Russia right to refuse Cyprus bail out but should back strong EU

29 march 2013

Sergei Karaganov, Doctor of History, is Dean of the School of World Economics and International Relations at the National Research University–Higher School of Economics. He is also Honorary Chairman of the Presidium of the Council on Foreign and Defense Policy.

Resume: The bankrupt Cypriot banks are worth nothing or less than nothing if they are not a part of the European financial system.

When the eurogroup of finance ministers first issued its ultimatum to Cyprus demanding a levy on deposits – requiring their de facto partial confiscation – many Russians were indignant. Even Russia’s leaders called the Eurogroup demand absurd, non-professional, unfair and dangerous.

The latest rescue plan agreed on Sunday by the eurogroup, which also involves the partial confiscation of deposits, changes nothing. Russians are angry – and have every right to be. 

The strong Russian reaction was partly caused by concerns about Russian legal and semi-legal holdings in Cyprus. But, most likely, really serious funds had been evacuated beforehand.

The reaction also resulted from concern about the fate of a few legal corresponding accounts Russian companies, including state-owned groups, held in Cyprus banks as they do elsewhere in the West, especially in Britain, the Netherlands, and Luxembourg.

The relative weakness of the Russian banking system and, most of all, the lack of the rule of law is pushing Russian companies towards channelling their transactions through foreign bank accounts. The abrupt halt of these transactions is causing losses – both financial and reputational for Russian companies and their partners abroad.

The nervous reaction resulted also from a feeling of being duped. Moscow thought the EU should have consulted Russia. The Cypriots were considered especially irritating. They have been begging for loans for years and were getting them. But this time did not bother to tell Russia much about the crisis. But probably many EU nations were not consulted either.

Several ideas as to how Russia should bail out Cyprus were put forward. Flamboyant Russian billionaire-turned-politician Mikhail Prokhorov was the first to propose a total buyout of the island’s economy. Others proposed a bailout for certain Cypriot banks or simply “to help” Orthodox brothers. But now the emotions are cooling down.

People are starting to understand that the bankrupt Cypriot banks are worth nothing or less than nothing if they are not a part of the European financial system. In any case, the ultimatum of the eurogroup has effectively killed those banks. It undermined their main asset – trust.

Nobody will ever again keep serious money in Cyprus. So why should Russians bailout or buy the Cypriot banks? As to the oil and gas fields on the Cypriot shelf, the political and legal climate for their development does not yet exist.

There is also another reason why I personally would advise Moscow not to play the bailout game. The Eurogroup ultimatum mortally damaged not only the Cypriot banking system and, indeed, the whole island’s economy but also hit trust hard in the banking system of the EU as a whole. Tens of billions of euros will move to Asia and elsewhere.

I do not believe that highly-professional financiers and politicians, who worked out that decision, did not take into consideration these inevitable consequences and risks. I hope that they are not wild adventurers and gamblers. Then why did they opt for such risks? It looks to me that the Cypriot cause célèbre is being concocted as a vehicle to send a message to the Club Med countries: comply with austerity and de facto external management or get out of the eurozone. Maybe two eurozones with a soft and a hard euro are in the making.

If my suspicion is founded, I am happy that the Germans and their allies inside the EU have steeled themselves and are getting ready for a real fight for the deep reform of the EU and the eurozone. Instead of procrastination, nice words about more democracy and more solidarity, while trying to muddle through and becoming a laughing stock for outside observers.

It is time to correct the mistakes of the past, made by the EU when it was in euphoria after the fall of Communism admitted – almost without conditions – countries, which were not economically and culturally ready for membership in the eurozone or even the union itself.

Russia needs a viable EU, even if it is a bit scaled down. As a partner and maybe in the future even an ally, and as a traditional role model. We should remember what European integration did: it overcame the history of state nationalism and wars in Europe making the West safe for Russia for the first time in more than a millennium of history.

It is one more reason why Russia should not try to undermine Germany and other northern EU countries as they attempt to impose sense and order. But if or when things go really bad for Cypriots my country should offer massive humanitarian aid. And after the collapse and restructuring of the Cypriot economy Russians can come and buy what is left: the climate, beaches, hotels, land. But that would be a different story and a different scale of investment.

| Financial Times

} Page 1 of 5