Research Center
Cyprus Economy

Russia "Nyet" for 5 bln direct loan to Cyprus

27 December, 2012

Russia has turned down a request to grant a 5 bln euro bailout loan to the Cyprus government, the fourth eurozone member to seek financial rescue, because the risks are too great to be assumed by a single creditor, according to a senior Kremlin official.

“We have no specific plans or instructions to do so,” Deputy Finance Minister Sergei Storchak said in an interview in Moscow, suggesting that it might consider a syndicated loan driven by an international lender, such as the International Monetary Fund.
“It’s obvious that no single creditor can work with Cyprus alone,” Storchak said, according to a Bloomberg report, adding that “anyone who steps up on an individual basis to finance that country’s government or to help recapitalise its banks would be taking an enormous risk.”
The rejection follows weeks of speculation by the communist-led administration in Nicosia that Russia would eventually come through with a second loan, in addition to the 2.5 bln euros it already gave Cyprus nearly a year ago. In exchange, the Cypriot authorities were expected to look favourably to a French-Russian joint venture to explore for natural gas along the island’s southern coast, but the bid by Total and Gazprom-subsidiary Novatek failed to make the cut.
A bailout deal with the euro area and IMF will be signed by February 12, said Thomas Wieser, who heads the group of officials that prepare meetings of euro area finance ministers.
Cyprus may need as much as 17.5 bln euros, almost the size of its economy, to pay its runaway public sector bills and recapitalise the banks with a major exposure to Greek sovereign debt, Finance Minister Vassos Shiarly said in November.
Last week, President Vladimir Putin said during an EU-Russia summit in Brussels that Moscow would consider giving financial assistance to Cyprus as a part of an international rescue package after the euro area takes a unified stance on aiding the island.
“While we don’t exclude taking part, as the president said, we’re not major creditors,” said Storchak, who oversees Russia’s debt and international financial cooperation. If a group of lenders were formed to help Cyprus, it would be based on Cyprus’s membership in the European Union, he said.
Moscow had signalled its willingness to take part in a Cyprus rescue amid German fears that EU money could bail out rich Russians who have stashed ill-gotten gains in the island’s banks.
Putin noted his country’s bulging foreign exchange reserves, which would give it the financial muscle to make a contribution.
“We do not see it as comfortable for ourselves to meddle in this process. But, if agreement is reached, we do not rule out the possibility to join in with the stabilization of Cyprus’ financial (position),” Putin told reporters in Brussels.
The money Cyprus needs is small change compared with other recent EU rescues of Greece, Portugal and Ireland. Yet objections have arisen in some member states, particularly Germany, at the idea of using taxpayer money to prop up a Cypriot banking system that boasts considerable Russian deposits of uncertain origin, a report in the Financial Times suggested.
In Berlin, members of the Bundestag have warned they will reject any bailout package for Cyprus that would guarantee the “black money” deposits of suspected Russian tax evaders.
Moscow’s support for a bailout would lower the EU’s bill, and might also help to minimise controversy. “It is an important political signal,” said Guntram Wolff, deputy director of Bruegel, a Brussels think-tank.
The size of a Cypriot bailout will not be clear until late January, when PIMCO, the bond investor, is expected to complete a review of the island’s banking system, crippled by its exposure to nearby Greece.
Initial estimates had suggested that the country’s banking system would require about 10 bln euros to repair, but that figure has since grown to 12 bln.
Meanwhile, Tyurkey’s EU Minister Egemen Bagis has mocked the Greek Cypriots over the current economic crisis, arguing the situation is thought-provoking in terms of the EU’s foundation philosophy.
“It is really thought-provoking that a country that possesses the bloc’s rotating presidency [until December 31] is in a position to declare its bankruptcy in terms of the European Union’s founding philosophy. But the position of Greek Cyprus does not make Turkey happy. To hit the country when it’s down has no place in our culture. God help them,” he said.
“If [Greek Cypriot President Demetris] Christofias is anxious over the economic crisis and wants to apply to Turkish Cyprus we are ready to lend a hand as their neighbor. Probably Greek Cyprus sees the cost of blocking Turkey’s EU membership. If they would accept the Annan Plan then a ‘united Cyprus’ would be one of the prosperous country in the world,” Bagis said.