Russia to Play Hardball on Cyprus Loan: Pro
Plans to levy a tax on Cypriot bank deposits as part of a 10 billion euro ($13 billion) bailout by the European Union have clearly angered Russia.
President Vladimir Putin's condemnation of the proposal as "unfair, unprofessional and dangerous" highlights the depth of discontent given Russian businesses and individuals hold an estimated 30 billion euros in deposits in the island.
"We can safely assume that influential Russians are taking a hit given the outcry in Moscow," Alastair Newton, senior political analyst at Nomura told CNBC.
Much is at stake. From Moscow's perspective, the fact that it wasn't consulted by euro zone finance ministers is adding insult to injury. Russia-European Union relations are likely to take a hit. Now, the narrative is turning to whether Moscow will retaliate against Europe - and what form it will take.
Euro zone finance ministers were in favor of imposing a 15.6 percent levy on deposits of above 100,000 euros to help recapitalize Cyprus' financial sector while sparing depositors up to that level, Reuters reported on Monday. Such a move would hit foreign depositors hard but limit the fallout on domestic Cypriot savers.
The government of Cyprus is hoping to push the divisive tax on bank deposits through parliament on Tuesday in a bid to stave off a default. Should Cyprus vote to shift the burden towards larger unsecured depositors, hitting Russian money, some are speculating that Russia could hold back natural gas supplies from Europe in reaction.
"The decision to impose taxation and revise the formula in order to maintain parliamentary passage, thus enabling the Russians to pay the price, is fraught with risk," wrote David Kotok, chief investment officer of Cumberland Advisors in Sarasota, Florida on Monday.
"Does it (Russian retaliation) come in the form of higher energy prices? Does it come with taxation or imposition of fees on the electrical grid that runs through Eastern Europe? No one knows," he added.
An energy embargo by Russia is highly unlikely, argued Nomura's Newton. "Cutting off gas to the E.U. would be excessive overkill," he said.
A more likely outcome is that Cyprus will face an altogether tougher round of talks with Russia over renegotiating the terms of a 2.5 billion euro loan granted to the island in 2011, if Cypriot authorities vote in favor of a revised tax on bank deposits and impose more onerous terms on larger foreign holdings. Russian Finance Minister Anton Siluanov on Monday suggested Moscow may take that course of action.
"We had an agreement with our E.U. colleagues that we would take co-ordinated action," Siluanov said in a comments reported by the Financial Times on Monday. "Our role was to possibly relax the terms for (Cyprus) paying back its credit."
(Read More: Cyprus Just a 'Small Blip' for the Euro: Chartist)
Siluanov added: "As it turns out, the E.U. took action to levy a tax on deposits without consulting Russia, and for this reason we will further consider the issue of our participation from the point of view of restructuring the earlier loan."
Nomura's Newton said Russia "playing hardball" with Cyprus in the loan renegotiations is the obvious option. "They do have a legitimate interest as a state given their loan to Cyprus two years ago," he said. "[President Vladimir] Putin can hardly do nothing."