Amidst the Ukrainian crisis, the global economic crisis, the ISIS menace, Russia’s ‘alleged’ intervention in the Ukrainian crisis, the annexation of Crimea, sanctions on Moscow and the dwindling economy of Cyprus, the relationship between Moscow and Nicosia has not relapsed. Cyprus having a vantage position located between the geographical fault line of Europe and Asia is seen as a critical country for both Western powers and Russia. Cyprus which is seen as a slow economy has shown its empathy to Russia and as a result, Russian economic czars see it as an important destination for wealth anchorage and protection.
The sanctions on Russia that included the oligarchs and media tycoons, whose accounts and transactions have been frozen, have been given hard choices to deal with. Within the European Union (EU), when sanctions were imposed on Moscow, there were differing voices within. Greece, Cyprus and Hungary were the EU members, who were not happy with the sanctions. It is because they understood that the sanctions would not only negatively impact Russia, but also the EU countries as their economies are closely interlinked. Moscow’s counter-sanctions on Europe have already started to show the effect on these countries’ already dwindling economies.
On sanctions, the EU itself has been hesitant, as Russia is the major exporter of energy to these countries. Greece and Cyprus, ho are already reeling under the constraints of a weak economy due to the stringent fiscal demands of the EU and have voiced out their opinion against the Russian sanctions, are caught in the crossfire between Russia and the US supported sanctions by the EU.
The Mediterranean region is one of the important strategic outposts for the US and Europe as NATO has its bases in some of the countries, such as Cyprus, Greece and Turkey. One of the eastern Mediterranean non-NATO countries, Syria is caught in the crossfire between pro and anti Assad forces including the Daesh. Russia, which has a naval base in Tartus, is looking for an additional base in the region apart from the existing one so that its strategic and economic interests in that region are not hampered due to consolidation of Daesh in the region which might not be conducive for Russia in the long run. In this regard, Cyprus fits the bill for Russia due to its strategic position.
Apart from the menace of ISIS on one side, Cyprus has its own problems due to the division of the island since 1974 and gradual weakening of economy. Adding to the issue is counter sanctions imposed by Russia as an answer to the US led sanctions, making the situation for Cyprus grim. The country is caught in this conundrum and wants to steer its way through Russia and the US to uplift its debt-ridden economy and to protect its strategic outpost in the region.
Strategic Location and Interest of the Influential Powers
The international system is witnessing a paradigm shift in the centre of power from the West to the East. With this geostrategic hub in the Mediterranean region, maintaining a pro-West alignment is crucial for the US and Europe to retain their influence in the world order.
Cyprus is situated in the northeast corner of the Mediterranean Sea. The island lies at the crossroads of Europe, Africa and Asia. It is on the sea lane of the maritime highway connecting the Mediterranean Sea through sea gates—the Suez Canal and Bab al-Mandab—with the Indian Ocean, leading to the Strait of Hormuz, the Persian Gulf, and the Strait of Malacca to the Pacific.1 The size of the country is small; however, its strategic location makes the country indispensable in the geopolitical matrix of the international system. It can be used as a base, both commercially and militarily, as it lies close to the busy shipping and air routes, linking Europe with West Asia and the Far East.
Cyprus, till its independence in 1960, was under the British rule and the latter was successful in acquiring two important military bases of Akrotiri and Dhekelia from Nicosia2. Its bases along with its mountains, specifically Mount Troodos, have played a crucial role as electronic ears of the western defence system for the whole of the Mediterranean since the Cold War period.3 With rich reservoirs of oil and gas and instability due to political, economical and cultural disagreements in the Near East region, Cyprus’ location is being used as an intelligence and logistics centre by the West. For the US and NATO, these bases form a link from Germany to Eastern Europe and help in launching military operations in West Asia.4
For Cyprus, its strategic position makes it important as well as vulnerable in the international system. Cyprus falls under the category of Small Island Developing States (SIDS), which is recognized by the United Nations as a distinct group of developing countries facing specific social, economic and environmental vulnerabilities.5 Since imperial times, the island has been under different rulers, such as the Greeks, Macedonians, Venetians, the Ottomans and the British. The complexities of colonization and the interference of external powers have left the island divided since 1974 and also susceptible to security threats. However, at the same time, it has been able to sustain itself as a significant country amongst the great powers due to its strategic position. It has evenly balanced itself between the powerful countries. It does not want to repeat its situation as a pawn of the great powers, as it was during the colonial and Cold War phase.
