Russian president Vladimir Putin slammed the European Union's proposal to tax deposits as part of a bailout, calling it "unfair, unprofessional and dangerous," just before Cypriot finance minister Michael Sarris traveled to Moscow for talks with Russian officials on Tuesday.
"I think the markets are currently relying on some Russian support for Cyprus based on the understanding that Russia has interest in Cyprus via the exposure of the Russian banks, which have substantial assets in Cyprus," Tatiana Orlova, strategist for Russia and CIS at RBS, told Emerging Markets.
Russian banks loaned about $40 billion to Cypriot banks and Russian deposits in Cypriot banks are around $27 billion, Orlova said, adding that if the tax on deposits had been approved, the direct hit to the Russian economy would have been "contained to something like 0.2% of Russia’s GDP."
"It doesn't mean, in my view, that the Russian government is going to do whatever it takes to bail out Cyprus and prevent a total meltdown in Cyprus's banking sector," she added.
The deposits that are still in Cyprus belong mainly to middle-sized Russian companies and to the Russian middle class, with the big Russian oligarchs likely to have moved most of their money away, as the bailout discussions had been going on for some time, according to Orlova.
"At the moment, the Russian political regime is not based on the support of the middle class," she said. "Putin seems to have given up on the support of the middle class."
Frank Hansen, a senior economist with Danske Bank, puts a 75% chance on Cyprus getting a bailout from Russia, 20% on a new deal from the Eurogroup and a 5% chance on the worst case scenario in which Cyprus would be unable to strike a deal with any of the two giants.
Russia may give help against rights to natural gas reserves in the Mediterranean Sea, considered of strategic importance as they could improve the EU's energy independence, Hansen said.
Orlova believes as well that "the Russian government will try to exploit the situation to allow big Russian companies to gain control of some valuable assets."
Gazprom is one of the companies that are already reportedly looking at access to various sites in Cyprus.
"If we are talking about the banking sector, VTB is the bank which is the most exposed, it has extended $13 billion worth of loans to Cyprus and its companies so we could be talking about [VTB] gaining a large market share in the Cyprus banking sector," Orlova said.
But even though the direct impact from a tax on Russian deposits in Cypriot banks is not big for Russia for the moment, the more time passes without a resolution the worse it could become.
"The news is perceived to be negative for the Russian economy because it may still impact the operational side of Russian businesses," explained Orlova.
"Basically, Russian businesses are using Cyprus as a transaction hub. They don't keep funds in deposits, but money flows are processed via Cyprus. For the moment there is a freeze on all transactions via Cyprus, it may already be hitting Russian businesses. So from this point of view there will be an impact, the extent of which will depend on this freeze."
- Follow us on twitter @emrgingmarkets