Posted by: theoptimisticconservative | March 20, 2013

Cyprus: The EU, out of ideas

The Pax Americana continues to disintegrate, and the crack-up continues to circle around the “Great Crossroads,” the junction of Asia, Europe, and Africa where everything affects everything else.  The latest chapter in the saga features Cyprus, where a stand-off between the EU and German voters has closed banks and ATMs to Cypriots, who would like to withdraw their cash before it is subjected to a 6.75% or 9.9% confiscation.  The Cypriot parliament voted on Tuesday against accepting the EU/IMF deal to restructure the nation’s debt.

The issues are (a) that Cyprus needs a bailout (due to catastrophic bank losses through financial exposure in the Greece bailout); (b) the German taxpayer is not enamored of paying for yet another bailout for an EU basket case; and (c) much of the money in Cypriot banks belongs to Russian depositors, who are (justifiably) suspected of preferring the Cypriot banking set-up because it’s easy to launder money there.  Why, Germans ask themselves, should their hard-earned money go to maintaining the cushy berth enjoyed by so many Russian fat-cats?  Why shouldn’t the Russian depositors – and the Cypriots themselves – have to pony up some of the bailout cash?

Getting Cyprus to kick in 5.8 billion euros is the proposal on the EU/IMF table for dealing with the current crisis – the proposal that closed bank doors in Cyprus when the confiscation measure was floated.  Under that proposal, Germany would be responsible for nearly 40% of the 10 billion euros to be provided by the EU in the bailout.  Angela Merkel’s bailout policies have been losing favor with the voters, and the Christian Democratic Union sees itself in real political trouble with a federal election looming in September.  The ultimatum to Cyprus is as much about German domestic politics as it is about anything else.

But the EU doesn’t operate in a vacuum, and it appears Russia is upping the ante, with Gazprom reportedly offering to bail Cyprus out – restructure Cypriot banks – in exchange for comprehensive natural gas concessions from Nicosia.  You could see that one coming from miles away.  The chatter today is all about whether Cyprus will give the Russians a naval base in the Mediterranean (probably), and whether Russia might go thermonuclear on Germany and cut off natural gas supplies (probably not).

There are basically two potential outcomes for this crisis.  In one, the EU decides that preserving a semblance of unity, and fending off a Russian intervention in Cyprus, are more important than structuring a financially responsible bailout for Cyprus.  Smoke and mirrors will be used to keep Cyprus going for a while, without bringing down the Merkel government in Germany.  Perhaps a relatively responsible bailout approach would significantly reduce Germany’s contribution, with the other EU members in effect paying a premium to keep the Union together.

In the other outcome, Cyprus obtains more help from Russia – like the injection of Russian cash in 2012 – and avoids the need to meet the requirements of an EU-brokered bailout, at least for now.  This outcome obviously makes it more likely that Russia will end up in a position to restructure Cyprus’s banks and take over her gas industry.  As long as there is no moment of financial reckoning for Cyprus within the EU, little light will be shed on quiet Russian moves toward that end.

It’s an interesting question why Cyprus’s problems had to come to this pass.  Cypriot banks were highly vulnerable in the Greek financial meltdown, but Cyprus has huge offshore gas reserves.  It may ultimately be fatal to Cyprus’s place in the EU that it has been taking so long to get exploitation of them underway.

Delays in exploiting Cyprus’s energy resources have caused the process to basically grind to a halt.  Houston-based Noble Energy has the exploration contract for Block 12 of Cyprus’s Aphrodite field, with a lease that expires in October 2013.  Noble drilled a first well in late 2011, announcing major exploitable reserves at the time.  Noble is also the principal in exploiting Israel’s offshore gas, and has been moving along smartly in that process.  But the company has announced two lengthy delays in its dealings with Cypriot gas, and in February 2013 told Cypriot officials that it had no timeline for the next step of drilling a second exploratory well.

Will Cyprus have to wait until October 2013 and bring in another company to get some movement on Block 12?  It’s a good question.  Italy’s ENI and South Korea’s KOGAS obtained licenses in January 2013 to drill in other blocks, and two Israeli firms bought stakes in February in Noble’s drilling contract.  France’s Total signed on to drill in two additional blocks.  Interest remains, but things aren’t moving quickly.

