Cyprus came away from a key meeting in Moscow with no bailout from the Russian government. This throws the ball back into Europe's court. Speculation is flying around the Web that Europe's pressure on Cyprus is designed to squeeze Russia, or alternatively that Russia is seeking a strategic breakout in the Eastern Mediterranean with a gas deal. The intersection of business and geopolitics is always fascinating
First of all, Nouriel Roubini hinted in a March 20 Tweet that Russia wants a naval base in Cyprus as part of any bailout deal. I'm not sure where Dr. Doom got that idea. Cyprus has a heavy British military presence, so a Russian base there would make about as much strategic sense as a Russian base in Gibraltar or Malta. The Atlantic Wire picked up on this idea too, citing speculation in a report from Ekathimerini. IMHO Russia doesn't have an immediate need for a Mediterranean naval base unless it is concerned about losing access to its base at the Syrian port of Tartus.
The advantage to Russia of a Cyprus base is unclear until we consider sailing distances.
Cyprus is 238 nm (one day's sail) to the west of Tartus, Syria, measured to Kyrenia.
Alternatively, Cyprus is 206 nm (0.9 days' sail) from Tartus if the closer port of Larnaca is the destination.
Cyprus is 393nm (1.6 days' sail) from the Port of Suez, Egypt.
Tartus is 432 nm (1.8 days' sail) from the Port of Suez, Egypt.
Any Russian navy power projection into the Mediterranean would probably pass through the Suez Canal, so Russia would shave about 40nm off the trip of any warships it sends (depending on where in Cyprus it wants to relocate its floating workshop). That seems like a negligible advantage unless it wants to add other things like a listening post to monitor British and/or NATO activities in the area. I just don't see the strategic impetus for Russia to make this part of a bailout deal.
A much more likely deal would be for Gazprom to acquire Cyprus' natural gas rights if Cyprus takes Russia's bailout deal. Gazprom likes its dominant pricing power over Europe's natural gas supplies. This deal is now much less likely IMHO because the Russian government is unwilling to provide a backstop by bailing out Cyprus' banks. It is also noteworthy that Russia is deferring to the European troika on further details of a Cyprus bailout and that European Commission head Jose Barroso was in Moscow together with Prime Minister Dmitry Medvedev when Cyprus came away empty-handed. If there is any intrigue between Brussels and Moscow over Cyprus, or any daylight between their public stances, it is not apparent from these indications.
Cyprus' precarious finances pose an immediate economic threat to Europe. S&P downgraded Cyprus' sovereign debt again. No one but crazy hedge fund managers is going to buy that debt without a bailout from Brussels. Europe is going to have increasing difficulty with further bailouts as its industrial activity continues to decline. Cyprus is now scrambling to impose severe capital controls on its citizens and Germany is warning that Cypriot banks may be shut permanently if the country won't accept the troika's bailout offers.
The unraveling proceeds apace. I've criticized public officials like Ben Bernanke on this blog but I can see how even he would look for a way out of the Fed's leadership before things get really bad in Europe and the U.S. ultimately feels the effects. I'll wait until Helicopter Ben makes his resignation official before I send my resume to the Obama Administration because I don't want to look too eager.
Oh, BTW, Boris Berezovsky died today. I guess he won't be part of any bailout deal.
