Banks in Cyprus are expected to remain closed until next week while frenzied talks continue about how to help the country.
After Cyprus's Parliament rejected a plan to provide its €5.8-billion contribution to its bailout by seizing a portion of bank deposits from anyone with a bank account, Cyprus was then tasked with coming up with a plan that will let it access a European Union bailout to stop its banks from failing.
The country's eurozone partners and the International Monetary Fund (IMF) said they would provide €10-billion in an emergency bailout if Cyprus came up with an extra €7-billion itself. Most of the bailout money is needed to shore up the country's banking sector, with the rest for government finances.
Plans considered by Cyprus include the nationalisation of pension funds of semi-government corporations, which hold between €2-billion and €3-billion, another form of levy on deposits or natural gas bonds linked to oil reserves discovered off Cyprus. But the pension-fund assets would leave the government exposed to further debt, and the oil reserves remain uncertain and will not be exported until at least 2019.
Banks in Cyprus are now not expected to open until Tuesday, because Monday is already a scheduled bank holiday. Although the autobanks are working, the banks themselves have been shut to prevent a run on deposits. The country's two main banks, Laiki and the Bank of Cyprus, face potential failure if a bailout is not secured. One official told the Associated Press that Europe and the IMF were pressing for the two banks to be wound down.
On Thursday, the Cypriot government was discussing imposing capital controls amid fears that money would flood out of the country once its banks were reopened.
Cyprus, which has a good trading relationship with Russia, spent the week trying to convince its ally to provide it with a multibillion-dollar loan. With an estimated $31-billion held in Cypriot banks by Russian banks, businesses and individuals, as well up to $40-billion in loans to Cyprus-registered firms, Russia has been gripped by fear since the crisis began to unfold, with state-run tele-vision transmitting rare live reports from outside the Cypriot Parliament.
If Russia agrees to the loan, it is likely to be in return for something concrete. The Kremlin is known to enjoy seeking hard assets abroad in exchange for aid, raising the question of whether negotiations might have snagged around stakes in the offshore gas fields and Cypriot banks. Gas fields discovered in 2011 could be worth many times Cyprus's gross domestic product (GDP), but the exact potential revenue is uncertain.
Much speculation has fallen on Gazprom, the state gas monopoly that has often been dubbed a tool of Kremlin foreign policy. A spokesman shrugged off speculation that it was seeking exploration rights for gas deposits in the Mediterranean. "There have been a lot of fantasies in the press," Gazprom spokesperson Sergei Kupriyanov said. "We have made no proposals."
The appearance in Moscow this week of George Lakkotrypis, Cyprus's minister for energy, commerce, industry and tourism, only fuelled speculation. The Russian press has reported that Gazprombank, a subsidiary of the gas giant, was interested in Laiki Bank. The Cypriot government denied reports that it had been sold to foreign investors.
Charles Robertson, the global chief economist at Renaissance Capital, a Russian bank, said a bid for gas fields would fit with Putin's strategy of using natural resources to boost Russia's influence.
"Energy is something that Putin believes makes the country powerful … it would fit with his long-term agenda," he said.
German chancellor Angela Merkel has described Cyprus's banking sector, which has swelled to eight times the country's GDP, as unsustainable. Meanwhile, Cyprus's Orthodox church has said it is willing to mortgage its assets to invest in government bonds. The church has considerable wealth, including property, stakes in a bank and a brewery.
Glum sums for tycoons who bought way in
A band of super-rich foreign tycoons who took Cypriot citizenship in recent decades — lured by a favourable tax regime — are believed to have been required to deposit at least €17-million to qualify for citizenship. A tax on deposits would hit them particularly hard.
Billionaires attracted by the citizenship scheme include the Norwegian-born oil tanker tycoon John Fredriksen, the Israeli internet gambling entrepreneur Teddy Sagi, and Alexander Abramov, the Russian steel magnate.
In 2010, Cyprus's then interior minister, Neoclis Sylikiotis, explained the rules to a local newspaper, Cyprus Weekly.
"Cypriot nationality is given in special cases, following approval from the council of ministers … on the basis of specific criteria, including the applicant being over 30, having no criminal record [and] owning a permanent home in Cyprus."
Other criteria include depositing at least €17-million with a local bank for five years, direct investments of €30-million, or registering a large business on the island.
Between 2007 and 2010, about 30 foreign nationals, mostly Russians, were reportedly granted Cypriot citizenship. Most prominent among them was Abramov. "Mr Abramov is considered to be offering high-level services to the Republic of Cyprus, taking into account his business activities," Sylikiotis said.
Abramov is a close business associate of the Chelsea FC owner Roman Abramovich and, together with a fellow Russian, Alexander Frolov, they hold controlling interests in the FTSE 100 steel group Evraz through the Cyprus investment vehicle Lanebrook.
Forbes magazine's list of the world's richest people puts Abramov's fortune at $4.6-billion, which does not come close to making him Cyprus's wealthiest naturalised citizen. That honour goes to 68-year-old Fredriksen, who made his first fortune during the Gulf "tanker wars" that accompanied the 1980s Iran-Iraq conflict. He ranks 87th on the Forbes list, worth an estimated $11.5-billion.
Gas propects are tantalising
Amid the panic caused by the Cyprus bailout plan, Cypriots employed in the island's oil and gas industry may be approaching their work with renewed vigour this week.
Some experts believe Cyprus could be sitting on natural gas reserves worth up to €300-billion, a bonanza for a country with an estimated gross domestic product (GDP) of €15-billion.
The gas fields came under the spotlight after Cyprus's President Nicolas Anastasiades promised that people who kept deposits in domestic banks for the next two years would be given bonds linked to revenues from natural gas.
Traders said they were not aware of any such bond but could see how it would work as a sweetener for customers.
But the Cypriot gas reserves have not been proved. In 2011, the United States energy company Noble announced a successful well off Cyprus in a field estimated to hold at least 200-billion cubic metres of natural gas. That prompted a flurry of interest in Cypriot waters, which, analysts say, could hold another 850-billion cubic metres of gas but there have yet to be any more discoveries.
The flood of money the Cypriot government envisages coming from these fields will also be painfully slow in coming
. Vincent Forest, Cyprus analyst at the Economist Intelligence Unit, said: "When Anastasiades said we can guarantee these sweeteners in two years, I seriously doubt this would be effective. It would take between seven and 10 years to have the first revenues from gas exploitation."
The situation is complicated by disputes with Turkey, which has a strong bargaining position because any gas pipeline would have to cross its territory, and Egypt, which questions Cyprus's claim to the gas fields.
Forest said: "You can't bet on gas for a country such as Cyprus. It's a small country, it's a weak country, it's got very difficult relations with Turkey. Most important, you have the Egyptians claiming rights to some of the gas reserves. It's a huge imbroglio." — © Guardian News & Media 2013