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For Rescue Line, Cyprus Prefers a Russian Loan

For Rescue Line, Cyprus Prefers a Russian Loan

June 18, 2012 | By DAN BILEFSKY

LIMASSOL, Cyprus — Caviar and pelmeni line the supermarket shelves in this picturesque seaside Cypriot city, so pervasively Russian that it has been dubbed “Limassolgrad.”

Now many on this tiny island nation, whose banks and government are facing economic insolvency, are hoping for financial salvation from Russia rather than Germany and the European Union.

“I would much rather be saved by Moscow,” said Elena Tsolia, 30, an attendant at the department store Debenhams, where Russian shoppers snap up bottles of Dior and Chanel perfume. “We are a small island and we don’t want to be owned by Germany.”

The slim victory by a pro-bailout party in Greek elections on Sunday has helped allay some concerns that a potential Greek exit from the euro zone would sink the Cypriot economy, which is heavily exposed to Greek banks. But as a backlash against austerity spreads across Europe, Cypriot officials say they are determined to avoid the kind of severe budget cuts that unhinged the Greek economy.

The Russian government last year gave Cyprus a three-year loan of 2.5 billion euros, or $3.1 billion at the current exchange rate, at a below-market rate of 4.5 percent to help it service its debt. Cyprus now needs at least 1.8 billion euros, or $2.3 billion, by the end of this month to buttress its ailing banking sector.

Officials say they hope to negotiate securing a new loan from Moscow as early as this week. Analysts say it could be as high as 5 billion euros. A loan from Moscow is the favored option, Cyprus officials say, because it would come with fewer conditions than a European Union bailout and help ensure that Cyprus’s 10 percent corporate tax rate — the lowest in the Union and the main draw for the estimated 50,000 Russian-speakers in Cyprus — remains unchanged.

But some analysts warn that by turning to Russia, Cyprus, which takes over the rotating presidency of the European Union on July 1, threatens to become a vassal of the Kremlin. As it is, President Demetris Christofias, a keen ally of the Russian president, Vladimir V. Putin, and the only Communist leader in the union, could prove an awkward public face when Cyprus takes over stewardship of the bloc.

Mr. Christofias, a fluent Russian speaker, studied at a university in Moscow and has personally overseen loan negotiations with Russia, officials say. On a trip to Moscow in 2008, he called himself “the red sheep” of Europe.

“Cyprus needs to decide if it wants to be a member of the European Union or the Soviet Union,” Fiona Mullen, a leading analyst in Cyprus, said. She noted that if Cyprus accepted a second Russian loan, nearly two-thirds of its gross domestic product could potentially be in thrall to Russian lenders.

That prospect is stirring anxiety among the island’s high-spending Russian expatriates and their army of accountants and lawyers who benefit from operating in a country shielded from Russian lawlessness and corruption.

Some analysts warn that Russia could demand a heavy price for its support, including a stake in the country’s large gas reserves recently discovered in the eastern Mediterranean. Russian companies are among those bidding for concessions. Nicosia insists a Russian loan will have no effect on the bidding process. But Cypriot gas will help offset European Union energy dependence on Russia, and analysts say Moscow’s intentions remain unclear.

To many Cypriots and members of the island’s Russian community, criticism of a potential Russian loan smacks of hypocrisy. George V. Vassiliou, the former Cypriot president, said during an interview that it was only natural that Cyprus would seek the most favorable terms. Criticism of Russia’s influence in Cyprus, he added, was little more than Russophobia.

“This is a remnant of the cold war,” he said. “If Citibank were offering a loan, no one would accuse us of being a vassal of the United States.”

The ardent affair between one of Europe’s tiniest countries and its giant ally is grounded in mutual interests.

For Moscow, Cyprus provides a gateway to the European Union, the world’s largest trading bloc, for the thousands of companies registered in Cyprus whose beneficiaries are Russian. Cyprus accounted for 20 percent of foreign direct investment in Russia last year, more than China.

Mr. Christofias has proved a dependable champion of Moscow. A confidential 2009 cable from the United States embassy in Cyprus to Washington leaked by WikiLeaks noted that Mr. Christofias had vilified NATO. It said his promotion of Russia’s security agenda within the European Union seemed “gratuitous.”

He was one of the few union leaders to support Russia in its 2008 war with Georgia. He also backed Moscow’s criticism of a proposed missile defense system in Eastern Europe strongly opposed by the Kremlin.

For Cyprus, Russia provides economic sustenance as well as being a steadfast geopolitical ally. Andreas D. Mavroyiannis, deputy minister for European Affairs, said during an interview that Russia, a permanent member of the United Nations Security Council, had consistently supported Cyprus in the conflict over the island’s division.

Turkey invaded Cyprus in 1974, dividing the island into a larger Greek part and a smaller Turkish part that only Ankara recognizes internationally. The Turkish presence remains a visceral and daily obsession for Greek-Cypriots, and Russian support provides a sense of security.

But Mr. Mavroyiannis emphasized that Cyprus looked west — not east. “We are not seeking an escape from our European obligations,” he said. “The Russian loan came with no strings attached.”

Russian cultural influence in Cyprus is palpable. There are several Russian schools and a Russian radio station. The Taras Bulba, a Ukrainian restaurant in Limassol, named after Nikolai Gogol’s heroic epic, beckons visitors in Cyrillic.

Many Russian expatriates pay for newly built seaside villas here with suitcases of cash, according to brokers, prompting some rare anti-Russian grumbling by Cypriots that the Russians are inflating real estate prices.

The most famous Russian investor in Cyprus is Dmitry Rybolovlev, a billionaire who once owned a potash fertilizer empire and who is the beneficiary of an offshore fund that has a large stake in the Bank of Cyprus.

Analysts say that Russia’s spy agencies are also believed to be operating in Cyprus, whose location close to the Middle East helps Russia to maintain its sphere of influence there. In January, a Russian cargo ship packed with 60 tons of ammunition stopped in Cyprus en route to Syria. Cyprus, as a European Union member, must obey the bloc’s strict embargo on military supplies to the Syrian regime. But the ship was allowed to sail, officials said, after giving assurances that it would alter its route.

While Cyprus’s draw may be more fiscal than spiritual, Natalia Kardash, the Russian editor in chief of Vestnik Kipra, a Russian weekly, said that Russians felt a kinship with Cyprus, in part because they shared an orthodox religion.

In the end, Cyprus officials say the country could seek aid from both the Russian government and the European Union. One option being studied is to seek European Union rescue funds to shore up the country’s banking sector and a loan from Russia to help shore up its bloated and overstretched public finances.

Either way, Ms. Kardash said the Russians were here to stay. “Cypriots are welcoming people,” she said. “Many people here speak Russian. You don’t feel like a foreigner. Why would anyone want to leave?”

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