With the discovery of natural gas and offshore oil in Cyprus and Israel as well as potential discoveries in Greece and Lebanon, these countries have an opportunity to position the region as a global energy hub. Cyprus has the potential to be a major energy supplier to Europe and beyond.6 The discovery of oil and natural gas along with the capability to become a supplier to Europe and beyond also brings Cyprus and this region into the large geopolitical matrix with a potential to become a flashpoint of conflict between the West and the East, including part of Eurasia.
Russia’s Position and Interests
In this complicated web of geostrategic interests, Russia’s position is convoluted. It feels threatened by the West’s containment policies. Moscow’s interests – power to influence, export of arms and energy diplomacy – are a continuation of that of its predecessor, the Soviet Union. Similarly, there is a continuation of competition between Russia and the West, as it was between the USSR and the West.
Currently, the West, led by the US through NATO, is in a confrontational posture with Russia since Crimea was annexed by the Kremlin government under President Vladimir Putin’s leadership last year. Both the sides have upped their militarisation in the Russian neighbourhood, leading to a recent ‘nuclear threat’ by President Vladimir Putin if Crimea is forcefully united back to Ukraine by the West.7
Moscow has made it clear regarding its discomfort on the expansion of the NATO and the EU membership in its sphere of influence, the ‘near abroad’. It has always been insecure regarding the latter’s presence in its nearby regions, such as the Near East region. NATO has been trying to defend these ex-Soviet republics as part of its covert containment policy against Moscow. It would also protect the EU as these republics would act as first line of defence for NATO.
Russia is trying to protect its influence and interests from being dominated by the West. It seems, it is also trying to rectify the missed opportunities due to its miscalculations, depending on its relations with the West. The severe sanctions inflicted on Russia by the West have led it to some introspection with regard to the lost opportunities, such as with Cyprus.
Chart of the Russia-Cyprus Relationship
The erstwhile Soviet Union and Cyprus shared a good bilateral relation. The legacy is continued with Russia. In 2008, Russia and Cyprus signed a joint declaration aimed at enhancing bilateral cooperation. The document outlined both parties’ commitment to intensify dialogue—with Nicosia contributing to the understanding between Moscow and the EU, and Moscow backing the reunification of the island within the United Nations Security Council (UNSC) framework. In addition, both the countries agreed on addressing global threats and combating organised crimes and in 2010, they signed a key accord on abolishing double taxation.8 This abolition led to the inflow of cash in Cyprus from Russian businessmen, making it a fiscal haven for them. However, apart from money flowing out of dubious sources, a major part of it comes from genuine Russian investors, who have sought protection under the European laws in order to safeguard their investment. Most of Russia’s businessmen are wary to invest in their own country due to some shortcomings within the Russian economic system, such as lack of investor trust and confidence in its banking system, absence of independent judiciary, widespread corruption, unfavourable business climate and inadequate investor protection agreements.9 Also, there is heavy intervention of the Kremlin government, which discourages most of the businessmen. Cyprus makes an attractive destination with its business friendly atmosphere.
