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26/08/2016

Russia ‘bails out’ cash-strapped Cyprus

Europe's East

Russia ‘bails out’ cash-strapped Cyprus

cyprus_pic_nasa.jpg

Cash-strapped Cyprus yesterday (5 October) secured a massive financial loan from Russia, a country with serious financial interests on the island. Cyprus, whose president Demetris Christofias is the only Communist to lead an EU member and eurozone country, will hold the bloc's presidency in the second half of 2012.

Cyprus' Council of Ministers approved an agreement with the Russian Federation for a €2.5 billion loan with a yield of 4.5%, government spokesman Stephanos Stephanou announced, according to the Famagusta Gazette.

Since the deadly blast at Cyprus's main power station on 11 July, which wiped out 53% of electricity production, the country has been struggling to avoid bankruptcy (see background).

Speaking to the press, Stephanou said the government authorised the finance minister to take all appropriate action to implement the agreement as soon as possible.

The deal among with the government measures for medium-term fiscal stability are expected to create "important advantages" for Cyprus, the spokesman said.

He added that the loan will enable Cyprus to cover its medium-term refinancing needs, avoiding liquidity strains on local commercial banks, as well as restore international investors' confidence and ease the rising tendencies on Cypriot bond spreads in the European secondary markets.

Noting that the loan will shield the Cypriot model of mixed economy and open an additional line of finance for Cyprus, Stephanou said the Cypriot government was satisfied over the confidence shown by the Russian Federation towards the island republic.

No strings attached?

Asked about the logistics of the deal, he said that implementation would begin early 2012, and Cyprus would pay off the loan in 4.5 years, paying a 4.5% interest rate. Stephanou said there were "no strings attached" to the loan.

Cyprus has seen its borrowing costs spike in the past year on the back of fiscal slippage and exposure of its banks to Greece, a factor which has pressured its credit ratings, according to the Cyprus Mail.

Budget talks are due to take place in December in a difficult political climate in the aftermath of an inquiry finding President Christofias personally responsible for the July 11 blast that killed 13 people.

The centre-right opposition has the majority in parliament and theoretically could refuse to approve the budget in a bid to force President Demetris Christofias to step down.

Ruling AKEL leader Andros Kyprianou yesterday urged his political rivals to leave the economy out of the ongoing row.

“Let us fight on any other issue but cooperate on the economy,” Kyprianou was quoted as saying.

Cyprus is a popular destination for Russian capital. Present most conspicuously in the banking, energy, financial services and property sectors, Russia has become a key player in the Cypriot economy.

Official figures released last year show that Russian investment in Cyprus reached $15.96 billion (€12.37 billion). Unofficially, the figure is believed to be much higher.

Russia provides the island's second-largest number of tourists behind those of the former colonial power, Britain.

Positions

Background

Cyprus's cabinet tendered its resignation on 28 July, bowing to political and public pressure for a broad reshuffle after a massive munitions blast that has threatened to force the island into asking for an EU bailout.

Cyprus President Demetris Christofias appointed on 5 August a new government, led by economist Kikis Kazamias, charged with leading the island's fight to avoid bankruptcy.

Moody's rating agency downgraded Cyprus two notches on 26 July, saying concerns about its fiscal position were amplified by the consequences of a massive blast that destroyed the island's largest power station on 11 July.

In Moody's view, Cyprus had failed to implement its own austerity programme, which includes spending cuts and privatising the island's stock exchange.

Cyprus is a presidential republic. The President Demetris Christofias is the only Communist to lead a EU member country. His term ends in the spring of 2013.

The main right-wing opposition party won parliamentary elections held last May, amid accusations during the campaign that the leftist ruling coalition of Christofias had been making too many concessions in the divided island's reunification talks.

Timeline

Further Reading