For Russia, it’s a Permanent Naval Port in Cyprus, Stupid!

The eurozone crisis is back on the international agenda with a very serious crisis unfolding in Cyprus right now. Some Wall Street investors might argue just in time to pull the rising U.S. stock market indices — the Dow Jones hit an all-time high recently — down for a better entry point in order to chase yearly performance. Many of those supposed financial wizards missed the rally. What a pity!

Now “pundits” are once again discussing bailouts, debt in the banking sector, contagion, potential Euro break-up and a new term – a deposit levy. Does anyone of the U.S. analysts who calculated the odds of a potential “Grexit” think that Cyprus will break up the euro zone this time? Anyone? Even if Cyprus goes financially down like ancient Atlantis — but this time in the Mediterranean Sea — with a contribution of approximately 0.2 percent to the entire European output this is hardly economically life-threatening for the EU. Granted, it is different for some people in Cyprus. But keep in mind dear Cypriots and foreign investors, by putting your money into a known tax haven you benefited from lower taxes and especially higher interest rates. According to Bloomberg calculations, those depositors earned a return on savings of 24.2 percent over the past five years which is much higher than the 13 percent they would have earned by depositing the same $1000 into a German bank account. Thus, this is the right context to view the one-off deposit levy in; in particular, if your banking sector is insolvent which is different from illiquid. Remember, it is just like with stock trading – you not only reap the gains but also take the losses. We need to stop thinking that socializing losses is a prudent business model. It is simply bad business!

Let’s take a look at Cyprus by the numbers provided by Bloomberg Television: The bailout package is worth $13 billion while tiny Cyprus has a population of 1.1 million. The problem stems from the fact that a $23 billion economy of Cyprus — which is according to Bloomberg 5 percent of Apple — has an enormous banking sector of $164 billion in assets which translates to seven times its GDP. This is unsustainable in the long run. Moreover, the banking sector has deposits of $88 billion while an estimated 40 percent of those are held by foreigners. Most of those are Russian companies and individuals.

Stefan Kaiser in the German “Der Spiegel” made the following observation: “Ultimately, Cyprus will have to reinvent itself. Until the crisis hit, the financial and real estate sectors comprised a quarter of the country’s gross value add. Another quarter comes from tourism. Industry only comprises about 12 percent. Cyprus, it appears, tied its entire fate to its banks.” Please allow me to add that Cyprus now needs to pay the price from an economic point of view.

However, let’s take a look at the situation from a geostrategic point of view. This is where Russian interests and deposits along with a potential Russian financial rescue come into play. As Al-Arabiya reported following a Russian Interfax news agency report one hour ago, Russian warships coming from the Baltic Sea will dock in Beirut instead of Syria’s Tartous port. The latter is Moscow’s only naval facility in the Mediterranean where Russian ships are being refueled, which currently makes for a safety problem given the escalating and ongoing conflict in Syria. Thus, it would indeed be a great idea for Russia to pick up the Cypriot pieces cheaply in some kind of financial deal. What I mean by that is gaining access to a second permanent naval port in Cyprus and therefore in the Eastern Mediterranean Sea.

This is what Russia is really after. President Putin is too smart to just throw good money after bad for a simple bank bailout. He wants a return on investment – a great geostrategic win to annoy the U.S. — and it is not the natural gas deposits offshore he is after — at least per se. Media outlets like to report that the world’s biggest gas-producer Russian state-owned Gazprom had expressed interest in exploration rights to the so-called “Aphrodite” gas field offshore  in exchange for some kind of bailout. I do not doubt this. Many oil and gas companies on this planet would love to add this valuable natural gas deposit valued at approximately $100 billion to their asset portfolio. But I do not think that anyone in Russia seriously believed that the Cypriots were desperate enough to give it away for nothing given the tremendous potential in the future with major potential energy customers nearby such as Turkey with rising domestic energy needs due to population growth along with steep economic growth, or even Greece and ultimately the European Union. This is not a prospect Gazprom is very fond of.

So again, Russia is sly and the natural gas deal story is a red herring! Much easier to accomplish and take advantage of the situation in Cyprus while scoring a big geostrategic win is buying access to a naval facility in Cyprus. I can only hope that the U.S. and NATO are already on it. If not, hurry! Peter Apps describes in a Reuters article how China by acquiring port assets in the Mediterranean is not the only great power increasing its involvement in the area. At the same time, Russia is sending warships to positions off Syria. Correctly, he concludes that “the Mediterranean is no longer seen as the strategic backwater many believed it had become”. This fact also throws out the window the following assumption formulated by Nikolas Gvosdev, professor of national security studies at the United States Naval War College in Rhode Island, quoted in the Reuters article “that the Mediterranean would become a purely Western sphere of influence.” Peter Apps goes on in his article by stating that in 2011 Admiral Gary Roughead – at that time Chief of Naval Operations and the professional head of the U.S. Navy – allegedly told senior officers the U.S. needed to return to the Mediterranean.

Let’s hope somebody in the U.S. administration listened to his advice and let’s hope somebody is dealing right now with the above described, if you will, ” Trojan Horse Naval Port Access” scenario. If not, given the current news flowing out of Cyprus, you have the weekend to start thinking about it or, even better, use our diplomatic channels to deal with this potential “inconvenience”.