Opinion

Felix Salmon

Cyprus: What are the Russians playing at?

Felix Salmon
Mar 22, 2013 15:17 UTC

Paul Murphy, watching Cypriot finance Minister Michael Sarris returning empty-handed from Moscow, says that “Medvedev and co could not have played a worse hand during this crisis — and it’s not immediately clear why”. His point is that the most likely outcome right now — he calls it “popping the red pill” — is that big depositors at Laiki Bank (read: rich Russians) are likely to lose some 40% of their money. Since that will make Russia very unhappy, why is Russia doing nothing to prevent it?

I don’t pretend to understand Russian politics, but this move seems to me to be a classic high-risk, high-aggression play; think of Medvedev as a geopolitical hedge-fund manager or poker player, and it begins to make a bit more sense.

Firstly, it’s worth noting that Russia is actually moving backwards on the amount of help it’s likely to extend to Cyprus. When the bailout plan was first announced, it included Russia extending its existing €2.5 billion loan to the country by five years, as well as reducing that loan’s interest rate. Now, Russia is refusing to agree even to that.

More generally, Russia is taking an absolutist stance with respect to Cyprus. No, we won’t restructure the money you owe us. No, we won’t buy a bank off you. No, we aren’t interested in your natural-gas reserves. And underlying it all, of course, an unspoken — and all the more powerful for being unspoken — physical threat to any Cypriot who causes powerful Russians to lose billions of euros.

Why would Russia be acting this way towards Cyprus? The obvious answer is that Russia knows exactly who’s sitting around this poker table: it’s not Cyprus that they’re playing, it’s the EU. If Russia were to enter into good-faith negotiations with Cyprus right now, that would help the EU, by reducing the amount of EU support that the island nation needs. Moreover, any deal that Russia made with Cyprus could be vetoed by Germany, or the Eurogroup, or the ECB, or even possibly the IMF. Russia is too big and too important to try to do deals which could be forcibly unraveled on a German finance minister’s whim.

And while we have a pretty good idea what the Russian prime minister is saying to Sarris in Moscow, we have a much less clear idea of what other Russians are saying to Cypriot lawmakers in Nicosia. The Cypriot capital is reportedly full of mysterious Russians right now, and it might not be all that hard for them to nobble a vote in parliament — especially given that just about any vote is going to be massively unpopular with voters. Remember that if the Cypriot parliament does nothing, then Cyprus collapses; we’re going to need a big show of political unity to prevent that. And so far, the only political unity we’ve seen has been against the bailout, not for it.

Which brings me to the blue pill, as described by Murphy:

Cyprus now has a binary choice: become a gimp state for Russian gangsta finance, or turn fully towards Europe, close down much of its shady banking sector and rebuild its economy on something more sustainable.

Murphy says it’s “obvious” which choice Cyprus should take. But it’s probably much less obvious to Cyprus’s parliament. As Paul Krugman says, Cyprus is very attached to its shady banking sector. And what exactly does Murphy have in mind when he talks about an economy based “on something more sustainable”? Natural gas? Well, given Cypriot national ties, it’s easy to see which company has pole position in terms of getting that mandate: Gazprom.

All of which is to say that there’s a real possibility — maybe not an outright probability, but certainly a good chance — that Cyprus will end up taking the blue pill rather than the red pill, and becoming a Russian client state, either inside or outside the euro. After all, Cyprus is a Eurogroup client state right now, and has wound up in this sorry place as a result. If it pops the red pill, it will have essentially no autonomy for the foreseeable future in any case.

It’s also easy to imagine that Putin’s Russia views its relations with the EU as something of a zero-sum game. Russia also has a more than 150-year obsession with acquiring influence, if not outright control, over warm-water ports in Southern Europe. Looked at that way, the loss of Cyprus from the EU to Russia would be a clear loss to the EU and a clear win for Russia.

Which, in turn, might explain why Russia is doing absolutely nothing which might help the EU. It’s making a risky and aggressive move to essentially seize Cyprus from the hands of Europe, and to gain an important geopolitical foothold in the eurozone. The downside to that move is that if Cyprus pops the red pill, then a lot of Russians, especially the ones with deposits at Laiki, could lose a lot of money. But even if that does happen, Russia will be waiting patiently on the sidelines, with a lot of new money if needed, ready to snap up Cypriot assets at fire-sale prices.

There’s no doubt that the best outcome for Cyprus, and for the EU, would be for Russia to extend its help now, before Cyprus’s banks reopen on Tuesday. But Russia doesn’t want what’s best for Cyprus, or for the EU: Russia wants what’s best for Russia. And the way it’s acting reminds me of nothing so much as a classic Wall Street bear raid, designed to drive down the price of something you want to be able to pick up very, very cheap. What’s more, it might even work.

