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A no-entry sign is seen outside a branch of Bank of Cyprus U.K., in central London March 18, 2013. About 3,500 British military personnel are based in Cyprus. (ANDREW WINNING/REUTERS)
A no-entry sign is seen outside a branch of Bank of Cyprus U.K., in central London March 18, 2013. About 3,500 British military personnel are based in Cyprus. (ANDREW WINNING/REUTERS)

BREAKINGVIEWS

Euro zone holds all the cards in Cyprus banking crisis Add to ...

Reuters Breakingviews delivers agenda-setting financial insight. Its global correspondents react to stories as they develop, delivering sharp and provocative commentary on big financial news as it breaks.

Tough on Cyprus, tough on the causes of Cyprus. The German-led, euro-zone strategy to deal with the island state’s financial problem hit a roadblock on Tuesday as the parliament in Nicosia rejected the controversial tax on bank deposits. The original idea was to extract cash both from Cyprus itself and the perceived originators of its problems – the Russian depositors who over the years inflated the banking sector’s size to eight times its gross domestic product. Hitting the presumed Russian money-laundering machine was not just a way for the euro zone to achieve the desired financial result, it was an integral part of the plan.

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The focus has now moved to Moscow. On Wednesday the Cypriot Finance Minister was visiting the Russian capital while Thursday sees an EU-Russia summit meeting. Euro-zone leaders are concerned that Vladimir Putin could have a say in the island’s future. Speculation is rife that Gazprom might use the country’s troubles to make a play for its offshore gas fields, in exchange for bailing out one of the country’s two largest banks. That could be the basis of an alternative to the deposit tax.

Cyprus might think that pulling Russia closer to the centre of the negotiations is in its own interest. That calculation is short-sighted. Cyprus’s capacity to play both sides is non-existent. Since the Greek crisis, all euro-zone leaders know that Germany and France are prepared to let a smaller EU member leave the monetary union if necessary.

So Moscow isn’t the only place where the island’s fate is decided. There’s Berlin of course, and also Frankfurt, where the European Central Bank can rule on whether to continue to allow funding for Cypriot banks, whenever they reopen.

The Cypriot government may lack diplomatic and geopolitical experience and the parliament may be unduly swayed by “business interests” – a pleasant euphemism used to describe Russian influence. Yet, faced with the ultimate choice, they will realize that the Russian option would lead to a financial meltdown and a catastrophic, uncontrolled exit from the monetary union. Cyprus is only worth something to Russia because it is in the euro. Leave it, and they will leave you.

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