Cypriot concerns not exclusively focused on finance

Most of what has been written on the Cypriot financial crisis has naturally focused on Eu ropean and global economic concerns – the prospects for the euro zone's banking policy, the danger of contagion from a potential default, the implications of a potential exit from the euro zone, and so on.

Among hostile commentators, many bitterly criticised the collective proposal of March 16th by the EU, Europe an Central Bank and International Monetary Fund to tax deposits in Greek Cypriot banks, a proposal which the Cypriot president accepted.

Others bitterly criticised the Greek Cypriots, and in particular President Nicos Anastasiades, who in his negotiation with the troika a week ago appears to have opted for a levy on the supposedly secured deposits under €100,000 for the sake of a lighter levy on those over €100,000. The perception was that he did not really care about the average Greek Cypriot depositor, let alone the idea of secured deposits.

To those who have viewed the matter through euro zone lenses, this decision was puzzling. Angela Merkel reportedly remarked at a meeting of her party that Cyprus was "exhausting the patience of its euro partners".

Political context
What most commentators have missed in all this is the political context. Of course the Russia n connection was mentioned. But practically all of those writing from outside Cyprus, and many writing from within, failed to situate this in its proper political context. What they saw was just the economic side of it: deputies voted down the European plan because they were trying to save Russian-derived Cypriot economic interests. But economics was not the principal concern for most, who were considering the political stakes. Cyprus is a politically disputed island. Successive Greek Cypriot political leaderships have for decades sparred diplomatically with Turkish and Turkish Cypriot political leaderships over the terms of the island's political reunification, which all sides profess they want. Ever since the collapse of the Soviet Un ion, Russia has been a valuable ally of the Greek Cypriots. Just as the Greek Cypriot governments induced Russian investment through special tax treaties, naturalisation of Russian citizens and the like, so they also bought Russian weapons and sought Russian diplomatic help. To the Greek Cypriot political establishment, Russia is Cyprus's reliable friend on the UN Security Council, where France and China are considered neutral and the US and the UK potentially hostile.

During the final negotiations of the UN plan for Cyprus (the “Annan plan”) in March 2004, the Greek Cypriot leadership relied on Russian help to withstand western pressure.

Greek Cypriots’ need for Russian diplomatic help is ongoing, because their dealings with the Security Council are ongoing. Negotiations over the Cyprus problem are under UN auspices – something the Greek Cypriot leaders want to maintain. So when the troika offered Anastasiades a choice between taxing deposits and risking catastrophe for the Greek Cypriot economy, more was at stake than caught the eye of commentators. To salvage the Cypriot-Russian alliance, Anastasiades sought to bring the levy on deposits over € 100,000 to a rate under 10 per cent. Deputies thought this insufficient – and between Saturday, when Anastasiades accepted the troika plan, and Tuesday, when parliament rejected it, the Russians had indicated that the alliance was under review.

Buying time
Parliament acted rationally too, since it was not absolutely rejecting the troika plan but buying time to consult with the Russians and seek alternative funds; the idea of taxing deposits could be returned to.

What was offered to Russia was too vague and risky. As for geopolitics, it was not on the agenda in any serious way. Neither party wanted Cyprus to move out of the western orbit into an exclusive Russian one. Greek Cypriots still stand to benefit politically from their EU membership, especially as Turkey is in the accession process with the EU. Russia too is playing for high stakes in its relationship with Europe.

Chares Demetriou is senior fellow at the school of politics, international studies and philosophy in Queen's UniversityBelfast