The trade volume between Russia and Cyprus depends upon export-import and tourism business. In 2013, the trade volume between the two countries stood at € 81.1 million.10 The investments from Cyprus to Russia in 2013 amounted to $22.7 billion, whereas investment from Russia to the Cyprus economy was $19 billion.11 Cyprus is interested in investing in the mining, metallurgy and agriculture sectors in Russia. Meanwhile, Nicosia entertains a large number of tourists from Moscow. Tourism represents 30 per cent of Cyprus’ revenue.12
Apart from export, investments and tourism, Russians have huge shares in Cyprus’ real estates and the banking sector. More than 25 per cent of bank deposits and about one-third of foreign investments come from Russia.13 When Cyprus was hit by the economic crisis, Russia loaned the country €2.5 billion in 2011, with a below-market rate of 4.5 per cent, which will mature in 2016.14 During a press conference in July 2012, former Cyprus President, Demetris Christofias said that the conditions offered by Russia for the loan were more favourable than the EU because it did not impose any conditions and offered a lower interest rate.15
In 2012, Cyprus asked for another €5 billion loan that Moscow denied, despite a lucrative offer by Cyprus, such as a stake in Cyprus’s offshore hydrocarbon deposits and an all weather port in the Mediterranean. The reasons behind Russia’s refusal were:
In 2013, the EU and Cyprus reached an agreement of € 13 billion loan, without Moscow’s assistance. The EU put across the condition of setting a 6.75 per cent one-off tax on savings between €20,000 and €100,000 and a 9.9 per cent slash on savings over €100,000, which belonged to the Russian businessmen.17 The euro zone troika (consisting of European Commission, European Central Bank and International Monetary Fund) sent clear signals that it did not want Russia to be the saviour of an EU member state, and German Chancellor Angela Merkel explicitly warned Cyprus against securing a side deal.18
The reason behind the souring of the relationship between Russia and the EU, apart from Moscow’s weapon of energy diplomacy, was the incident on March 2013 when the Russian government officials raided German NGOs along with other European organisations working on human rights related issues.19 Chancellor Merkel’s tough stand on tackling Russian oligarch’s money in Cyprus was assumed to have stemmed from this discontentment and the impending domestic elections in 2013. It would have been extremely difficult to convince German voters of the need for a tax-payers funded bailout of Cyprus, which would have ended up helping Russian oligarchs.20
Nevertheless, it seems that the Russian investors would benefit in the coming years. Under the final terms announced on July 2013 by the Central Bank of Cyprus, large depositors in the Bank of Cyprus would have 47.5 per cent of their money forcibly converted into shares, up from 37.5 per cent in an original plan. The lawyers representing clients with blocked money estimated that the Russians as a group would end up with roughly 60 per cent of the bank’s new shares.21 In 2013, six Russians were elected as shareholders in the Bank of Cyprus,22 reflecting Cyprus’ dependence on Russian oligarch’s money.
Cyprus’ Woes
The Ukrainian crisis and the counter-sanctions by Russia on the West have made things difficult for Cyprus’ debt ridden economy. Russia has banned Nicosia’s food exports, leading to major losses for the island. It is losing out in tourism business because of the sanctions on Russia. Nicosia entertains a large number of tourists from Moscow. Tourism represents 30 per cent of Cyprus’ revenue.23 The impact of Russian ban and the loss in the tourism business has led Cyprus and some countries, such as Greece and Hungary to voice their reservations against the EU sanctions on Moscow.
The weak economic conditions and the austerity regulations of the EU have led Cyprus to think of ways to ease the tensions between the West and Russia. The Cypriot President Nicos Anastasiades on February 2015 gave statements on Russia’s sincerity towards resolving the Ukrainian crisis and upholding of the Minsk Agreement.24 The appealing tone of the Cypriot President to the West was to resolve the issues between Russia and the West for the return of normal business. It is crucial for Cyprus to lift the ban on its exports by Russia as well as the return of Russian tourists and investments by the Russian businessmen in the island, so that they can overcome their debt.
Rationale and Strategies behind Russia and Cyprus Alliance
The stumbling economic downgrade and the belligerent relationship with the EU, the US and NATO, Russia, through its adroit diplomacy, is trying to rejuvenate the bilateral relations with countries, such as Cyprus and Greece, who have grievances against the EU.
