Amid Sanctions Battle, Russia Courts Cyprus

6 MINS READFeb 27, 2015 | 10:13 GMT
Amidst Sanctions Battle, Russia Courts Cyprus
Cypriot President Nicos Anastasiades (L) shakes hands with Russian President Vladimir Putin at a signing ceremony at the Novo-Ogaryovo residence outside Moscow on Feb. 25.

Cypriot President Nicos Anastasiades met with his Russian counterpart, Vladimir Putin, in Moscow on Feb. 25 and the two countries updated their bilateral military agreement. This agreement allows Russian naval vessels to use Cypriot ports for resupply and maintenance. Anastasiades said that Cyprus is Russia's most reliable partner in the European Union and criticized EU sanctions on Russia.

This meeting highlights Cyprus' need to balance between Russia and the West. It also showcases Moscow's interest in keeping good ties with strategic members of the European Union. While the Russian government understands that Cyprus has limited influence on European affairs, Moscow is counting on several EU members to provide support to end the sanctions against it. As the sanctions start to expire in March, Russia will need as much political support as possible.

Cyprus occupies a strategic position in the eastern Mediterranean and has traditionally been a source of conflict between the east and the West. The island's location makes it an important part of any security dynamic in the region. Cyprus is not a member of NATO, but it is a critical component of the alliance's Mediterranean operations. It would play a central role in a NATO intervention in the Levant or North Africa. The United Kingdom hosts two sovereign air bases with approximately 8,000 troops on the southern portion of the island. The United States also sees Cyprus as an important ally for maintaining control of Mediterranean waters.

Cyprus Locator

Cyprus, however, also has close ties with Russia. The island has long been a primary offshore banking haven for Russia. Russian-owned companies based in Cyprus comprise the bulk of the island's offshore sector, which accounts for roughly 15 percent of Cypriot gross domestic product. In 2011, Russia loaned Cyprus 2.5 billion euros (about $2.8 billion) to cope with its economic crisis. In 2013, Russia restructured this loan to grant Cyprus lower interest rates and delay its maturity from 2016 to 2021. During Anastasiades' visit, the Russian parliament agreed to postpone the repayment of this loan yet again for five years. Russia is also a key source of tourists for Cyprus, and Nicosia worries that a weaker ruble would hurt the island's tourist sector.

More recently, Russia's security interests in Cyprus have increased over concerns that the crisis in Syria could threaten Russia's only Mediterranean port in Tartus. Russia is interested in having access to air and naval facilities in Cyprus, but Cyprus understands that granting Russia full military use of a base would create problems with Western allies. As a result, Cyprus offered Russia the use of its facilities only in emergency situations, such as Russian evacuation scenarios in the Middle East. The military agreement signed Feb. 25 underscores Cyprus' need to move carefully in its concessions to Russia.

A Delicate Balance

Cyprus is a member of the European Union, and it depends on European and U.S. investment to resurrect its economy, which took a hit in 2013 when the island requested a bailout for its banking sector. Nicosia is particularly interested in receiving investment for its energy sector because it needs foreign companies to exploit offshore hydrocarbon reserves in Cyprus' exclusive economic zone and to finance the infrastructure development needed to get those resources to market.

In addition to money, Cyprus also needs political backing from its partners. The island has been divided since 1974 into a Greek-Cypriot sector and a Turkish-Cypriot sector. The Greek-Cypriot government in Nicosia has tense relations with Turkey, and it needs U.S. and Russian support to achieve reunification on terms favorable to the Greek Cypriots. U.S. Vice President Joseph Biden visited Cyprus in May, a notable gesture to the island. But Nicosia would like the United States to put more pressure on Turkey to stop its naval incursions in Cyprus' exclusive economic zone. Maintaining good ties with Russia is a way for Cyprus to pressure the United States for more political support.

Anastasiades' visit to Russia needs to be understood as a part of Cyprus' permanent balancing act, but Nicosia and Moscow also have more immediate concerns. In late 2014, Moscow introduced a series of laws designed to lure foreign-based companies back to Russia with promises of a tax amnesty. This was part of Russia's attempts to fight capital flight, which doubled between 2013 and 2014 following the Ukraine crisis and the devaluation of the ruble. Cyprus wants Russia to exempt the island from these laws, or at least enforce them selectively.

The extent to which offshore Russian companies are affected by Moscow's new tax laws will depend on how rigorously authorities implement them. Nicosia would like Russia to be flexible enough to allow the continued presence of Russian money in Cyprus. While this issue was not officially on the agenda, Anastasiades probably discussed this with Russian representatives. Moreover, one of the agreements signed during the Cypriot president's visit was a memorandum of understanding to facilitate the exchange of information between Cyprus and Russia, officially to prevent tax evasion and money laundering. This suggests that Cyprus is willing to share more information with Russia in exchange for Moscow's tolerating the presence of Russian money on the island. Obtaining such intelligence could give Putin an important political tool, since his government would have more details on Russian money in Cyprus. A similar deal was struck in 2009, when Nicosia shared information with the Kremlin on Russians using Cyprus as a financial shelter.

Russia would like Cyprus to pressure the European Union to de-escalate sanctions on Moscow and to support their gradual lifting. Russia understands that Cyprus is not a particularly influential player in the European Union, but in recent months the Russian government has been courting its main partners in the Continental bloc to oppose, or at least tone down, sanctions. Russia sees Cyprus as a part of a group of countries that also include Greece, Hungary and, to a lesser extent, Austria and Italy. Putin met with Hungarian Prime Minister Viktor Orban in Budapest on Feb. 17, and Russian Foreign Minister Sergei Lavrov met his Greek counterpart, Nikos Kotzias, in Moscow on Feb. 11.

So far, Russia's strategy has been marginally successful. To apply sanctions, the European Union requires unanimity. While Greece, Cyprus and Hungary have repeatedly criticized European sanctions against Moscow, they ultimately voted in favor of them. The coming months will offer Russia the opportunity to test its strategy again; the different series of sanctions that were introduced in 2014 begin to expire in March, and the European Union once again needs unanimity for renewal. Moscow is counting on its partners to create enough pressure that these measures are not renewed when they automatically expire. This political decision will largely depend, however, on Russia's actions in the battlefield in Ukraine.

Anastasiades' visit to Moscow underscores the extent to which several members of the European Union need to permanently balance between Russia and the West. The crisis in Ukraine has made this balance particularly difficult as Europe's largest political and economic actors pressure the smaller countries in the bloc to follow the official EU line when it comes to Russia. The Cypriot president's meeting with Putin also underscores the effort these countries frequently make to find some room for maneuver and to protect their political and financial ties with Russia.

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