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How Cyprus, A Two-Bit Country, Could Change the World How Cyprus, A Two-Bit Country, Could Change the World

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How Cyprus, A Two-Bit Country, Could Change the World

The tiny island poses an existential threat to the eurozone, proof that little countries can occasionally have big consequences.

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Protesters chant slogans and wave Cypriot flags outside the Cypriot parliament, Friday, March 22, 2013. (AP Photo/Petros Giannakouris)

Little countries can occasionally have big consequences. We saw that with Austria in the First World War and Czechoslovakia in the Second. And now, in what has become almost a rite of spring, the eurozone is facing its latest existential threat, this time from tiny Cyprus, which is threatening to default.

After three years of these repeated crises, many Americans—and Washington policymakers—have stopped paying attention to what may or may not be the death throes of European unity and its principal bonding agent, the euro. Since 2011, each time a country (Greece, Spain, Italy) has threatened to go under, we've heard the end is near. Then Super-Mario Draghi, the head of the European Central Bank, has stepped in, most recently with unlimited bond-buying and other measures, saving Europe’s politically paralyzed policymakers. So by now there’s a boy-cries-wolf quality to the warnings.

 

But Cyprus is a little different. It's so small that European leaders are now openly talking about letting it drop out of the eurozone—a no-no with much larger Greece (until now) because the precedent would immediately raise questions about which medium-sized country was next. What’s also interesting is that Cyprus, already a haven for (mostly) illicit Russian money, is a potential playground for Moscow’s great-power ambitions in Europe. It's a toehold in the middle of Europe that the increasingly alienated Russian state has long coveted, along with leverage based on Europe’s energy needs.

Until now, the Kremlin appears to be taking the lead from its principal companies, natural-gas giant Gazprom and the state oil cartel Rosneft, which turned down an offer from Cypriot Finance Minister Michalis Sarris on Friday under which Moscow would give Cyprus assistance in return for stakes in Cyprus's banks and energy deposits. Cyprus is said to have substantial oil and gas deposits offshore, but there are questions as to how large they are, and whether some of them might belong to Turkey.

But you can bet there’s keen strategizing going on in Moscow right now. Since we know that Russian President Vladimir Putin during the last decade or so has gradually assumed control over Russia’s oligarchs and state energy companies, perhaps we should assume he’s simply holding out for more. Bear in mind: Putin has long sought to use Russia's vast oil and gas supplies as an instrument of power. In the mid-'90s, after 15 years in the KGB, Putin attended the St. Petersburg Mining Institute and wrote a dissertation titled "Toward a Russian Transnational Energy Company." The topic: how to use energy resources for grand strategic planning. Russian Prime Minister Dmitry Medvedev said that Moscow "has not closed the door" on possible future assistance to Cyprus.

 

There is also ample evidence that Putin's Russia is trying to reprise, to some degree, its Cold War role as the chief countervailing force to Washington and regain its influence in (at least) the eastern half of Europe. The Kremlin, which still sees itself as a great-power rival to the United States, may be a little worried right now about these power balances. It is probably calculating that, thanks to revolutionary, if controversial, technologies such as fracking, America could soon rival Russia as an energy power. According to forecasts through 2040 released by the U.S. Energy Information Administration late last year, the U.S. could become a net exporter of natural gas by President Obama’s last year in office, 2016.

The odds are that the Europeans and Cypriots will figure out a way to keep the wolf away from sheep and fix this temporarily. On Friday, Cypriot President Nicos Anastasiades held talks with the European Commission, the European Central Bank, and the International Monetary Fund over new proposals to find the $7.5 billion Nicosia needs to fork over as its part of the bailout. The Russians are watching carefully. They often make up the biggest depositors in that bank haven and are thus the ones most likely to be affected by a potential levy, the device originally proposed under the bailout, under which depositors under 100,000 euros are exempted.

But there is still potential here for two huge developments: The first country could leave the eurozone, opening the way to … anything. The designers of the 1992 Maastricht Treaty that created the eurozone deliberately avoided an escape clause, thereby drawing a determined line between the future and Europe’s war-torn past. If any nation exited, no matter how small, an important and probably very dangerous precedent would be set.

And the other potential big piece of news over Cyprus is: Whither Russia? According to Moody’s Investors Service, Russians have $31 billion of deposits in Cyprus; if you include loans to companies registered in Cyprus, Russia is exposed to the tune of about $60 billion. And now Moscow is being offered a deal to, in effect, buy the whole little place and add Cyprus to the Kremlin's resurrected "sphere of influence." If anything moves the Germans and the French to rescue Cyprus, it may be the prospect of that more than anything.

 

 

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