A bailout for Cyprus, a geopolitical failure for Russia

March 25, 2013

Russia's Prime Minister Dmitry Medvedev and EU commission President Jose Manuel Barroso meet in Moscow. (KIRILL KUDRYAVTSEV/AFP/Getty Images)

Cyprus and the European Union have reached a bailout deal for the tiny and troubled euro-zone economy. That's good news for Cyprus (even if the deal turns out to be bad, at least it's an end to the uncertainty) and good news for the European Union. But the resolution of the entire Cyprus bailout saga, in the terms described, would be bad news for Russia: it would signal a failed bid by Moscow to reassert some of its once-vast power in Europe and to stand up as an alternative to the European Union.

Russia has a few interests at stake in the European Union bailout for Cyprus. The first and most obvious is that Russian citizens stand to lose billions of dollars worth of savings in Cyprus's banking sector, which serves as a low-tax haven for Russian oligarchs. Those oligarchs, remember, wield outsize political power within Russia. The second is that Cyprus is a political client state of Moscow's, a helpful little ally on such matters as sending arms to Syria. The third is symbolic, and doesn't actually have that much to do with Cyprus itself, but with Russia's standing in Europe.

The bailout deal-making was a sort of stand-off between Moscow and the European Union. Which of Cyprus's two major benefactors could get a better deal?

Last week, as Cypriot lawmakers tried to hash out the bailout with the E.U., they also tried to negotiate for a loan extension and line of credit from Russia. The idea was that the more they got from Russia, the less they'd need from the E.U., and the less painful the bailout would be. Cyprus wanted this so badly that it even offered Russia stakes in its recently discovered natural gas reserves.

This was an opportunity for Russia to make a client state even more loyal and to present itself as the alternative to the E.U., part of a decades-old effort to pull Eastern Europe into Moscow's orbit and thus lessen the relative power of the West. During negotiations, Russian Prime Minister Dmitri Medvedev publicly criticized the E.U., calling it "an elephant in a china shop."

If today's deal holds, then it will not leave Russia with a very favorable outcome. Last week's talks between Cyprus and Russia ended inconclusively, with Russian officials telling their Cypriot counterparts that they weren't ready to approve anything.

And yet, it does appear that Moscow was negotiating — in its own way. "Russia is taking an absolutist stance with respect to Cyprus," Reuters's Felix Salmon wrote at the time. "This move seems to me to be a classic high-risk, high-aggression play; think of Medvedev as a geopolitical hedge-fund manager or poker player, and it begins to make a bit more sense."

Another way to put it is that Moscow may have been trying to bully Cyprus into taking a deal that was as favorable as possible to Russia. Paul Murphy of the Financial Times, also cited by Salmon, argued that this forced Cyprus into an all-or-nothing scenario. "Cyprus now has a binary choice: become a gimp state for Russian gangsta finance, or turn fully towards Europe, close down much of its shady banking sector and rebuild its economy on something more sustainable," Murphy wrote.

Maybe Moscow thought this would tilt its client state toward the pro-Russia choice in that binary, but it appears to have be having the opposite effect.

In the deal reached today, depositors who have over $130,000 in Cypriot banks — many of these are the Russian oligarchs sheltering their money in Cyprus — are going to lose even more of their money than it looked like they were going to before last week's stand-off. Some of them will lose all of their money. Cyprus, as a nation, would become more beholden to the E.U. — and, as a result, relatively less beholden to Russia, which would have fewer interests in the country, anyway.

Russia is not in the process of losing a client-state, exactly — the political and cultural ties are likely still too deep for something that drastic to happen that quickly — but Moscow certainly isn't doing itself any favors. As Salmon wrote today, "If this is how the game ends, it’s an unambiguous loss for Russia, and a win for the E.U."

Moscow's aggressive, all-or-nothing approach appears to have only pushed Cyprus further toward Europe. That narrative might sound familiar to close observers of the Cold War, when such tight controls over Eastern Europe as the Brezhnev Doctrine helped sow the seeds of political unrest, the collapse of the Soviet Union, and the eventual spread of NATO as far east as Romania.

That's an extreme case, of course, but it reflects certain habits of Russian foreign policy. In 2009, when Russia shut off gas exports to Ukraine (and thus to much of southeastern Europe, which imports Russian energy through Ukraine) to try to force that country to pay its overdue debts to Moscow, it ended up costing Russia as much as $1 billion in lost exports and may have damaged the country's reputation as a safe source of energy.

As Foreign Policy's Dan Drezner wrote in response to the Cyprus deal, "So much for Russia as a counterweight to the European Union." He added, "Moscow couldn't budge the ostensibly enervated EU from its position on the EU member with the closest ties to Russia." Moscow certainly held all the right cards to win out in Cyprus, to secure a good deal for its creditors and pull the client state a bit closer. But, to continue the power analogy, it doesn't appear to realize that the game it's playing has changed. This isn't the Cold War anymore; Russia can't coerce its way back into Europe.

That's a lesson, incidentally, that Russia might also be learning in the Middle East, where it can send as many guns as it wants to its reliable ally Syrian President Bashar al-Assad, but it can't overturn the Arab Spring.

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Max Fisher | March 25, 2013