Could Cyprus go the way of Ecuador?

By Felix Salmon
March 29, 2013

A small country which has adopted a major global currency finds itself with massive debts and insolvent banks. Its only real hope is that it controls areas rich in hydrocarbons; the problem is that it has neither the wealth nor the expertise to exploit those hydrocarbons on its own. The result: it ends up essentially selling itself to an omnivorous global superpower which is interested only in access to resources rather than in domestic economic growth and prosperity.

This is the narrative which might well end up playing out in Cyprus. The local population is so unhappy with the euro that they’re seriously looking to bitcoins as an alternative, despite the fact that there is no real bitcoin economy, and insofar as there is one, it’s inherently deflationary. Much of the country’s political, economic, and religious elite is seriously talking about leaving the euro. If they decided to do that, Cyprus would probably become even more controlled by Russia than it is already — especially given that Gazprom is by far the most obvious candidate when it comes to finding a partner which can exploit Cyprus’s natural gas reserves.

If you want to see an example of what this story looks like in practice, just take a look at Ecuador, which adopted the dollar as its national currency back in 2000. Since then, it has had a brutal debt restructuring, causing most foreigners to give up on putting their money into the country. Predictably, China stepped into the vacuum, and is now by far Ecuador’s largest source of funds.

The latest development is that Ecuador is probably going to sell about three million hectares of pristine Amazonian rainforest — that’s about 12% of the total area of Ecuador — to Chinese oil companies. Ecuador might not be drilling in Yasuni — yet — but this new parcel is right next door, and if the Chinese come in to drill for oil there, the effects on Yasuni can’t possibly be positive.

Ecuador’s indigenous population is up in arms, but is effectively powerless in the face of China’s tsunami of cash. For its part, China has no real interest in Ecuadorean economic growth or the wellbeing of its people; it just wants to control Ecuador’s natural resources, and is willing to pay many billions of dollars to do so.

If Cyprus once again restructures its debt and/or leaves the euro, could we end up in a world where Russia controls Cyprus to anywhere near the degree that China controls Ecuador? The answer to that has to be yes, given Russia’s imperial ambitions and the degree to which Russia’s wealth dwarfs anything in Cyprus right now. Cyprus has already announced that its harsh capital controls are going to be in place for at least a month; realistically, they’re likely to stay much longer than that. So long as they remain in place as the Cypriot economy suffers the deepest recession in the history of the eurozone, it’s going to be very difficult to persuade Cypriot voters to accept the status quo.

The EU, then, should be thinking very hard about how it can bring Cyprus back into the European fold. There are as many differences between Cyprus and Ecuador as there are similarities — but still, Ecuador is a sobering reminder that rich, resource-hungry powers really can end up essentially taking over a nominally sovereign democratic nation. For many years, the EU looked down at emerging-market countries suffering major crises, with an attitude of “it could never happen here”. Well, we’ve now learned, the hard way, that big crises can happen in the EU. The lesson must surely be that nothing is unthinkable.

12 comments

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It looks like someone was investigating the perpetrators of 2008 attacks on US major banks

and found that funds (trades were made at trillion level) for bear runs originated in some Russian accounts in Cyprus

Posted by kabud | Report as abusive

Solomon’s academic nonsense, as usual.

Cyprus has no incentive – political and/or economic – to get out of Eurozone and Euro.

Fundamental reforms of the banking sector will take place under ECB/Cyprus CB.

And, as with Greece, EU will take its time to facilitate the return of both to capital markets with restructured banking sector.

Posted by hariknaidu | Report as abusive

You’re making the mistake of confusing interests of the Russian government and interests of Russian bureaucrats and small businessmen with money tied up in Cypriot banks. Russian government does not give a flying f..k about Cyprus or about its banks. It is a strategically insignificant island with two major industries, banking and tourism, one of which has just flopped.

But, more importantly, all the talk about natural gas reserves is a hail mary on the part of the Cypriot officials, trying to find anything, _anything_ they could sell to raise another billion or two.

I have not seen any reliable sources claiming more than ~300 km3 of offshore natural gas reserves in Cypriot waters. By Russian standards, that’s negligible (Gazprom alone currently controls ~23,000 km3 of reserves.) Gazprom obviously wouldn’t reject these reserves if they could get them for free (or well below market value), but they are not worth buying the whole country, even if Gazprom’s interests and Russian government interests were perfectly aligned (and they aren’t).

Contrast this with China/Ecuador case. In Ecuador, China had a troubled country with significant poorly developed reserves of several natural resources which were somewhat scarce in China itself. Proven oil reserves of Ecuador amount to ~40% of proven oil reserves of China. China is mostly deforested (but they are trying to reverse it) and tiny Ecuador has total forest biomass on the order of 15% of Chinese forest biomass.

