Cyprus: Communist leader has leverage with Brussels
If President Christofias doesn't like the EU's bailout conditions he could go to Moscow instead
Limassol - Seeking to cover its exposure to the Greek banking crisis and reduce its national debt, Cyprus has become the fifth Eurozone country to officially apply to Brussels for a bailout.
But while Cyprus is thought to need less than €10bn – a sum dwarfed by the €100bn Spanish bailout – the former British colony in the Mediterranean has the power to deeply embarrass the EU because of its special relationship with Moscow.
In short, if Brussels plays hardball and demands harsh austerity measures in return for a bailout, the Cypriots could go instead to Moscow for their money.
Having one of the EU member states partly bankrolled by President Putin would not only be embarrassing - especially given that Cyprus takes over the revolving presidency of the EU on 1 July – it would also raise the spectre of Russian expansionism in the region for the first time since the Cold War era.
First, the facts. Fitch, the credit rating agency, downgraded Cyprus to junk status overnight. It is believed the Popular Bank of Cyprus – which has the greatest investments in Greek banks – needs a €1.8bn bailout by Thursday. The other big bank in Nicosia, the Bank of Cyprus, has 50,000 British customers and joined the UK banking protection scheme yesterday. It has less exposure to Greek banks, but it has refused to rule out sharing in a bailout.
Now to the threat. Cyprus is the only country in the EU with a Communist leader – and President Demetris Christofias is close to Moscow.
Russia provided Cyprus with €2.5bn in a bilateral loan last year and has big investments in the Cyprus offshore banking industry which is the mainstay of the island's economy.
The echoes of Russian expansionism go back to the 1970s, before the north of Cyprus was invaded by Turkey.
Britain had conceded independence to Cyprus in 1960 after years of fighting with Cypriot partisans, but the US and the CIA became alarmed at the increasing presence of Soviet advisers amid clashes between Muslim Turkish Cypriots and Christian Greek Cypriots under the rule of the charismatic Cypriot national hero, Archbishop Makarios.
The threat of Soviet influence was ended when Turkey, a Nato member, invaded the north of Cyprus in 1974, on the grounds of protecting Turkish Cypriots. The north was partitioned with the UN policing the disputed 'green line' and the island has been divided ever since.
Britain retained large tracts of coastline in the south as 'Sovereign Base Areas' – British territory – with an airbase at RAF Akrotiri. The salt flats of the Akrotiri peninsula have become a key listening post for the West, with much of the land criss-crossed by the wires of vast radar installations, aimed at the Middle East.
However, since the break-up of the Soviet Union, Russia under Vladimir Putin has taken an increasing presence in the high streets and boulevards – not to mention the beaches - of the EU's Republic of Cyprus.
The CIA raised concerns in 2010 about an alleged spy who was bailed and disappeared in Cyprus. In 2011 a massive explosion of ammunition killed 12 people and caused electricity power cuts after damaging a nearby power station. The ammunition had been seized by US forces from a former Soviet ship allegedly sailing from Iran to Syria.
Russian businessmen and tourists have flocked to the small island, long seen as a safe haven for Russian money with the attraction of a corporate tax rate of ten per cent, and highly discreet banking. There are now so many Russians in Limassol, the deep water port on the south coast, that the tourist town has its own Russian-language newspaper, two Russian schools and a radio station. Stores stock kefir, a sour Russian yoghurt drink, and Baltika, Russia's popular beer.
President Christofias has made it clear that if Brussels imposes strict regulatory conditions that would hit Cypriot workers then he won't be interested. Putin will doubtless get his first call – but he wouldn't mind borrowing from the Chinese either.
With that kind of leverage, Christofias could drive a uniquely hard bargain in Brussels.