Mediterranean in order to remind the world of its economic and geopolitical interests in the region. A Trojan horse for Cyprus will help Russia achieve this goal, as on 1 June the republic took over the Presidency of the Council of the EU from Denmark.

Besides common Orthodox beliefs and a Byzantine cultural heritage, international interests unite Russia and Cyprus. Cyprus inherited friendly allied relations with the Kremlin from the USSR. The latter protected Cyprus in the United Nations Security Council, criticizing the Turkish occupation of the north of the island in 1974. Today, the Russian Federation adheres to this image of “the protector of Cypriot independence, sovereignty and territorial integrity.” This makes Nicosia more confident in its complicated relations with Ankara, while for example Great Britain’s support of Turkey’s accession to the EU further distances London from Nicosia.

The Russian Federation has recently increased its secret intelligence activity in Cyprus. Rumour has it that its espionage rings are active here, their strategic task being linked with the island’s closeness to the Middle East, where Moscow traditionally struggles to strengthen its influence. This January, a Russian cargo vessel Chariot was seen in the port of Limassol. Syria allegedly ordered the vessel which carried four containers filled with 60 tons of bullets for AK-47s and antitank arms from the Rosoboroneksport state company to the Russian naval base in Tartus. As an EU member state, Cyprus should have stuck to the European Union embargo against Damask and detained the Russian vessel, but local officials let it sail. According to Russian sources, the Kremlin also uses Cyprus for its large-scale arms traffic with the Middle East countries, namely Syria, Lebanon, Iran and Iraq, as well as with China and India.

THE “RUSSIAN SPIRIT”

Meanwhile Russia's presence is better felt on the island itself. The number of Russian tourists grows ever year, and reached a peak of 323,000 visitors this summer. Cyprus considers Russian tourism its second most important, trailing only British tourism. The republic spends over US $3mn a year promoting itself to the Russian market.

On top of tourism, many Russians have immigrated to the island. According to the 2011 census, 8,600 Russians officially live there, but the Russian Embassy says the real number is up to 40,000-50,000 (839,000 people live in the Greek part of Cyprus). A Russian site describes four ways to permanently move to Cyprus: buy real-estate, establish a company, immigrate based on a business project or use a work visa. Liberal legislation attracts migrants and many Russians move to the island, buying property or starting businesses.

Limassol is the largest Russian enclave in Cyprus. So many Russians have arrived, that it is now jokingly referred to as Limassolgrad. The city has its own Russian-language newspaper as well as two Russian schools and a radio station. In addition, the mayor speaks Russian and one can find traditional Russian fur coats, caviar, meat dumplings and Baltika beer in local stores. Many Russians escape to Cyprus to avoid the bureaucracy and corruption of the Kremlin, with its insatiable enforcement machinery and impossible business conditions.

WHAT IS THE COST OF MONEY?

President Demetris Christofias contributes to the Cyprus-Russia link. Christofias studied in Moscow, and speaks Russian (much better than English) and is deemed to be a reliable ally and supporter of Vladimir Putin. During his 2008 visit to Moscow, he called himself the “red sheep of Europe” (currently he is the only communist head of state in the EU). In August 2008, Christofias was one of only a few European Union leaders to openly support Russia in its war against Georgia. He has also backed Moscow in criticizing NATO's missile shield plans in Eastern Europe. According to US confidential diplomatic correspondence of 2009 revealed by WikiLeaks, the Cypriot president sharply criticized NATO and conducted a “voluntary” policy of backing Russian security interests in the EU.

Some experts consider Cypriot dependency on Russia to have crossed the safe limit, as Nicosia risks becoming Moscow’s vassal in the EU. Russian loans to Cyprus might turn out to be very expensive in the future. First of all, this concerns large gas deposits recently discovered in the republic's economic zone. According to preliminary estimates, the new fields contain between 140bn and 230bn cu m of natural gas, making it the second largest discovery of resources of this sort in the past 10 years. That could make the Eastern Mediterranean one of the most promising areas in the world for exploration and extraction of energy resources. The Cypriot government predicts that off-shore gas deposits are sufficient to provide Cyprus with its own energy up to 2017, and enough to allow the nation to export the fuel beginning in 2019.

Over 30 foreign companies, including Gazprom, NovaTEK (the second biggest Russian gas giant) and Gazprombank, will participate in the tender to develop 12 blocks of the shelf. Gazprom expects to not only extract gas near Cyprus, but also to build a gas pipeline to pump the gas to Greece. Given its financial dependency on Moscow, Nicosia will likely be quite flexible in satisfying the Kremlin’s energetic appetite.


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