Posted by Nameless | Report as abusive

harik: Cyprus has good reason to leave the Euro. Why stay: The Euro makes its tourist sector non competitive when it could be booming with lower prices and Cyprus has no chance to revive its money center business now that its banks have blown up. Using its own currency would allow it to get its fiscal house in order and start growing again. Staying in means years, decades perhaps, of misery and stagnation.

Posted by Chris08 | Report as abusive

You are right about the fact that the chinese are the major source or fresh funds of Ecuador, but there is another upside for the ecuadorian government in this arrangement: the chinese do not try to impose economic policy conditions on the ecuadorians! Think of the oil deals as way for the chinese to secure the collateral for the funds the ecuadorians borrow (like you described in your article “Lessons from Ecuador’s bond default”). This way the chinese do not have the necessity to impose further conditions and the ecuadorian government has a lot of flexibility on economic policy. This is like an expensive way for the ecuadorians to be free of the traditional negative-growth-policies sponsored by the IMF and other international institutions. So it does not have to be necessarily bad for Cyprus to have another option on the table.

Posted by gonzaloalberto | Report as abusive

This just in: The Russian government says it will not compensate Russian savers who have lost money in the Cyprus banking crisis. http://www.bbc.co.uk/news/world-europe-2 1992745

Posted by Nameless | Report as abusive

Think of the chinese-ecuadorian deals as pure financial transaction. Ecuador gets fresh funds from china and lets them have direct access to its collateral, in this case the oil rights (much like you said in your article “lessons from the ecuadors bond default”). Think of this as a rather expensive way for Ecuador to get credit, but without having to deal with the traditional Negative-growth-policies recommended by the IMF and other international institutions. This way the government gets the flexibility it needs to deal with its economic problems. So i think it should not necessarily be bad for cyprus to have another options on the table

Posted by gonzaloalberto | Report as abusive

So Chinese investments in Ecuador are “imperialism” yet the investments of U.S. companies around the world are just “investments”. Don’t you realize the latin nations are very aware of the influence of u.s. investments in their countries but prefer Chinese $$$ as they don’t attempt to control the governments and dictate internal policies.

Posted by jjjheine | Report as abusive

So Chinese investments in Ecuador are “imperialism” yet the investments of U.S. companies around the world are just “investments”. Don’t you realize the latin nations are very aware of the influence of u.s. investments in their countries but prefer Chinese $$$ as they don’t attempt to control the governments and dictate internal policies.

Posted by jjjheine | Report as abusive

This author decide to comment on the Ecuadorian government without the slightest idea of what
is currently going on in the Andean nation: Economic growth, reduced levels of poverty, a great deal of infrastructure development and construction in the form of roads, bridges, highways. Hospitals and clinics been built to care for all the needs of the Ecuadorian population, schools and learning institutions have major improvements so education is a major priority. Ecuador has been forced to absorb a HUGE influx of displaced Colombians out of their own country for
dire circumstances, Ecuador host the biggest number of refugees in ALL of Latin America.
Wondering how mighty Germany will react or cope with all of a sudden half of the turkish population runs trough their common border?!? or what if the all powerful US of A has to absorb the equivalent of 5 mexico cities at once?!? Ecuador small size and resources are being taxed heavily with all this heavy burden. Also is need to be noted the increased amounts of citizens from Cuba, Haiti and low and behold Spaniards!!!!! who are making Ecuador a choice destination.
Get your knowledge, information and facts about Ecuador broaden A$$#0£3 Salmon and don’t make ridiculous pathetic contemptible comparisons.

Posted by Glenm1 | Report as abusive

@harik: Cyprus may have a very good incentive to leave the Euro – the current situation will lead to spiraling depression and with the straight-jacket that is the Euro, it will find it extremely difficult to reposition (what is left of) its economy.

Flexibility is key here – and the Eurozone is anything but.

As far as political incentives go, this could well be the only reason for Cyprus to stay in the Euro, although the treatment we received from our ‘partners’ shows exactly how much political currency there exists for us. Besides, exiting the Euro does (should…) not automatically mean exiting the EU.

The Cypriot government MUST, at the very least, compare the two scenarios and not resort to fear-mongering of the type ‘exiting the Euro would be a disaster’ (staying in the Euro is already a disaster, so it’s just a matter of deciding which is the least disastrous).

The Euro is NOT a holy cow.

Posted by yPapa | Report as abusive

Clearly, Mr. Salmon here has not done all his economic reasearch and it’s sensationalizing the real influence of the Chinese in the country. The US, continues to be the largest trading partner of the country, followed by South American countries (as a group). In this light, China’s influence is limited. Furthermore, the government is very aware of the potential of giving too much influence to China and has given preference to multilateral institutions credits. In the case of Cyprus, there is already not only economic, but also heavy political Russian influence in the country, much more so than the Chinese have in Ecuador. BTW – I’m NOT a Correa supporter.

Posted by AndresMC | Report as abusive