Negotiations for Cyprus’ bailout, which has hinged largely on its hydrocarbons future, have ended with Russia missing the chance to swap aid for offshore exploration licenses and the Greek Cypriots agreeing to an EU bailout package that hits at the Russian oligarchy by shutting down the island’s second-largest bank.
Over the course of last week, Greek Cypriots were shuffling back and forth to Moscow in an attempt to lure Russia into a bailout package that would have given it a stake in the island’s estimated 60 trillion cubic feet of natural gas offshore—but it wasn’t a big enough stake to tempt the Kremlin.
Earlier in the week, Cypriot officials had rejected an EU bailout package that would have seen anyone with a bank account over 20,000 euros paying a 3-15% levy on deposits in return for future gas shares. (Related article: Cypriot Bailout Linked to Gas Potential)
Cyprus then hit up Russia to raise the stakes in this geopolitical game for control of Mediterranean hydrocarbons. The trick was to raise the specter of a Russian grab for Cypriot gas reserves in order to force a kinder bailout offer from the EU.
Russia held out for more from Cyprus, but the possibility of a deal with Moscow was enough to put steps in motion for a new plan.
To wit, the new EU bailout package accepted by Cyprus shuts down the island’s second-largest bank, Laiki, which will mean heavy losses for uninsured account-holders, many of whom are Russian oligarchs. In return, Cyprus gets a €10 billion ($13 billion) bailout and avoids the total collapse of its banking system. Only depositors with over €100,000 will be hit, while smaller depositors will be protected.
It’s still not clear what will happen to deposits of over €100,000. According to the BBC, once Laiki is closed down, these deposits will be moved into a “bad bank”, but it is not clear how much of the deposits will actually be lost. Smaller deposits will be moved to the Bank of Cyprus, which will undergo a significant reconstruction. (Related article: EU Caught Playing Dirty and it’s all about Russian Gas)
The EU has never done this before. It has always sought to protect depositors. This time, however, we’re talking about Russian oligarchs.
Why the change in strategy? As we noted last week, Europe now feels emboldened to hit out at Russian oligarchs because of major gas discoveries in the Levant Basin—particularly Israel’s Leviathan and Tamar fields, the latter which is to begin production already in April. This is gas that can make its way to Europe and provide an alternative to the Russian monopoly on European gas supplies. Simply put, the EU is no longer afraid of the implications of Russia turning off the gas spigots in retribution.
The markets—oblivious to the geopolitical nuances of the Cyprus bailout—are relieved. According to Reuters, Europe’s top shares rose 0.8% on Monday, while the euro zone banking shares index rallied 2.4% on the bailout news.
The bottom line here is that Russian oligarchs are effectively funding the Cyprus bailout, and this certainly won’t go down well in Moscow. And it certainly isn’t the end of this game. There will be a proxy response from Russia.