Don’t Forget the Geopolitics of Cyprus

With so much focus on the economic and financial dimensions of the crisis in Cyprus, it is easy for Europeans to overlook the geopolitical angle. That would be a mistake.

The greater the sense of desperation among Cypriot citizens (and the deeper their disappointment with the responsiveness of western European governments), the higher the probability that the country will turn more to Russia for help. Such help would not be granted without conditions. Indeed, Russia would seek assurances of greater and more durable access to some key Cypriot strategic assets.

Cyprus is already quite linked to Russia. Specifically:

• The Cypriot government received last year a sizeable loan to tie the country over as negotiations with “the troika” (consisting of the European Commission, the European Central Bank and the International Monetary Fund) dragged on and on;

• Deposits from Russian individuals and corporates facilitated the (excessive and irresponsible) expansion of Cypriot banks;

• Russian tourism is a notable source of income for the island; and

• There is considerable Russian interest in Cyprus’s underdeveloped gas fields.

If the current crisis were to intensify to such an extent as to force Cyprus to leave the eurozone, look for it to turn to Russia for immediate financial assistance to stabilize what would likely be a very disorderly domestic situation. And IF this once-improbable (indeed, once-unthinkable) event were to materialize, expect Russia to be highly willing and very able to step into the chaos.

A greater strategic role in Cyprus would compensate Russia for its diminishing influence in Syria, another Mediterranean access point. Meanwhile, its involvement in the development of Cypriot gas fields would give it an even greater say in the supply of energy to western Europe.

This willingness is accompanied by significant financial ability. Cyprus’s funding gap is puny in relation to Russia’s international reserves ($520 billion) and annual current account surplus ($81 billion in 2012).

These considerations should play a prominent role in Europe’s assessment of whether, how and when to provide exceptional support to Cyprus. And in making the calculus, Europe may wish to recall the historical case of Egypt from the 1950s (albeit the parallels are far from perfect).

When the West turned down Egypt’s request for financial assistance to build a new dam on the Nile – a national project deemed vital for the country’s wellbeing – the government of the time felt it had no choice but to go to the Soviet Union for help. By doing so, it committed the country to almost 20 years of Soviet influence, changing the geopolitics of the region in a consequential and durable manner.

Europe has more than an immediate economic and financial interest in working with Cyprus to stabilize an increasingly volatile situation. And it should do so driven less by the need avoid an institutional Eurozone exit and more by the importance of fundamentally restoring growth and hope to Cyprus. There is little time to waste if Europe is to avoid an economic, financial and geo-political shock.

This article contains the current opinions of the author but not necessarily those of PIMCO. Such opinions are subject to change without notice. This article has been distributed for educational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission.

Photo: Borislav Bajkic/Shutterstock.com