Cyprus to get 'no strings attached' Russian bail-out

15.09.11 @ 09:37

  1. By Andrew Rettman
  2. Andrew email

Eurozone member Cyprus is set to join Greece, Ireland and Portugal by seeking external aid to prop up its finances. But unlike the EU and IMF bail-out packages, its loan is to come from Russia with "no strings attached".

  • Cyprus euro coin - Russia is keen to help the offshore banking centre with a direct loan (Photo: European Commission)

Russian finance minister Alexei Kudrin in a telephone conference with press on Wednesday (14 September) confirmed that Moscow is at an advanced stage in negotiating the rescue package with Nicosia.

"Italy has not approached us. Eurozone countries have not approached us in general ... At the moment, we are holding talks only with Cyprus. We have good progress [in the] talks. They will conclude within one month," he said.

Cypriot newspaper Phileleftheros earlier reported that Russia will bung Cyprus a €2.5 billion loan at an annual interest rate of just 4.5 percent, 10 percent below the market rate. A €1 billion tranche is to be paid in December and two other payments are to be made by March 2012.

Speaking in the Financial Times on Wednesday, Cyprus finance minister Kikis Kazamias said the money will be used to plug the country's budget deficit and to help re-finance maturing debt, €1 billion of which is up for repayment in early 2012.

He added that the deal is "a friendly agreement with no strings attached", in contrast to the onerous austerity and financial sector reform measures demanded by the EU and IMF from Cyprus' fellow eurozone bail-out states.

One possible motive for Russia's generosity is the prospect of an EU and IMF-led overhaul of the country's offshore banking sector, said by analysts to be a haven for money laundering.

"US and European intelligence and law enforcement officials say Cyprus remains a haven for shadowy enterprises ranging from Islamic terrorists to narco-gangsters, as well as for Russian and other citizens of the former Soviet Union seeking the perfect destination to park, clean and re-export billions in stolen cash," Czech investigative journalist Jiri Kominek wrote in a 2009 report published by the Jamestown Foundation, a US think-tank.

For their part, financial analysts have said the quick-fix Russian loan will not help put the country back on a sound financial footing.

"If the government does not take the necessary measures as promised, this lending will lead to greater problems in the medium term as the government deficit is structural and rating agencies will continue to downgrade the country", the Piraeus Bank's Cyprus-based fund manager Marios Demetriades told Bloomberg.