Cyprus Shuts Banks Until Tuesday, Seeks Russia Aid

Michalis Sarris, the Cypriot minister of finance
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Michalis Sarris, the Cypriot minister of finance

Cypriot banks will remain closed at least until Tuesday as negotiations between the country and Russia over financial assistance continue in Moscow.

Cyprus banks have been closed since Saturday to prevent a run on accounts after terms of a bailout called for a tax on bank deposits in return for receiving a 10 billion euro bailout from its euro zone partners. The country rejected the bank-deposit tax proposal on Tuesday.

The so-called troika of the European Commission, European Central Bank and International Monetary Fund is also set rejected Cyprus's "plan B" which proposed raiding the country's pension funds and turning them into government bonds to raise money to secure a bailout.

Cypriot finance minister Michael Sarris, meanwhile, is in Moscow for talks with Russian officials. He told CNBC that the country hoped to get some support from Russia, saying "The discussions will last as long as it takes. We will be here until we get some agreement."

The talks sparked a rumor that Cyprus had struck a deal to sell its Popular Bank to Russian investors, but a government spokesman denied such a deal.

"The government denies reports that the Cyprus Popular Bank has been sold to foreign investors," Christos Stylianides told Reuters in a statement, giving no further comment.

"It would make sense for the Russian banking system perhaps to to go in and sort out the Cypriot banks, why not if such a large amount of the deposits are Russian anyway? It provides a nice way out for Cyprus while relieving Europe of the obligation to rescue Cyprus," Edmund Shing, European Index Strategist at S&P/Dow Jones Indices, told CNBC.

Ivan Tchakarov, chief economist at Renaissance Capital, told CNBC that the situation could allow Russia to become the "savior of Europe" as the relationship between Cyprus and its European Union peers grew increasingly acrimonious. The European Commission squarely placed the blame with Cyprus in a statement on Wednesday, saying an alternative solution, preferably without a levy on deposits below 100,000 euros would be acceptable. "The Cypriot authorities did not accept such an alternative scenario," the Commission said.

"This situation presents a fantastic opportunity for Russia and even President Putin to take moral high ground and to extend another loan to Cyprus and to become a savior of Europe," Tchakarov told CNBC in Moscow on Wednesday.

"From now on, Russia will play a pivotal part in negotiations, the mistake [to leave Russia out] before has been corrected for the moment," he said, adding that Russia had a vested interest in helping Cyprus too.

(Read More: How Russia Could Take Revenge Over Cyprus Deal)

Russia has already extended a $3.2 billion loan to Cyprus which the country has asked to extend and thirty to forty percent of Cypriot bank deposits are estimated to belong to Russian businesses and individuals.

"At the end of the day we're only talking about an additional seven to eight billion dollars of additional money that is needed to have a complete package for Cyprus, this is small change for Russia,"he added.

Russia's leaders President Vladmir Putin and Prime Minister Dimitry Medvedev condemned the European proposal to levy a 15.6 percent tax on deposits over 100,000 euros. Putin called the move "unfair, unprofessional and dangerous" and Medvedev said it was tantamount to the "confiscation" of people's money.

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

"You can understand why the Russians are very upset about that. Yesterday we had the Russian finance minister saying that we had been left in the dark [during negotiations] and we were not happy about it. Giving all the financial links between Russia and Cyprus, it seems strange that Russia was not brought in on the talks," he said.

Tchakarov said that $70 billion of Russian money would be exposed to the risk of capital controls in Cyprus should a bailout solution not be found. Helping the country was therefore a logical step for Russia.

Analysts and economists have told CNBC that Europe's proposed levy on Cypriot deposits was an indirect way of tackling what is seen as money laundering practices by Russians in Cyprus.

(Read More: Gartman on Cyprus: 'Don't Mess with Russian Mafia')

Shing that Europe had made a "major mistake" in targeting every Cypriot depositor, despite the charge of money laundering.

"They haven't proved any money laundering — get the proof first rather than saying all depositors are going to be treated as if they're guilty. It's as if they've been proven guilty before being given the chance to show themselves as being innocent," he told CNBC Europe's "Squawk Box."

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