Russia prepared to ride to Nicosia’s aid

Russia is poised to save Cyprus from financial meltdown with a €2.5bn (£2.2bn) loan that will enable it to pay maturing debt and deal with its burgeoning budget deficit.

The crisis-hit island’s communist government is close to successfully concluding negotiations with Moscow – a move that will quash fears of Cyprus having to resort to rescue loans from the EU.

“It will not solve public finance or other problems in the state sector, but it will help us better deal with issues of liquidity,” said the country’s finance minister, Kikis Kazamias. “With the situation that exists in world markets and the difficulties we face with bonds, we don’t have the luxury of choosing our lenders.”

Like Greece, Cyprus is in effect locked out of international capital markets because it would be charged prohibitively high borrowing rates following a series of credit downgrades. Agencies have cited the island’s overstretched banking system and its exposure to debt-stricken Athens. The Cypriot economy was strained further by a devastating munitions explosion in July that knocked out electricity supplies and sparked fears that Nicosia would soon have to follow Portugal, Ireland and Greece in being bailed out by the EU.

The EU’s most easterly member, Cyprus accounts for 0.2% of the eurozone’s total economy. About €1bn of government debt will mature at the beginning of 2012.

Russia, which on Wednesday ruled out increasing holdings in the eurozone before Europe came up with a clear strategy to save its debt-burdened states, is thought to have agreed to a five-year loan with an annual interest rate of 4.5% – well below that offered even by the former British colony’s financial institutions.

“Eurozone countries have not approached us in general [for aid],” Moscow’s finance minister, Alexei Kudrin, told an investment conference sponsored by Reuters.

“We are holding talks only with Cyprus. We have good progress at talks. They will conclude within one month.”

The emergency loan reflects the two countries’ close relations. Favoured by oligarchs because of its low taxes, Cyprus is a popular destination for Russian capital and has a large Russian community.

Even before the island’s entry to the EU, the vast majority of its 14,000 offshore companies were Russian-owned, according to the Global Policy Forum. An estimated $18.7bn of foreign investment from Russian sources was poured into local banks last May alone.

Under President Demetris Christofias’s communist Akel party, ties with Moscow have improved considerably, with the government going out of its way to award citizenship to Russians depositing large amounts in banks.

Like many members of Akel, Christofias studied in Moscow and is a fluent Russian speaker. “He is very proud of his communist affiliations and deeply fond of Russia,” said a seasoned observer of Cyprus affairs. “It’s where his heart lies.”But the prospect of being rescued by Russia has also been criticised with lawmakers worrying it will entice the government into eschewing crucial structural and fiscal reforms vital to streamlining a profligate public sector and overhauling the Cypriot economy.

“This will help stave off the immediate danger of default but it doesn’t solve our economic problems, it just pushes them down the road,” said Nicholas Papadopoulos a local parliamentarian with the centre-right Diko party.