Still, questions linger: why is this crisis happening now? And why did the EU prescribe such a bitter pill for the Cypriot depositors? If we look at who those depositors actually are, a clearer picture begins to emerge. The first thing to note is that European depositors’ money began to flow out of Cyprus’s banks back in 2010, and by now, most European depositors have already left. For European leaders, it was much easier to impose a tax on depositors once their constituents had pulled their money out of the country.
European leaders also waited until someone else showed up to pick up part of the tab for the bailout. It turns out that Russian depositors have been pouring money into Cypriot banks, taking advantage of Cyprus’s lenient money-laundering laws, among other things. Indeed, Russian deposits have more than doubled since the summer of 2010, reaching over $30 billion at the end of last year. But perhaps as much as another $30 billion of the so-called Cypriot deposits are also actually Russian. How can this be? Well, many Russian companies are actually set up as Cypriot parent companies, which in turn own a Russian subsidiary. The bottom line, then, is that Russian deposits (totaling approximately $60 billion) make up more than half of all the deposit money in Cyprus’s banks, as of December 2012.
This is where geopolitics enters the picture. What if Russian President Vladimir Putin decides to come to the rescue? Russia certainly could afford it, and as it turns out, there are a number of things that Cyprus could offer that would be quite attractive to Moscow, including natural gas—and possibly even a Mediterranean naval base.
Given how much Russia has to lose at the hands of the bailout package, it is little wonder that Putin is up in arms about the terms of the EU-IMF bailout. And given how much Cyprus has to lose in the event of a bankruptcy, it is little wonder that the Cypriot finance minister has flown to Moscow to try to cut a deal.