Yesterday evening the Cypriot Parliament took the only sensible decision at this stage which was nothing at all. I think this is a Mexican standoff where, unlike in a duel, the first to shoot is at a disadvantage. We had an anticipation of what was to be when the Cypriot finance minister resigned after a thorough consideration of his options: a) to be killed by an angry mod in the streets of Nicosia b) to be killed by a shot in the back of the neck by a professional assassin (or possibly in a more violent fashion) c) both d) none of the above. Later the parliament was roughly given the same choice and resigned from passing a law. If nothing is done, then Cyprus will have to leave the euro and will have no choice but to devaluate its currency. This outcome is harmful to both Russia and Germany, so Nicosia reckons they will have to move.
The outcome may be bad for Russia and Germany but not necessarily for Russians and Germans so the government in Cyprus is gambling heavily. Let’s start with Russia. The perception is that the holders of these deposits are mean tax evaders while, in fact, there are also a lot of companies doing it to lessen the fiscal burden, and some of that lessening could very well mean business is more competitive and adding jobs or less expensive products to Russians. After all, when a company pays taxes, it is either their shareholders, their employees or their customers paying, the organization cannot perform that act as such. But, the size and scope of these tax evasions is probably small when compared with the whole size of the economy and Russian population at large can live with the loss of a few billion in deposits of their distinguished citizens and companies. The calculation is, of course, impossible. Germans on the other end would benefit directly by not having to put the money to cover for the mess but also because Cyprus is a good opportunity to press other euro zone members into complying with public sector austerity or else. Cyprus is a small economy and German banks are not significantly exposed to it. It is cheap to let it fall. Of course the euro would depreciate in the short run, but are they not always complaining that the euro is expensive? Furthermore, and this is the real gain, it would struck fear into their partners who are always trying to find a way out of the rather loose corset Germany imposes upon them. Cyprus could be the example of what will happen to others if they don’t behave.
But bureaucrats and politicians think differently. Their goal is to stay in power so they help whoever they think will help them stay there. Of course neither Germany, nor Russia want to be the first to move because they would be in a disadvantage. But one of them will and it will probably be Germany as it is already feeling the pressure of their partners to sit back at the negotiation table. But the moment they do, we will know their bluff has been called.