If Cyprus is too small a nation to get things kick-started herself (or is simply moving too slowly), it is a serious question why the EU doesn’t weigh in – or at least some from among its member governments.  Cyprus’s best hope of climbing out of her financial hole is to get her gas on the market.  Gas revenues are far preferable to EU-brokered bailouts, and a solvent Cyprus is one that will neither drain the German wallet nor invite Russia into the Eastern Med.

It’s not as though European governments have been shy about weighing in with private companies and each other on matters of energy policy.  And as Sarah Palin has pointed out, companies sometimes have to be pushed by governments to go ahead and exploit oil and gas from leases they are simply holding onto, waiting for exploitation to be more profitable.  I suspect Noble’s lackadaisical pace is due largely to the fall in global gas prices, which would make it less profitable to bring up Cypriot gas right now.  Noble hasn’t slowed down in the pursuit of the Israeli gas next door, but Israeli gas isn’t imperiled, as Cyprus’s is, by threats from Turkey, and Israel isn’t insolvent or facing a financial crisis.  In a down market, the relative factors favor Israel.

These factors aren’t things no one has the power to do anything about, however.  They are exactly the sort of disadvantage that the interest of friendly nations can mitigate.  What is the EU for, if not to help Cyprus help herself?  Ensuring the security of offshore drilling in the face of Turkish intimidation, and forcing drillers to drill or sell their leases to someone else, are exactly the kinds of things small nations can’t always do, but big nations and alliances can.  If the EU, or at least a consortium of some of its members, had a vision here, what it would be doing is, precisely, helping to move the Cypriot gas industry along as a key element of a “bailout” restructuring.

The dream of a world in which such things aren’t necessary could only thrive in the context of the Pax Americana.  During the Pax, it wasn’t necessary to the general peace that the issue of divided Cyprus be resolved.  Without the Pax, however, it is on just such issues that nations will have to bring national power to bear.

Cyprus is in a tough spot, her economic and political viability dependent on the patronage of larger powers.  Her situation has been allowed to languish unresolved for nearly 40 years; the cost of propping her up is the price of that policy.  Both Turkey and Russia want to be able to use Cypriot territory for their own purposes.  The EU can act like an alliance and protect and support the Republic of Cyprus, or it can see Cyprus effectively ceded to Ankara or Moscow.  What it cannot do now is treat Cyprus like a pain in the neck and assume that nothing else will change.

Politicians throughout the developed world have had the luxury for too long of triangulating against the existing order, as if it is a permanent fixture that will survive no matter how it is resented or undermined.  In fact, all forms of order, whether good or bad, are maintained only through keeping a steady strain on the lines in choppy seas.  Russia and Turkey already know what they want out of Cyprus – and it’s not what the European powers have historically wanted.  If the EU doesn’t want to see its geopolitical reality altered out from under it, now is the time to begin acting like statesmen rather than hall monitors.

J.E. Dyer’s articles have appeared at Hot Air, Commentary’s “contentions,Patheos, The Daily Caller, The Jewish Press, and The Weekly Standard online. She also writes for the new blog Liberty Unyielding.

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Responses

  1. Om the mark, as usual Optcon. Most likely (positive) outcome now in Cyprus, is a confluence of Russian and EU interests in Cyprus, to avoid a financial meltdown that drags the rest of the Eurozone down with it. This time the Germans and their Brusselcrat underlings have gone to far. Two bloody World Wars and they still haven’t learned their lesson.. I’m not going to touch upon the negative scenarios, right now they are too depressing to contemplate

    Russia will probably buy one of the two main Cypriot banks, extend a 2.5bn Euro existing loan to the government and pick up a piece of the Cypriot gas reserves at an attractive price.

    It remains to be seen what the geopolitical ramifications will be. I can no longer rule out the permanent stationing of Russian military assets on the island, although that will take several months or years to manifest. We will be discussing this subject a lot in the near future, especially with the goings on in Syria, Iraq Lebanon and Egypt.

