Cyprus seeks Russian loan to cut its debt

Cyprus, the struggling eurozone nation, is negotiating with Russia over a multi-billion dollar loan to tide over the financial crisis of its debt-laden banks, the Russian news agency, Ria Novosti reported yesterday.

The island nation's finance minister Michalis Sarres, who is Moscow for a fresh round of talks told reporters that discussions were underway on the terms of financial aid from Russia in return for stakes in Cyprus' banks and offshore gas projects in the Mediterranean.

''We are, of course, seeking assistance but in a way that would make economic sense for Russia,'' Sarris said. ''A large number of conditions are emerging during the discussion, related to banks, natural gas and other assets, on which we could base cooperation with Russia.''

Both teams of negotiators comprising officials and bankers from Cyprus and Russia are working intensively on the terms of a deal, Sarris said.

It has been reported that Cyprus was not seeking a fresh loan from Russia, but the talks were on possible Russian investments in the banking and energy sectors of the debt-ridden nation.

"The banks are the ultimate objective in any support we get, so it'll either be a direct support to the banks or the support that we get through other sectors will be channelled to the banks, because this is our biggest challenge to recapitalise the banks," Sarris said.

Cyprus was also seeking a five-year extension of an existing €2.5-billion Russian loan, and a cut in interest rate.

The exigency for financial aid emerged following the Cypriot parliament's rejection of a tax on bank accounts Tuesday. The levy was set as a condition by the European Union and the International Monetary Fund for providing a €10-billion bailout for the indebted nation. (See: Markets cheer as Cyprus rejects levy on bank deposits)

The bailout conditions demanded Cyprus to chip in around €7.5 billion and the levy on bank accounts was intended to make part of that by raising approximately €5.8 billion. Overall, Cyprus needs about €17 billion to shore up its financial turmoil.

The tax proposal caused widespread panic and anger among Cypriots and foreign account holders in the country's banks.

Russian President Vladimir Putin was furious over the European Union's proposal to tax bank deposits to bail out the banking system in Cyprus, saying it was specifically designed to extract money from Russian depositors who are estimated to hold at least a quarter of the deposits in the Mediterranean island's banks.

It is believed that Russians hold €15 billion or over 55 per cent of the total €27 billion deposits in Cyprus' banks.

EU, particularly Germany, is concerned about Cyprus' reliance on Russian money, while Russia blamed the EU for destroying the economy of the island nation for its gain.

Observers believe that Russia is keen to provide the financial aid to the island nation in return for gaining access to its offshore energy resources and even securing a naval base in the Mediterranean.