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    Cyprus Trying to Overcome an Impasse



Cyprus might have overestimated its negotiating power and seems to have found itself in an impasse. It rejected the EU-IMF proposal and negotiations with Russia seem to have failed. Meanwhile, Turkey is on the watch as it will not allow a deal involving the island’s gas riches without the northern part of the island benefiting as well. Despite the small size of the island, significant consequences on the Euro-zone are to be feared.

by: Karen Ayat

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Natural Gas & LNG News, News By Country, , Cyprus, Turkey

Cyprus Trying to Overcome an Impasse

All eyes are on Cyprus. Exposure to Greek debt haircut by Cypriot banks has led the island to a very tricky situation as it struggles to find a helping hand. Cyprus rejected the first option: an EU-IMF EUR 10 billion deal which included a levy on bank deposits. Germany talked about ‘accountability’ stating that Cyprus had to participate in order to obtain a financial aid. No Cypriot MPs voted in favor of the bill, to the relief of thousands of Cypriots protesting on the streets of Cyprus.

What’s in it for Russia?

Cyprus then moved to Plan B: negotiating a deal with Russia to possibly swap exploration rights for financial assistance. Why would a non-EU member be key in aiding a country in the Eurozone? In other terms, what’s in it for Russia?

Firstly, the EU-IMF proposal did not please Russia, as many of the larger deposits in Cypriot banks are held by Russian nationals who see the island as a safe offshore haven to park their cash. They were attracted by high interest rates, low taxes (corporate tax of 10% - half that of Russia’s) and a high level of discretion.

Secondly, investing in the island’s offshore gas to tighten its grip over European supply and have a foot in the Eastern Mediterranean could have been another incentive for Russia. Recent talks between Israel and Turkey entertaining the idea of building a pipeline from Israel’s Leviathan all the way to Europe via Turkey were not to Russia’s liking, unhappy to share a Russia-dependent Europe. In 2011, Noble made a find offshore southern Cyprus estimated to yield between 5 and 8 trillion cubic feet. In other words, it could be enough gas to satisfy domestic demand for 50 years, keeping in mind the small size of the island and its population of only one million. The Cypriot government believes to be sitting on a total of 60 trillion cubic feet (equivalent to 40% of EU’s gas supplies) but the reserves have not been proven yet and commercial viability could be years away.

Cyprus might have overestimated its negotiating power: its finance minister returned from a trip to Moscow without the funds needed.

Why is it so important to save Cyprus?

Pressure on Cyprus is increasing by the day with a Monday deadline set by the ECB to come up with EUR 5.8 billion. Banks plan to re-open on Tuesday as they hope a solution would have been achieved by then. Banks fear that if they were to open before then, depositors would rush to withdraw their cash. But why does it matter? How can a tiny island affect the rest of the world? And what about just letting it sink? If Cyprus is let to default on its debt, it is likely to exit the Eurozone, threatening a domino effect among other indebted nation such as Greece, Italy, Ireland, Portugal and Spain, which could further escalate the crisis in the Eurozone.

Turkey on the watch

The common denominator in recent talks is the gas in Cypriot waters. Turkey has threatened that Cyprus’ attempts to speed up offshore natural gas exploration to attract desperately needed funds will be challenged by Turkey. Turkey has made it clear it will not tolerate any deal involving the island’s gas riches without the northern part of the island benefiting as well. Needless to say Cyprus’ position is not to be envied.

Karen Ayat is an analyst focused on energy geopolitics in the Eastern Mediterranean