    In reference to geopolitics, Robert Kaplan a journalist I respect once said “the West begins… and ends, in Greece”. Cyprus, a Greek offshoot, and the way the current situation is handled, will prove the validity of that observation.

  2. PS

    There is also going to be a geopolitical echo in Greece proper, depending on what the final outcome is in Cyprus. Russia’s hand is so strong now, due to the ineptitude of the Europeans, that Russia will probably ask for, and get, the Greek national natural gas pipeline network and (at least) a piece of the drilling rights in the Hellenic EEZ..

    Had Germany consciously planned the strangulation of the South East European economies to compel them into Russia’s embrace, she could not have achieved a better outcome.

  3. Barroso and the European Commission will be in Russia tomorrow for previously scheduled executive-to-executive talks with the Russian goverment. Obviously Cyprus will be high on the agenda.

    And in a more sensationalist vein. It will be interesting to see which is the next port of call for the three vessels carrying 700 Russian Marines last reported docked in Beirut. Maybe, their new home port of Larnaca or Limassol? I’d bet on Limassol, easier to neutralize flights out of RAF Akrotiri (in a crunch) that way. Thank you, Germany…

  4. The only thing saving the Euro from oblivion is the German taxpayer. These crises will continue until the European countries return to national currencies.
    It will be a very painful and messy re-organization.
    The weaker countries have to be cut loose. Tax and spend at your own peril.

  5. “The weaker countries have to be cut loose”

    Half Germany’s debt was written off sixty years ago, and the rest restructured at very favorable rates over the long-term. She defaulted three times in the 20th cent. In addition to starting two World Wars.

    eurosnews.wordpress.com/2013/02/27/60-years-ago-peripherals-wrote-off-half-germanys-debt/

    http://www.dw.de/german-economic-miracle-thanks-to-debt-relief/a-16630511

    So much for the virtues of Germany…and its ‘thrifty and industrious” taxpayers

    • Germany owns Europe without firing a shot.

      • And they are about to give it away to Mother Russia. And also insure our LNG business hasa great run over the next decade.

        Europe – give truth to soft power – and the facade that it is. No military, no energy, and increasingly no money.

      • Overconfidence, at the height of their periods of fleeting power has historically been a German flaw. Someone, or some series of events will bring them back down to Earth. As always

      • PS

        Preferably without firing a shot.

        • Indeed

        • Oh yes – please on that one. Although do they have any guns to fire?

          • They’ve got guns, but not enough ammo for the time being. That condition has been known to change.

  6. If Cyprus is forced out of the euro. It would be an excellent time to float the idea of resurrecting a currency bloc along the lines of the “Sterling area” tailored for Europe, as an alternative to the eurozone. The UK, PIIGS, East Europeans and possibly the French and Belgians (at least the Walloon part) will probably give it a good hearing out. All must privately be concerned that they will eventually become provinces of Berlin now….confiscation of deposits are tactics similar to the ones employed in the occupied countries by the Nazis in WWII. Even Medvedev of all people called it a “Soviet” tactic. This is not the kind of Europe these countries originally signed up for.

    Hopefully cooler heads (mostly in Germany) will prevail

  7. In case anyone is interested in reading opening speeches at Russia-European Union Partnership Conferences. Both briefly mention Cyprus as expected.

    Barosso

    europa.eu/rapid/press-release_SPEECH-13-249_en.htm

    Medvedev, in Russian for you Optcon :)

    government.ru/stens/23436/

    Anybody else can read the transcript in English when completed at

    government.ru/eng/docs/23435/

  8. Thanks, jgets. Medvedev is basically framing cooperation with Russia as the way ahead for the EU, on Cyprus as on other things in general.

    Russia would, of course, love to have the EU invite Russia in, to craft a “solution” for Cyprus.

    But the Russians will take Cyprus any way they can get her.

    I just saw a tweet that the ECB says they’ll cut Cypriot banks off if Cyprus doesn’t rethink the parliamentary vote to reject the bailout plan. Stupid, stupid, stupid. It’s like they want to hand Cyprus over to Russia by default. Somebody in Europe show some leadership, for crying out loud.

    • Yes Optcon. your tweet is correct. it’s as if destroying the island’s economy is being done deliberately.

