NEW YORK ( Reuters Blogs) -- Paul Murphy at FT Alphaville, watching Cypriot finance Minister Michael Sarris returning empty-handed from Moscow, says that "Medvedev and co could not have played a worse hand during this crisis -- and it's not immediately clear why". His point is that the most likely outcome right now -- he calls it "popping the red pill" -- is that big depositors at Laiki Bank (read: rich Russians) are likely to lose some 40% of their money. Since that will make Russia very unhappy, why is Russia doing nothing to prevent it?I don't pretend to understand Russian politics, but this move seems to me to be a classic high-risk, high-aggression play; think of Medvedev as a geopolitical hedge fund manager or poker player, and it begins to make a bit more sense.
Cyprus now has a binary choice: become a gimp state for Russian gangsta finance, or turn fully towards Europe, close down much of its shady banking sector and rebuild its economy on something more sustainable.Murphy says it's "obvious" which choice Cyprus should take. But it's probably much less obvious to Cyprus's parliament. As Paul Krugman blogs at The New York Times, Cyprus is very attached to its shady banking sector. And what exactly does Murphy have in mind when he talks about an economy based "on something more sustainable?" Natural gas? Well, given Cypriot national ties, it's easy to see which company has pole position in terms of getting that mandate: Gazprom. All of which is to say that there's a real possibility -- maybe not an outright probability, but certainly a good chance -- that Cyprus will end up taking the blue pill rather than the red pill, and becoming a Russian client state, either inside or outside the euro. After all, Cyprus is a Eurogroup client state right now, and has wound up in this sorry place as a result. If it pops the red pill, it will have essentially no autonomy for the foreseeable future in any case. It's also easy to imagine that Putin's Russia views its relations with the EU as something of a zero-sum game. Russia also has a more than 150-year obsession with acquiring influence, if not outright control, over warm-water ports in Southern Europe. Looked at that way, the loss of Cyprus from the EU to Russia would be a clear loss to the EU and a clear win for Russia. Which, in turn, might explain why Russia is doing absolutely nothing which might help the EU. It's making a risky and aggressive move to essentially seize Cyprus from the hands of Europe, and to gain an important geopolitical foothold in the eurozone. The downside to that move is that if Cyprus pops the red pill, then a lot of Russians, especially the ones with deposits at Laiki, could lose a lot of money. But even if that does happen, Russia will be waiting patiently (see this ekathimerini.com article) on the sidelines, with a lot of new money if needed, ready to snap up Cypriot assets at fire-sale prices. There's no doubt that the best outcome for Cyprus, and for the EU, would be for Russia to extend its help now, before Cyprus's banks reopen on Tuesday. But Russia doesn't want what's best for Cyprus, or for the EU: Russia wants what's best for Russia. And the way it's acting reminds me of nothing so much as a classic Wall Street bear raid, designed to drive down the price of something you want to be able to pick up very, very cheap. What's more, it might even work. -- Written by Felix Salmon in New York. Read more of Felix's blogs at Reuters.