Cyprus convenient excuse for EU to entangle Russia in debt crisis (Zhao Yongsheng)

Cyprus has just seen a bailout deal hammered out with the EU and IMF on Sunday, just in time as otherwise the European Central Bank would have stopped providing emergency funding.

If assistance from Europe had stopped, the financial system in Cyprus would have collapsed. Financial panic has already spread, with citizens stockpiling goods and banks forcibly closed.

But the EU can make a double gain from this crisis. It may force Russia to give a hand to Cyprus, and it can teach a lesson to the island, which has long been a problematic tax haven.

What makes the EU believe Russia will be forced to strike a deal? Because Cyprus has gathered so many wealthy Russians.

Cypriot banks hold 68 billion euros ($88 billion) in deposits. Foreigners hold some 40 percent of the deposits, and most of them are Russians. No wonder Russian President Vladimir Putin on March 18 called the proposed tax on bank deposits in Cyprus "unfair, unprofessional and dangerous."

Cypriot Finance Minister Michalis Sarris visited Moscow on March 20 and talked with Russian officials about any possible means to avoid the collapse of the country's financial system. The Cypriot government had hoped Russian banks could buy some of its assets.
The importance of Cyprus to Russia is different from that of Greece to China. When Greece suffered from its debt crisis, it sought out China for help. As China didn't retain much real interest in Greece, it didn't choose to assist Greece directly. But China didn't walk away from Greece either. Instead, China offered an additional $40 billion to IMF as assistance to the EU.

But Russia may not be as "lucky" as China. Russia may be forced to assist Cyprus and get further entangled into the European debt crisis. The terms are still unclear, but the Cypriot government may impose 15 percent deposit tax on those who have 100,000 euros or more, or possibly even higher. EU regulations insure holdings up to 100,000 euros, making it the cutoff point.

Holders of large accounts may be wiped out entirely in some banks or take a 40 percent haircut, and it is clear this is targeted at the Russian millionaires or billionaires who saw Cyprus as a happy home for their assets.

Russia may find it not so risky to assist Cyprus. One reason that China didn't assist Greece is that Greece didn't have enough mortgage assets.

Although Cyprus is only a small island, leaders in Nicosia will agree without the slightest hesitation to pledge all the country's assets in exchange for assistance. Once the EU sees Russia give out assistance, it may offer further assistance itself.

Although Cyprus is only a tiny island in the Mediterranean, it has touched the nerves of the whole world. Oil and gold prices were low on March 21, and markets have been fretting about the debt crisis in Cyprus and whether it will affect other European countries.

In this long-brewing new round of the European debt crisis, the EU has already seized on the idea to make BRICS countries such as China and Russia offer assistance.

Behind the Cypriot crisis is the game between the EU and Russia. BRICS nations can hardly detach themselves from big international events such as the debt crisis in Europe.

The author is a visiting scholar of the Institute of European Studies, CASS, and vice chairman of the Paris-based China-France Association of Lawyers and Economists.

（Contact Zhao Yongsheng：jacques.zhao@163.com）