      It gets worse. In the mayhem that’s going to occur till the 25th of March, all options are open. The possibility of Cyprus leaving not just the Eurozone but the EU (an impossible thought a few scant days ago) to formally join the Eurasian Economic community has been tabled in some circles. The reasoning being: “the Europeans have destroyed our banking sector in any case by their handling of the situation in recent days, with or without their bailout.” “our banks and economy will tank regardless of what we do now”. “we’ve got nothing to lose”. The German embassy is under tight security and the masses are shouting “Germany out, Russia in” on the streets of Nicosia. This is an extreme scenario, but it is indicative of the mood on the island, and what desperate people will do in desperate situations.

      Realistically no one knows exactly what’s going to happen on the island,
      All is n flux. If something concrete and reliable concerning the turn of events ( that’s not web available) comes up, I’ll let you know.

      • This seems a fitting beginning of the end for an idea that never had a chance and for which some pretty heavy weight economic thinkers said was a disaster.

        The Germans have been able to make their big run on the basis of selling high priced manufactured goods to other nations that really could not afford it. Their leaders blinked when countries were admitted – and now because of domestic political concerns cannot admit to their population the bribe they laid at thier feet to go along with the whole mess.

        I bet the UK is wishing their house was in better order. In the old days it wouldn’t have been the bear swooping in, it would have been the Brits.

  9. Thanks, jgets. This isn’t getting the attention it merits over here in the USA.

    JEM, I agree that the Brits would be the obvious ones to “swoop in” here. With their historical connection to Cyprus and their ongoing interests there (including thousands of Brits who’ve made a second home on Cyprus), they have a natural “in.”

    I wouldn’t expect the Germany of 2013 to try to exercise a grand vision for Europe. 100 years of scaring Europe to death up to 1945 is something it will take the rest of the continent a while longer to get over. Plus, Germany assigned herself a much more neutral geopolitical role in the reunification process, and I think others in Europe still consider that a good thing.

    All of this was tolerable while the US was still the big dog constraining what everyone else considered possible. Hate us as they might, the EU nations simply expected the US to make continental leadership a moot point anyway.

    Now the statesmanship void at the center of the Cyprus crisis is a British one. It’s sad to see, quite frankly. Tenaciously guarding the vulnerable outposts of Western culture was the quintessentially British role in the centuries leading up to WWII. Now, with the US turning inert at an accelerated pace, the pathetic truth may be revealed that old Albion just doesn’t have “it” anymore.

    Maybe Cameron will step in and cobble something together with the French — something that will apply some spit and baling wire to the EU concept. But I doubt it. The Brits are of two minds about the euro and the EU anyway. And Hollande and Cameron are both in bad odor with their voters. I don’t think either perceives himself to be in a position to take heroic action on anything.

    What we may see instead is a slowly-accelerating scramble to make the most out of breaking up the EU. Opting out of the euro may become the new fashion.

    And, of course, if the euro no longer holds together a “European” vision, there’s only one nation that is positioned to operate effectively on its own and do “leadership”-type things in Europe. No need to guess which one it is.

    Vanity, vanity, eh? Europe’s Indian Name is “The Usual Suspects.”

  10. It will be interesting to watch who blinks first – and unfortunate that the Germans have moved the stakes such that Russia will be able to walk right in and save the day.

    The Germans are so focused on process they often miss the end game. Vision has never been a Gerrman cultural strength. And of course the one who had a lot of it is not a name discussed in polite company, and with good reason.

  11. Tonight’s last folks

    Eurogroup blinks…ready to hear new Cypriot proposal. Point is moot though. Reminds me of the remark “The operation was a success but the patient died,”

    Cypriot Parliament expects to vote on new measures 10:00AM tomorrow, expected to past. No levy on deposits under 100,000 euros is foreseen. Laiki bank to be restructured into a “good’ and bad’ bank. Won’t matter, on Tuesday when banks are suppose to open, there’s going to be a bank run in Cyprus that’ll bring to mind George Bailey and Uncle Billy.

