Russia likely to contribute to Cyprus bailout

Last Updated: Tue, Jan 29, 2013 18:00 hrs

Russia is likely to contribute money to a rescue package that Cyprus is trying to finalize with eurozone partners, the cash-strapped country's finance minister said Tuesday.

Vassos Shiarly said leaders from the other 16 EU countries that use the euro are in "high level" talks with Moscow about a contribution to the bailout and that a deal was "probable."

"I think it's only a question of time," he told The Associated Press in an interview.

The Kremlin confirmed that the two countries' presidents, Vladimir Putin and Dimitris Christofias, spoke by phone about the issue on Tuesday, but gave no details.

Cyprus has enough money to survive through April but hopes to sign a final rescue bailout deal in March, after general elections, Shiarly said.

The key concern is size. The bailout, most of which would go to help stabilize Cypriot banks, would likely be worth as much as the tiny country's entire yearly economic output of €17.5 billion ($23.51 billion). Many experts say that is too much for the country to be able to pay back. And if Cyprus can't handle its rescue loans, that defeats the purpose of a rescue program.

Shiarly insisted Cyprus would be able to cope with the bailout — which some estimate would push public debt to 140 percent of annual gross domestic product. The government could manage, if deemed necessary, by selling state-owned companies and its controlling stake in Laiki bank, the country's second largest lender, he said.

The so-called troika of the European Commission, the European Central Bank and the International Monetary Fund are meanwhile looking for ways to reduce Cyprus' debt load. There has been speculation that the troika might try to impose losses on the Cypriot banks' investors, such as bondholders and depositors, many of which are Russian.

That is one reason why Russia, a long-time ally of Cyprus, has been involved in the bailout talks.

Cyprus already received a low interest loan of €2.5 billion ($3.36 billion) from Russia two years ago to keep it afloat and has asked to extend its repayment from 2016 to 2021. The left-wing government tried last year to clinch an additional €5 billion loan from Moscow but those talks never yielded a deal.

Shiarly said Cyprus' eurozone partners are aware that the country's connection with Russia is a "very strong one."

"We have lots of Russian businesses operating from Cyprus, lots of Russian investment has gone through Cyprus in the past, the relationship is a very close one, not to mention the same religious Orthodox (Christian faith) that we maintain," he said.

The country has also faced allegations — mostly from Germany which is resisting granting a bailout — that it's a Russian money laundering hub, something that Cypriot officials strenuously deny.

"One only has to look at the international reports from organizations whose role is to report on matters such as money laundering and you will find that we rank very favorably compared to many other European member states," said Shiarly.

Shiarly said Cypriot authorities are briefing eurozone partner countries on the country's anti-money laundering efforts to dispel any misconceptions and to curb resistance to a bailout.

He pointed out that the many of the losses Cypriot banks took in Greece were due to a writedown on Greek sovereign debt that the eurozone had insisted on. When the other eurozone countries see that Cyprus problems' are largely due to the Greek writedown, "I think the attitude will change and we will receive the financial assistance we're seeking," said Shiarly.

"We're not asking for a gift, we're asking for a loan on the reasonable terms which have been offered to other member states," he said.

Eurozone states have already rescued the governments of Greece, Ireland, and Portugal as well as the Spanish banking sector.

Shiarly noted that Cyprus has already enacted a string of austerity measures, including deep public sector salary cuts and tax hikes as foreseen under a draft bailout agreement.

But Shiarly, whose job will be up next month when elections are held, dismissed any talk of a Greek-style 'haircut' for Cyprus under which private investors will be forced to take losses on their investments in Cypriot sovereign debt.

"It has been rejected by us, it has been rejected by the Commission, it has been rejected by the IMF and therefore I think it's not an issue."

The finance minister said recapitalizing Cypriot banks directly from the EU's rescue fund is one option that the country can pursue. But that is unlikely to happen before April next year at the earliest, when a single banking supervisory that will oversee the process is up and running.

Shiarly backed European Central Bank chief Mario Draghi's assessment that Cyprus needs eurozone support so as not to upset the currency bloc's slow and fragile recovery.

"I have read these statements how even small Cyprus can be a systemic risk to the euro and not only myself, but I believe many other European ministers of finance share this view."


Lynn Berry in Moscow contributed to this report.

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