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How Russia Could Take Revenge Over Cyprus Deal

Frans Lemmens | The Image Bank | Getty Images

Germany might be telling the world not to blame it for Cyprus' bailout plan, but one analyst told CNBC that Russia could avenge the loss of billions of dollars it has invested and deposited on the island by cutting Germany's energy supply.

As the Cypriot parliament prepares to vote on a controversial and unprecedented proposal to levy a tax on bank accounts held on the island, the deal has been described as a covert move by Germany and its euro zone partners to tackle what they perceive as Russian money laundering in Cyprus.

Twenty percent of total deposits of the Cypriot banking system are held by Russians and many Russian businesses are registered in Cyprus, making any plan to levy a 15.6 percent tax on deposits over 100,000 a moot point for Russia. The country has also given Cyprus a $3.3 billion loan that Cyprus wishes to extend.

(Read More: 'Unfair, Dangerous' Cyprus Deal Whacks Rich Russians)

Russia's leaders have already condemned the European bank levy proposal, with President Vladimir Putin calling it "unfair, unprofessional and dangerous" on Monday. On Tuesday, Russian Prime Minister Dimitry Medvedev added to the growing Russian frustration over the move. "Quite strange and controversial decisions [are] being made by some EU member states. I mean Cyprus. Frankly speaking, this looks like the confiscation of other people's money," Medvedev said on Monday.

(Read More: Will Cyprus Derail Draghi's Good Work?)

Steve Keen, professor of Economics & Finance at the University of Western Sydney, told CNBC that Russia could retaliate against the perceived proxy attack on its citizens, and their money.

"If you try to target the Russians, and there's President Putin acting under the image of the 'strong man' of Russia, why would he not then decide to shut down gas supplies to Germany until that was righted?

"If you're going to attack money laundering then attack it directly, don't make Cypriot peasants and small businessmen collateral in your campaign against Russian oligarchs. Declare the campaign rather than doing it under the carpet like this too," he added.

"Russia has been willing to play that card before," Keen said, alluding to when Russia's largest state-owned gas and oil supplier Gazprom reduced gas supplies to Europe in 2009 during a dispute with an Ukrainian energy company.

With 36 percent of Europe relying on Russia for its gas supply, the threat or act of limiting supplies gives Russia a powerful card to play should it wish to push home a political point against Germany.

However, that's a highly unlikely scenario, according to Seth Kleinman, head of energy strategy at Citigroup's global commodities research team in London. "It has kind of happened in the past … you have seen Russia cut flows of gas to Europe," but not lately, and not now, Kleinman said.

"It is an explosive political situation," Nick Spiro, head of Spiro Sovereign Strategy, told CNBC. "This is a rubicon which should have never been crossed...This bailout agreement has Germany's political fingerprints all over it," Spiro told CNBC Europe's "Squawk Box."

"If Germany's aim was that the larger deposit holders, the Russian ones, were going to bear the brunt of this, then obviously it's backfired," he added.

Steve Keen told CNBC that the proposal was tantamount to "blowing the brains out of capitalism" and such a proposal would destroy the euro and the idea of a monetary system.

"It's mind-boggling that German bureaucrats and politicians can think that this is a sensible way to share the pain," Keen said. "If you destroy the trust that depositors have in their bank accounts, you fundamentally destroy the oil of capitalism."

"This is an absurd decision which has to be blocked somehow. If the Russians block it or the Cypriots block, somebody has to block it," he said, ahead of a crucial debate in the Cypriot parliament over whether to ratify the plan.

Approving the plan is central to Cyprus receiving a 10 billion euro bailout from the European Union and International Monetary Fund (IMF) but as yet, the outcome of the vote is uncertain.

The Cypriot President Nicos Anastasiades reportedly told German Chancellor Angela Merkel and the European Union's economics affairs commissioner Olli Rehn on Monday that he would stand by what was agreed at a euro zone finance ministers' meeting last week but "insisted that EU partners offer some additional help," a state spokesman, Christos Stylianides, told state radio on Tuesday.

(Read More: Cyprus President Is a 'Fool:' Gartman)

Stylianides added that President Anastasiades is also likely to talk to the Russian President, Vladimir Putin, on Tuesday.

Against a backdrop of protests in Cyprus and sharp declines in global equity markets on Monday, the German finance minister attempted to deflect blame from his country, saying the solution had not been a German idea and that he was open to it being changed.

"The levy on deposits below 100,000 euros was not the creation of the German government," Wolfgang Schuble told reporters in Berlin on Monday. "If one reached another solution we would not have the slightest problem," he added. On Tuesday, however, Schuble said that Germany pressed for a "bail-in" of Cypriot depositors to protect European taxpayers.

-By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt

Contact Europe: Economy

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