Cyprus wavers between Moscow and Brussels

Above is Cyprus’ finance minister Vassos Shiarly speaking to CNBC at today’s Eurozone meeting in Luxembourg. Cyprus is experiencing difficulties recapitalising banks exposed to Greece’s debt and is also facing a wider problem with a public deficit running at 6.5% of GDP (EU guidelines require this to be reduced to 2.5%), though the island’s communist government is in denial about the latter because it fears having to take unpopular belt-tightening measures.

Indeed, it seems that President Dimitris Christofias – so reviled and certain of humiliating defeat that he has already declared his intention not to stand in next year’s presidential elections – is intent on salvaging, in his own eyes at least, some credibility by going down as a martyr to socialism, a defender of workers’ salaries and pensions in the face of neo-liberal capitialism. Thus, what his government has been trying to do these last few weeks is secure bank recapitalisation through EU bailout funds but, for the purposes of the public deficit, secure a bilateral loan with Russia, hoping in this way to avoid austerity strings that have been attached to EU bailouts for Greece, Portugal and Ireland.

Cyprus has been shut out from international bond markets since May 2011. This prompted Nicosia to agree last December to a Russian loan deal worth €2.5bn (at an interest rate of 4.5% to be repaid over five years) and now Cyprus is seeking, according to reports, up to €5bn more from Moscow.

It’s clear that for Russia implicating itself further in the Cypriot economy suits its strategic interests in the Eastern Mediterranean, especially since its long-term influence in Syria is under threat; but the advantages for the Cypriot economy are less clear. In fact, Christofias’ Russian gambit is somewhat of a cheap trick, because he knows repaying the loans to Moscow will still require austerity measures and hard decisions on economic and public sector reform, except it won’t be Christofias who’ll be responsible for taking them, but the next government.