Cyprus is the third largest island in the Mediterranian, after Sicily and Sardinia. The Republic of Cyprus is a small nation composed of 800,000 people with an economy of less than $18 billion, representing less than 0.2 per cent of the euro zone’s gross domestic product.
An opaque banking system has evolved, under government influence, with some $70 billion in deposits, much of which emanate from Russia. Indeed, Cyprus has become in essence a client state not just of Russia and a number of the former Soviet satellites, but more specifically of the Russian Mafia. The corrupt financial sector, promoted by a blind-eyed government in the pockets of Russian oligarchs who use Cyprus as a mechanism to cleanse dirty money and evade Russian taxes, accounts for 45 per cent of the entire national economy of Cyprus.
Understandably, in such circumstances, the Cypriot governmentnow finds itself between a rock and a hard place. Its agreement with the euro-zone to impose a 6.7 per cent haircut on small depositors and a 9.9 per cent haircut on large depositors has provoked fury from both groups. The government may fall come election time if the small depositors are hit; and cries about the breaching of the rule of law are justifiably rife across that group. But heads literally may roll if the Russian oligarchs are robbed. So the government wavers between loss of position and loss of life as it gropes around a number of equally unappetising alternatives.
If small depositors are spared completely, then the Russians are out by 15 per cent and all their tax evasion gains go to the euro-zone. If small depositors remain on the hook, then street riots may be expected once the banks reopen, as reopen presumably they eventually must.
Anxious eyes no doubt will be glancing northwards,across the Cyprus partition, where the Turks may decide to enter the south as liberators of their oppressed brothers. A lot of chickens are coming home to roost on this beleaguered island.