COMMENT

Russia is run by billionaires, just like the US. So all you self righteous people are not in any position to judge a single Russian. What happened to our own banksters????

Nothing.

And why should Russia not think of itslef. I think this is a smart move on their part!

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Esther Dyson’s hopes for Russia

Felix Salmon
Jan 25, 2012 18:49 UTC

In the general atmosphere here in Davos of worry and apprehension, it was great to be able to sit down with Esther Dyson this afternoon and get a dose of refreshing optimism — and about Russia, of all places. There’s an elite group of Russian technologists here — Dyson, a lifelong Russophile who’s fluent in the language and on many boards of Russian technology companies, introduced me to both Arkady Volozh of Yandex and Anatoly Karachinsky of IBS. And she’s convinced that the success of the Russian technology sector can not only make for thriving companies but also for a much improved country.

I was skeptical, but Dyson made a number of good points. For one thing, it’s really hard to build a successful software company through corruption and bribery and other dark arts — especially when you’re creating websites which are judged on their broad popularity. And while natural resources can be stolen, human resources really can’t be.

More importantly, a whole generation of Russians is growing up on the internet, freely using Russia-developed websites which are every bit as good as their US counterparts. Their life online is transparent and not controlled by large and oppressive bureaucracies, and Dyson is convinced that once they’ve experienced that much freedom online, they’re going to start demanding it in real life as well.

Not immediately, of course: Putin is going to win the next election, and he’s going to do so legitimately. But at some point a majority of the Russian population will have no memories of the Soviet era. And already that younger generation is both demanding change and driving growth.

They’re fantastic engineers, for one — look at the way, for instance, in which Boeing does a large part of its engineering work in Russia. Or, more generally, at the Israeli technology sector, much of which is powered by Russian emigres. Russia has many problems, but there’s no doubt that its computer-science colleges are churning out a lot of smart graduates, and that the likes of Karachinsky are hiring those people at a rate of thousands per year. And they’re not robots, either: these kids are creative.

Dyson is intimately familiar with projects like Digital October in Moscow, and she’s a huge fan. Meanwhile, of course, there are the much larger phenomena which get a lot of global attention — things like Mikhail Prokhorov’s bid for the presidency, or the massive Skolkovo science park. If these things fail — and there’s a good chance that both of them will — that’s not necessarily a bad thing: free and successful societies have lots of failure. And importantly, when you look at both of them, you see hope and optimism. Which are not what you might call classic Russian traits.

I’m not entirely convinced. The population of Russia has been declining for the past 20 years, and is continuing to shrink: there are 14.2 deaths per 1,000 people per year, and just 12.6 births. And if you look at the weirdly-shaped population pyramid, you can see that the post-Soviet generation is dwarfed by its more conservative elders. It’s going to take a very long time indeed before they can or will effect any real change.

Still, if there’s any hope for Russia, it’s in the idea that democracy will percolate up from youth and the internet, rather than being demanded in some kind of revolution. As Prokhorov says, “every time we have a revolution, it was a very bloody period”. Russian democracy is not going to mean a US-style free-market economy: Russia tried that, in the 1990s, with disastrous results for the broad population. But a wired country is, by its nature, always going to be a little less corrupt. And a little more hopeful.

COMMENT

Russian Total Fertility Rate has been steadily growing (from 1.16 in 1999 to 1.54 in 2009, even higher now) and mortality falling (life expectancy at birth went up from a rock bottom of ca. 65 years in early 2000es to estimated 70.3 years in 2011). Correspondingly, natural decline went from about 6.5 ppm in early 2000es to likely 1 ppm in 2011. Even with grossly under-counted migration, the population was essentially stable in the last three years. Latest Census (2010) found about 1 million more people in the country than expected (0.7% of expected population), in contrast to Latvia where Census discovered 158 thousand missing (7% of expected number). It is much more likely than not that in the next decade to population will be either stagnant or increase marginally.

While upwards of 1.54 TFR is much lower than replacement rates, in Europe this number is beaten only by Scandinavian countries, Netherlands, Belgium, UK, France, Ireland, couple of Baltic countries, and Serbia. The rest of Europe has it worse.

So, the demographic trends are unambiguously positive, unlike in many other places. On immigration – whatever the way local population looks at it, this is fact of life. Immigration-related tensions are causing the rise of right wing parties across the whole of Europe, which makes Russia not exceptional at all. A normal (and improving) country.

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