Russia Loses Out as Cyprus Reaches Deal

Michelle Caruso-Cabrera | CNBC

Cypriots line up at the ATM to withdraw their savings in the midst of the banking crisis in Nicosia, Cyprus.

The relationship between Cyprus and Russia will not be damaged as a result of a bailout deal Cyprus struck with its European partners, Cypriot finance minister Michael Sarris told CNBC, even though many Russian depositors will be hit hard by the agreement.

(Read More: Cyprus Clinches Last-Minute Deal to Secure Bailout)

"I think the Russians were understandably disappointed with this turn of events. They have had a long, successful and happy history and association and this has come partly as a shock despite the fact that many of these things had been rumored," Cyprus' finance minister, Michael Sarris, said early on Monday in Brussels.

The last-minute deal between Cyprus and its international lenders involves setting up a "good bank" and a "bad bank" and includes a levy on uninsured deposits over 100,000 euros ($130,000) at the second largest lender, the Popular Bank of Cyprus (Laiki) which is set to be wound down. Any deposits below 100,000 euros at the Popular Bank of Cyprus will be protected and moved to the Bank of Cyprus, the country's largest bank.

Meanwhile, Russian President Vladimir Putin has instructed his government to negotiate the restructuring of a pre-existing $3.2 billion Russian loan to Cyprus, according to his spokesman. Last week, Cyprus requested an extension to the loan and a reduction in its interest to 2.5 percent from 4.5 percent.

Reuters quoted Putin's spokesperson as saying the Russian President "considers it possible to support efforts... aimed at overcoming the crisis in the economy and banking system of this island state".

(Read More: Will the Cyprus Deal Take the Euro Far?)

Up to 40 percent of Cypriot bank deposits are estimated to belong to Russian businesses and individuals worth around $32 billion, according to Moody's ratings agency.

Sarris said some Russians were "disappointed" and "have said 'maybe we'll look somewhere elsewhere' [to put our money]" he told CNBC in Brussels.

But with an estimated 40,000 Russians living in Cyprus, Sarris was keen to stress relations between Russia and Cyprus were good.

"It's a mistake to think that it's a very special class of rich people [that have their money in Cyprus]. Russians have their lawyers, accountants or their families and friends in Cyprus, so our relationship can withstand a shock like this," he added.

Comments from Russia's prime minister, Dmitry Medvedev, suggested otherwise. "In my view, the stealing of what has already been stolen continues," Medvedev was quoted by news agencies as telling a meeting of government officials.

After Cyprus' parliament initially rejected Europe's bank deposit levy proposal, Sarris travelled to Moscow in the hope that the country could offer alternative financial assistance. After two days of talks, however, Sarris returned to Cyprus empty handed.

"Comparing deals [from Russia and Europe] is not easy. They have different dimensions and characteristics, circumstances change," Sarris said. "I think this [European deal] is a good deal, it addresses issues fundamentally and decisively."

Finance ministers leaving bailout talks in Brussels told CNBC that they did not want to second guess Russia's reaction. "I understand that the Russian government have a loan negotiated with Cyprus some years ago, and they're reducing the interest rate on that and possibly extending the maturity on that, so that seems to be satisfactory, "Irish finance minister Michael Noonan told CNBC on Monday in Brussels.

"They certainly didn't move to give financial assistance to their depositors, so I can't second guess about the Russian public opinion," Noonan said. Meanwhile, Koen Geens, Belgian finance minister, said he had "no idea" what Russia's reaction would be, "I've no idea, that's not in the agreement," he said.

One corporate dealer told CNBC, however, that he foresaw Russian pulling out of Cyprus altogether.

"I'm not sure how long those lawyers and accountants that Sarris mentioned are going to stay in Cyprus if they're getting their funds taken off them every five seconds," Torrie Callander, Senior Corporate Dealer at Global Reach Partners, told CNBC Europe's "Squawk Box."

Lothar Mentel, Chief Investment Officer at Paradigm Group, agreed: "Let's face it, Cyprus also depends a lot on that Russian money and if they're upsetting them a lot now, as they will, that money is at risk of going elsewhere," he told CNBC Europe's "Squawk Box."

Mentel added that the Russian government had seemed "indecisive" in their negotiations with Cyprus over financial aid. "You almost get the feeling that Russians themselves haven't got that much sympathy towards those Russia deposit holders, " he said.