Russian poker face only reveals Cyprus peril

Moscow is heavily invested in Cyprus but is in no rush to help out, writes Felix Salmon

In his Financial Times blog, Paul Murphy said after the Cypriot finance minister, Michael Sarris, returned empty-handed from Moscow: “Medvedev and co could not have played a worse hand during this crisis — and it’s not immediately clear why.”

His point is that the most likely outcome right now — he calls it “popping the red pill” — is that big depositors at Laiki Bank (read: Rich Russians) are likely to lose some 40% of their money. Since that will make Russia very unhappy, why is Russia doing nothing to prevent it?

I don’t pretend to understand Russian politics, but this move seems to me to be a classic high-risk, high-aggression play; think of Russian prime minister Dmitry Medvedev as a geopolitical hedge-fund manager or poker player, and it begins to make a bit more sense.

Firstly, it’s worth noting that Russia is actually moving backwards on the amount of help it’s likely to extend to Cyprus. When the bailout plan was first announced, it included Russia extending its existing €2.5bn loan to the country by five years, as well as reducing that loan’s interest rate. Now, Russia is refusing to agree even to that.

More generally, Russia is taking an absolutist stance to Cyprus: “No, we won’t restructure the money you owe us. No, we won’t buy a bank off you. No, we aren’t interested in your natural-gas reserves.”

Underlying it all, of course, is an unspoken — and all the more powerful for being unspoken — physical threat to any Cypriot who causes powerful Russians to lose billions of euros.

Russia knows exactly who’s sitting around this poker table: It’s not Cyprus that they’re playing, it’s the EU. If Russia were to enter into good-faith negotiations with Cyprus right now, that would help the EU by reducing the amount of EU support that the island nation needs.

Moreover, any deal that Russia made with Cyprus could be vetoed by Germany, the Eurogroup, the ECB, or even the IMF. Russia is too big and too important to try to do deals which could be forcibly unravelled on a German finance minister’s whim.

And while we have a pretty good idea of what the Russian prime minister is saying to Sarris in Moscow, we have a much less clear idea of what other Russians are saying to Cypriot policymakers in Nicosia. The Cypriot capital is reportedly full of mysterious Russians right now, and it might not be all that hard for them to nobble a vote in parliament — especially given that just about any vote is going to be massively unpopular with voters.

If parliament does nothing, then Cyprus collapses; we’re going to need a big show of political unity to prevent that. And so far, the only political unity we’ve seen has been against the bailout, not for it.

Which brings me to the blue pill, as described by Murphy. Cyprus has a binary choice: Become a gimp state for Russian gangster finance, or turn fully towards Europe, close down much of its shady banking sector, and rebuild its economy on something more sustainable.

Murphy says it’s “obvious” which choice Cyprus should take. But it’s probably much less obvious to parliament. And what exactly does Murphy have in mind when he talks about an economy based “on something more sustainable”?

Natural gas? Given Cypriot national ties, it’s easy to see which company has pole position in terms of getting that mandate: Gazprom.

Thus there is a real possibility that Cyprus will end up taking the blue pill rather than the red pill, and become a Russian client state, either inside or outside the euro.

After all, Cyprus is a Eurogroup client state right now, and has wound up in this sorry place as a result. If it pops the red pill, it will have essentially no autonomy for the foreseeable future in any case.

It’s also easy to imagine that Putin’s Russia views its relations with the EU as something of a zero-sum game. Russia has a 150-year obsession with acquiring influence, if not outright control, over warm-water ports in southern Europe. Looked at that way, the loss of Cyprus from the EU to Russia would be a clear loss to the EU and a clear win for Russia.

Which, in turn, might explain why Russia is doing absolutely nothing which might help the EU. It’s making a risky and aggressive move to essentially seize Cyprus from the hands of Europe, and to gain an important geopolitical foothold in the eurozone.

The downside to that move is that if Cyprus pops the red pill, then a lot of Russians could lose a lot of money. But even if that does happen, Russia will be waiting on the sidelines with a lot of new money if needed, ready to snap up Cypriot assets at fire-sale prices.

There’s no doubt the best outcome for Cyprus and for the EU would be for Russia to extend its help now, before Cyprus’s banks reopen tomorrow.

But Russia doesn’t want what’s best for Cyprus, or for the EU. Russia wants what’s best for Russia. And the way it’s acting reminds me of nothing so much as a classic Wall Street bear raid, designed to drive down the price of something you want to be able to pick up very, very cheap. What’s more, it might even work.