On February 2015, a defence deal of leasing out the Limassol port to the Russian navy and the Paphos air base25 was signed between the two countries, upsetting the US. The Russian navy has been using the Cypriot ports since the erstwhile Soviet Union, maintaining close defence ties. However, the February deal is significant for the timing of the agreement. Moscow has a confrontational relationship with the West and by signing it, it shows President Putin’s power of breaking a united western front against Russia and proves its remnant power of influence over the European countries in that region. The deal did not strike a positive note with the West, in particular, the US because of the fear that Russia will use Cyprus to contain their power in the Mediterranean region.
The US and West’s antagonism with Cyprus regarding the February agreement is due to the location of the Limassol port and the Paphos air base. The port and the air base are situated in a position, which gives docking access to the Russian ships and aircrafts, commercial and military, near the British base of Akrotiri. The soured relationship between Russia and the West makes the docking of the Russian ships and aircrafts an unwelcomed move. It weakens the possibility of the accessibility power of the US and the West in that region at a time of unpredictable situation, where Moscow and America or the other western countries might be at loggerheads.
Russia, at present, has its naval facility at the Syrian port of Tartus, giving the Russian navy its only direct access to the Mediterranean. If Russia can access the Limassol port, then, it can expand its presence in the Far East region and, in future, it would help in having an expanded energy network. It needs access to warm water seas and oceans. In its foreign policy document of 2013 and also in its military doctrine, Russia has expressed its vision of expanding its presence in Eurasia. The maritime route stretching from the Atlantic Ocean to the Asia-Pacific Ocean is a warm water route. Russia, a landlocked country, has always been struggling with warm water access for its development. Cyprus’ strategic location as a warm water island will allow Russia to have vessels in eastern Mediterranean that will give close access to West Asia, specifically Syria, Egypt, and the Arabian Peninsula. It will also help Russia to move closer to the Suez Canal and Turkey, a NATO member.26
Secondly, it is to circumvent the West’s, especially NATO’s, tactics of encircling Moscow and weakening its influence in the global order. It feels that the West, especially the US, is trying to curb its influence, a feeling which is affirmed by the on-going Ukrainian crisis, NATO’s expansion and the contradicting positions that Russia and the West, especially the US, have in any global challenge, such as the Syrian crisis.27 Thirdly, Russia needs access to this region for its expansion of energy strategies. It has interests in the energy assets in Africa, and the energy deals in this region including north-central African countries, such as Sudan. In this energy matrix, the Cyprus route takes short time to reach West Asia and Africa from Russia or Europe.28 With its grand plans of regaining its position as an indispensable player in the international system, Cyprus is crucial in Russia’s grand strategy.
Meanwhile, Cyprus is reeling under severe economic debt and an EU bailout as well Russian loan. It cannot afford to antagonise either party due to the financial debt as well as the security threat it faces from Turkey over the island conflict. With Russia, it is important to maintain a strong relationship because Moscow supports the Greek-Cypriots in the UNSC regarding the division of the island. Also, the ISIS crisis looms large in its neighbourhood and Cyprus and Russia share similar feelings against Islamic extremism, seeing it as a threat to their security. Russia shares good relationship with the Syrian President Bashar al-Assad and his regime. It sees the regime as a bulwark in the region against Islamic fundamentalism.29
Cyprus has recently discovered offshore oil and gas. To explore it, it will need Russia’s expertise apart from other Western countries including the US to do the exploration and consultancy regarding it. Hence, maintaining an appeasing relationship with Russia is beneficial for Cyprus, without annoying the West.
Conclusion
The reinforcement of its relationship with the aggrieved EU members, such as Cyprus, helps Russia to maintain its position in the world order, while posing hindrance to the West’s, especially the US objectives in regional and global matters.
Cyprus, being a small island state, needs to maintain a balance between its relationship with Russia and the West. With the EU, the fiscal help is crucial for Nicosia from becoming a defaulting country. It also faces problems, such as becoming a tax haven, laundering of money and a transit point for migration to Europe, which brings added financial and security woes. Likewise, though currently Russia’s economy is weak, however, it has the capability to help the country in security and economic terms.
