Brussels’ Cyprus slip-up

Russia is furious and will not take this lying down. Most foreign deposits in this island country are in accounts held by Russian offshore companies, with totals estimated at ranging from about €20bn to €30bn. President Vladimir Putin and Prime Minister Dmitry Medvedev made it clear that they perceive the planned “confiscation” of a portion of the Russian deposits as a hostile move.

According to the prime minister, the EU is carrying on like a “bull in a China shop” and likened its approach to the practices of the Bolsheviks. The Cypriots, who flew to Moscow late last week to peddle a plan to allow Russian capital to take a stake in rehabilitating their economy, have also felt the sting of the Russian bitterness, accused of trying to “suck the milk of two wet-nurses” (Russia and the EU).

The failure of the Cypriot emissary in Moscow proved that, contrary to what Russian businessmen with an interest in the island expected, Russia’s leaders are sacrificing the possibility of short-term gain to a long-term economic and political strategy. Cyprus’s offer to Moscow held a package of proposals ranging from taking over indebted Cypriot banks to sharing in the exploitation of natural gas in the marine shelf. “Our investors studied this offer, and not one of them was interested,” summed up Russian Finance Minister Anton Siluanov at the conclusion of the negotiations.

Senseless risk

Hardly any of the experts on Russian politics, however, doubt that the “lack of interest” shown by the semi-public Russian companies was primarily the decision of President Putin. The immediate losses of Russian companies, including losses to state institutions, will, if those accounts are taxed, nonetheless climb into the hundreds of millions if not billions of euros. It is clear, however, that even if it does officially offer aid, Russia will be unable to maintain its strategic position on its island base. All the more so as the swift development of the Cypriot crisis comes at a time when Russian gas giant Gazprom is seeing profits fall due to the exponentially increasing export of shale gas from the US; moreover, investing in ocean wells in zones that are both seismically and politically uncertain (Turkey, Israel and Cyprus all have interests in the same waters) would be a senseless risk.

The fact that Russia was specifically excluded by Brussels from the negotiations to resolve the crisis will strengthen the Russian policy camp focused on creating a counterweight to the EU in the Eurasian sphere, as opposed to the camp that is still toying with the possibility of cooperating with the Union. This trend strengthens the hand of powerful officials such as Putin’s adviser and deputy secretary-general of the Eurasian Economic Community (EurAsEC), Sergei Glazyev.

Reducing Russian influence

The Union is currently endeavouring to reduce Russian influence in its Cyprus backyard. Everything from cleaning up the financial sphere to ending Russia's gleaning of sensitive information about Brussels’ policies from its local sources. But this is all that the EU wins from the affair. Western and Russian analysts are already drawing up a list of losses from reprisals by Moscow, and it’s a long one. It stretches from a retaliatory tax on financial and business operations of EU companies (primarily German), through strict licensing rules, to the tool so beloved of Russian authorities – surprise inspections launched by financial authorities or health and safety officers.

The important thing is whether Russia adopts laws to streamline financial operations in its own territory. If so, the Russian state could become stronger, as business concerns over the unpredictable “confiscatory” policy of the EU, add another string to Moscow's bow.

Even more likely, Moscow may push harder to promote the rouble or the Chinese yuan as the next reserve currency, helped here possibly by the fact that the way the Cyprus crisis was resolved also threatens Chinese and Indian interests. The EU, with its own “nationalisation” weapons, has no doubt “shot itself in its foot”. It has also bruised its image, increased fears of unpredictable behaviour, and reinforced the powers aimed at building a “parallel centre” of global influence.