Cyprus: the Mouse That Roared

The eastern Mediterranean, and particularly Cyprus, has been spring loaded for an international crisis for many months.  RUSI's European Futures Programme has been looking at the political dynamics that create this situation.  Many tense situations become spring loaded by their circumstances and no one can predict what, if anything, might set them off.  But in the politics of the eastern Mediterranean there are so many hefty mice at large that it is very likely at least one of them will run across the pressure plate.  The current Euro crisis between Nicosia, Brussels and Berlin might just be the one.

RUSI's work on this issue makes a number of things very clear.  Firstly, the crisis of the Euro is producing a more general crisis of governance across southern Europe.  The governments of Spain, Portugal and especially Greece are under great popular pressure and are being increasingly squeezed by the rise of both right and left wing extremist parties.  The relationship between crises of governance in Greece and Cyprus is likely to be especially contagious.  The financial ministers in Brussels seem strangely blind to the political effects of their bail-out terms, while the politicians in Berlin are fully aware of them, and have been determined to face them down as an example to the rest of the Euro zone. 

From Banking Crises to International Political Tensions

So far, so understood.  This crisis is not about money - Europe can easily find €10 billion  to bail out a country with a $23 billion GDP that contributes a mere 0.2% to the EU's collective GDP.  It is about the discipline and sustainability of the Euro zone and the fate of other southern states under pressure who must not be allowed to bring the whole house down in their indebtedness. Total bail-outs for Greece, Spain, Portugal and Ireland since 2008 have already totalled over €500 billion and this is hardly the end of the story. But while EU officials and German politicians hold the line on these issues, the tensions around Cyprus have increased greatly in recent months and have the potential to turn this banking crisis into a full scale international problem. 

Greek-Turkish relations are poor and worsening.  Northern Cyprus remains unrecognised by the European Union, and in turn, regards Cypriot accession to the EU in 2004 as illegal.   The city of Nicosia in itself is a dividing line between Greek and Turkish Cypriots, between the Euro zone and the outside world, between orthodox Christianity and European Islam. The bail-out deal this week, even when the details become clear, is estimated to reduce the Cypriot economy by at least a 15 per cent this year and at least 5 per cent next year, with corresponding levels of unemployment topping 25 per cent very quickly.  If Cyprus begins to burn politically as a result of this economic crisis, it is unlikely that Turkey will not feel compelled to insulate northern Cyprus from the fall-out by all means possible. More than that, Turkey may feel emboldened to press its claims on behalf of the Turkish Cypriots even harder. 

This may revolve around the gas and oil reserves in the waters around Cyprus, and particularly the extension of explorations off northern Cyprus. Of course, Turkey rejects the Cypriot government's claims to ownership of the hydrocarbons in these waters. In 2011 Turkish warships were deployed to halt offshore drilling operations and the government in Ankara threatens to bar any foreign companies exploring those waters from gaining any licenses in Turkey.  In truth, the amount of gas and oil in the whole Levant Basin, excluding Israeli waters, is not huge in relation to European supply or demand (about 125 billion cubic meters of gas and 1.75 billion barrels of oil[i]) but it might be significant for small countries in the region. Not least in significance is the fact that Cypriot hydrocarbon fields adjoin the Leviathan and Tamar fields in Israeli territorial waters, and both Syria and Lebanon have intriguing offshore possibilities that energy companies would like to explore.

Failing with Russian Alternatives

The Cypriot government has already tried, unsuccessfully, to barter with Russia over these hydrocarbon reserves for more help from Moscow in meeting the bailout terms, but negotiating with an asset they do not unambiguously own is a poor strategy. 

The Russians understand this and have not offered more than some revision on the €2.5 billion they have already lent to Cyprus.  As another of our European futures analyses reveals, Moscow is more annoyed and meddlesome over Cyprus than strategically calculating.  This may change as the crisis develops.  There is estimated to be around £22 billion of Russian oligarchs' money in Cypriot banks - far more than the €6 billion they needed to raise to trigger the ECB's €10 billion bail-out money - even if most of the oligarchs do their active banking in the Gulf.  But Russia has other reasons to make the most of the Cyprus crisis and be a player in the waters off northern Cyprus.

 Russia will almost certainly lose its access to the Tartus naval base in Syria sometime in the near future.  It may lose it before the Assad regime falls; it will certainly lose it once it does.  This may be little more than a strategic setback - the Russians don't use Tartus in any important strategic ways - but it will increase Moscow's incentive to look for compensating opportunities out of the Cyprus crisis.  Then too, the hydrocarbons in northern Cypriot waters may only be borderline as viable energy assets at present, but however cool Gazprom and Rosneft were in meeting the Cypriot delegation this week, Russia has a longer-term energy interest in keeping them off the market or possessing them itself while it depends so heavily on exporting Russian gas to its European customers. The Russians will have both a political and an economic interest to be players in northern Cypriot waters in the coming weeks.

A Spring-Loaded Crisis in the Eastern Mediterranean

Most importantly, any success the Cypriot government might have in using these disputed hydrocarbon assets,  it is a no win situation for Greek-Turkish relations. If Cyprus raises enough cash to trigger a bailout, without also starting a banking collapse, it will wreck its economic prospects for the foreseeable future and lapse into a state of private (oligarchical) affluence and public squalor.  If it does not, it may have to leave the Euro and will meet the same austere fate. 

A desperate Cyprus and an impoverished and angry Greece would not be good partners for Turkey at the best of times, let alone when hydrocarbon rights are at stake, alongside greater Russian presence in the eastern Mediterranean and the considerable ripple effects on Turkey of the meltdown the Arab spring is creating in the Levant.  The Syrian crisis has only just begun to have a powerful effect on all the neighbouring areas and this will likely include the territories, and the waters, of the eastern Mediterranean.

Most long term of all, this spring loaded crisis demonstrates the increasing dynamic that pits northern Europe against southern Europe.  'Cyprus', says Gideon Rachman in the Financial Times, 'is also a particularly clear cut example of the fundamental deficit of trust between north and south Europe.'  The fact of crises is that they often arise because leaders fail to see what is at stake in the early stages of a troubled situation. 

There is a real possibility that this divergence of views between Brussels and Berlin on the one hand and Nicosia, Athens and Ankara on the other will produce more severe effects than any politicians in these capitals had intended.  The mouse will have run over the pressure plate, and what still now looks like a financial crisis for the credibility of the Euro is in danger of turning into a full-fledged political crisis for the stability of the eastern Mediterranean.

 Note

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[1] The EU's annual gas consumption is in the order of 420 billion cubic meters, of which it produces around 150 billion cubic meters itself. The proven hydrocarbon reserves in this area could be worth as little as $2 billion on recent estimates.