It is expected that if Nicosia’s energy markets become functional in the near future, trouble between the island and Russia might emerge, pushing Moscow to the side of Turkey, creating a dangerous scenario for Cyprus. How far the NATO would be able to protect the country will be questionable, given the strength of Russia and Turkey’s defence modernization. Turkey currently is not in an appeasing relationship with the West, because of the stalemate on the EU membership.
The EU might benefit from the energy dividends of Cyprus, but it will strengthen a strong adversarial nexus in its neighbourhood, Russia and Turkey axis, which would have influence in other parts of the region, crucial for the West.
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* The Authoress is Research Fellow at the Indian Council of World Affairs, New Delhi.
Endnotes:
1 James Leigh and Predrag Vukovic, “A Geopolitics of Cyprus”, Rubin Center, December 22, 2011. http://www.rubincenter.org/2011/12/a-geopolitics-of-cyprus/ (Accessed April 21, 2015).
2 The UK leases out these bases to the US and NATO.
4 Iason Athanasiadis, “US Seeks Major Military Base on United Cyprus”, Asia Times Online, April 10, 2004. http://www.atimes.com/atimes/Middle_East/FD10Ak04.html (Accessed April 21, 2015).
5 “About Small Developing Countries’, UN-OHRLLS. http://unohrlls.org/about-sids/ (Access April 28, 2015).
6 Anastasios Papapostolou, “The Current U.S. Interest in Cyprus: “Trust, but Verify”, Greek USA Reporter, July 30, 2014. http://usa.greekreporter.com/2014/07/30/usa-interest-in-cyprus-trust-but-verify/ (Accessed April 21, 2015).
7 John Hall, “Putin Threatens Nuclear War: Russian Leader will Take any Necessary Step to Drive Nato out of Baltics and Defend Crimea”, Daily Mail, April 2, 2015. http://www.dailymail.co.uk/news/article-3022793/Putin-threatens-nuclear-war-Russian-leader-necessary-step-drive-Nato-Baltics-defend-Crimea.html (Accessed April 21, 2015).
8 Igor Delanoe, “Cyprus, A Russian Foothold in the Changing Eastern Mediterranean”, Rubin Center, August 4, 2013. http://www.rubincenter.org/2013/08/cyprus-a-russia-foothold-in-the-changing-eastern-mediterranean/ (Accessed April 25, 2015).
10 “Cyprus-Russia Trade Relations”, Ministry of Energy, Commerce, Industry and Tourism, June 2014. http://www.mcit.gov.cy/mcit/trade/ts.nsf/All/8A346235DFDE026BC2257CE10045B2CD/$file/Cyprus-Russia%20Trade%20Relations%20(June%202014).pdf (Accessed April 30, 2015).
13 Luke Harding, “Russian Expat Invasion of Cyprus Also has Sinister Overtones”, The Guardian, January 26, 2012. http://www.theguardian.com/world/2012/jan/26/cyprus-russian-invasion (Accessed April 28, 2015).
14 Delanoe, “Cyprus, A Russian Foothold”, op.cit.
16 Roy, “Russia and the Geopolitics of”, op. cit.
19 Stanislav Kuvaldin, “Authorities Search NGOs for 'Foreign Agents'”, Russia beyond the Headlines, March 27, 2013. http://rbth.com/politics/2013/03/27/authorities_search_organizations_for_foreign_agents_24325.html (Accessed May 3, 2015).
20 Roy, “Russia and the Geopolitics”, op.cit.
27 During the Arab Spring, though Russia was not directly involved, but it was trying to expand its influence in the region by supporting dialogue as a medium of resolution amongst the conflicting parties. After the ousting of Muslim Brotherhood in Egypt by the military, it quickly extended its hand of friendship to the military government, which has led to a subtle weakening of the age old ties between Egypt and the US. Moscow, with its adroit diplomacy, has also strengthened its relationship with Turkey and Iran.
28 Ibid.
29 Indrani Talukdar, “Dissonance between Saudi Arabia and Russia”, Indian Council of World Affairs, February 25, 2015. http://www.icwa.in/pdfs/VP/2014/VPDissonance24022015.pdf (Accessed May 7, 2015).