    It is rumored and I stress rumor, that the mission of Cyprus’ Economics minister Mr. Sarris, to Moscow has failed. Moscow (through it’s ministry of economics) is only willing to discuss an extension of its existing 2.5.bn euro loan to Cyprus. No bank acquisitions, no natural gas talks. The scuttlebutt is Germany has made it clear to the Russians that Cyprus is an EU internal issue, to be dealt with solely within the Union, at the risk of damaging Russo-German relations.

    on the other hand

    According to both Russian (close to Putin) and Cypriot sources, in an evening meeting at President Putin’s house with the European Commission members, when the topic of Cyprus came up Messrs Barosso and Putin left the room and continued the conversation alone and in private. What that could mean I don’t know.

    Tomorrow’s Cypriot official’s travel itineraries to and from Moscow should give an answer.

    I do know is that this is adding up to be quite a mess.

  12. Dysfunction in Nicosia, no sign yet of any agreements. Cypriot State’s bankruptcy on the horizon.

    Humiliation in Jerusalem, Bibi kowtows to Sultan Recep Taggip.

    Celebration in Diyarbakir. Kurdish Newroz ceasefire with the Turkish state .

    All in all, a great week for Ankara.

  13. The outcome on Cyprus is now known.

    Severe recession and a 40% reduction in GDP on the island will now follow.

    This in a country with gas reserves worth 300bn euros measured very conservatively.

    All for a fistful of 10bn euros.

    We have reached the end of the opening act.

    The Cypriots are a resilient lot, barring any treachery concerning their right to exploit their gas, they’ll be alright in a few years. And I wouldn’t be surprised if the lost deposits of ordinary Russians and Russian businesses on the island aren’t slowly converted into shares in Cypriot gas reserves.

  14. I hope you are not being overly optimistic with your forecast – I can see something much worse – similar to the IMF induced collapse in the PIIGS. ASterity is only austerity because it is madated with the govt mistakes being cemented into place.

    How do you fix this – a significant loosening of labor regulation as well as the crasy environmental side to boot. Taxes need to be lowered, especially on investment – and subtract the favored status of debt in the tax code.

  15. The greatest repercussion from Cyprus will be the loss of trust in the EU’s banking system and this morning, the EU took the next step, which shall complete that destruction of trust. The consequence will be a massive flight of capital from EU banks. Switzerland is the most likely refuge, as it is not a member of the EU.

    <a href="http://www.telegraph.co.uk/finance/financialcrisis/9952979/Cyprus-bail-out-savers-will-be-raided-to-save-euro-in-future-crises-says-eurozone-chief.html&quot;Savings accounts in Spain, Italy and other European countries will be raided if needed to preserve Europe’s single currency by propping up failing banks. Jeroen Dijsselbloem, the Dutch Chairman of the Eurozone, announced that the heavy losses inflicted on depositors in Cyprus would be the template for future banking crises across Europe.

  16. […] will ultimately agree to the bases being used for a military strike.  The world lost interest in Cyprus’s financial problems after the EU imposed a harsh bailout deal in March 2013.  But Russia didn’t – and, as reported […]

  17. […] will ultimately agree to the bases being used for a military strike.  The world lost interest in Cyprus’s financial problems after the EU imposed a harsh bailout deal in March 2013.  But Russia didn’t – and, as reported […]

  18. […] fueling the usual speculation that Moscow is negotiating for basing rights on the island.  (See here for more on Russia’s strategic approach to Cyprus.)  It has become routine in the last few years […]

  19. […] fueling the usual speculation that Moscow is negotiating for basing rights on the island.  (See here for more on Russia’s strategic approach to Cyprus.)  It has become routine in the last few years […]

  20. […] fueling the usual speculation that Moscow is negotiating for basing rights on the island.  (See here for more on Russia’s strategic approach to Cyprus.)  It has become routine in the last few years […]

  21. […] and their neighbors watched earlier this year as the EU strong-armed Cyprus into the embrace of Moscow, through just such a campaign of sanctimony and shortsightedness.  Now it’s Ukraine’s turn.  […]

  22. […] and their neighbors watched earlier this year as the EU strong-armed Cyprus into the embrace of Moscow, through just such a campaign of sanctimony and shortsightedness.  Now it’s Ukraine’s turn.  […]


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