The Pax Americana continues to disintegrate, and the crack-up continues to circle around the “Great Crossroads,” the junction of Asia, Europe, and Africa where everything affects everything else. The latest chapter in the saga features Cyprus, where a stand-off between the EU and German voters has closed banks and ATMs to Cypriots, who would like to withdraw their cash before it is subjected to a 6.75% or 9.9% confiscation. The Cypriot parliament voted on Tuesday against accepting the EU/IMF deal to restructure the nation’s debt.
The issues are (a) that Cyprus needs a bailout (due to catastrophic bank losses through financial exposure in the Greece bailout); (b) the German taxpayer is not enamored of paying for yet another bailout for an EU basket case; and (c) much of the money in Cypriot banks belongs to Russian depositors, who are (justifiably) suspected of preferring the Cypriot banking set-up because it’s easy to launder money there. Why, Germans ask themselves, should their hard-earned money go to maintaining the cushy berth enjoyed by so many Russian fat-cats? Why shouldn’t the Russian depositors – and the Cypriots themselves – have to pony up some of the bailout cash?
Getting Cyprus to kick in 5.8 billion euros is the proposal on the EU/IMF table for dealing with the current crisis – the proposal that closed bank doors in Cyprus when the confiscation measure was floated. Under that proposal, Germany would be responsible for nearly 40% of the 10 billion euros to be provided by the EU in the bailout. Angela Merkel’s bailout policies have been losing favor with the voters, and the Christian Democratic Union sees itself in real political trouble with a federal election looming in September. The ultimatum to Cyprus is as much about German domestic politics as it is about anything else.
But the EU doesn’t operate in a vacuum, and it appears Russia is upping the ante, with Gazprom reportedly offering to bail Cyprus out – restructure Cypriot banks – in exchange for comprehensive natural gas concessions from Nicosia. You could see that one coming from miles away. The chatter today is all about whether Cyprus will give the Russians a naval base in the Mediterranean (probably), and whether Russia might go thermonuclear on Germany and cut off natural gas supplies (probably not).
There are basically two potential outcomes for this crisis. In one, the EU decides that preserving a semblance of unity, and fending off a Russian intervention in Cyprus, are more important than structuring a financially responsible bailout for Cyprus. Smoke and mirrors will be used to keep Cyprus going for a while, without bringing down the Merkel government in Germany. Perhaps a relatively responsible bailout approach would significantly reduce Germany’s contribution, with the other EU members in effect paying a premium to keep the Union together.
In the other outcome, Cyprus obtains more help from Russia – like the injection of Russian cash in 2012 – and avoids the need to meet the requirements of an EU-brokered bailout, at least for now. This outcome obviously makes it more likely that Russia will end up in a position to restructure Cyprus’s banks and take over her gas industry. As long as there is no moment of financial reckoning for Cyprus within the EU, little light will be shed on quiet Russian moves toward that end.
It’s an interesting question why Cyprus’s problems had to come to this pass. Cypriot banks were highly vulnerable in the Greek financial meltdown, but Cyprus has huge offshore gas reserves. It may ultimately be fatal to Cyprus’s place in the EU that it has been taking so long to get exploitation of them underway.
Delays in exploiting Cyprus’s energy resources have caused the process to basically grind to a halt. Houston-based Noble Energy has the exploration contract for Block 12 of Cyprus’s Aphrodite field, with a lease that expires in October 2013. Noble drilled a first well in late 2011, announcing major exploitable reserves at the time. Noble is also the principal in exploiting Israel’s offshore gas, and has been moving along smartly in that process. But the company has announced two lengthy delays in its dealings with Cypriot gas, and in February 2013 told Cypriot officials that it had no timeline for the next step of drilling a second exploratory well.
Will Cyprus have to wait until October 2013 and bring in another company to get some movement on Block 12? It’s a good question. Italy’s ENI and South Korea’s KOGAS obtained licenses in January 2013 to drill in other blocks, and two Israeli firms bought stakes in February in Noble’s drilling contract. France’s Total signed on to drill in two additional blocks. Interest remains, but things aren’t moving quickly.
If Cyprus is too small a nation to get things kick-started herself (or is simply moving too slowly), it is a serious question why the EU doesn’t weigh in – or at least some from among its member governments. Cyprus’s best hope of climbing out of her financial hole is to get her gas on the market. Gas revenues are far preferable to EU-brokered bailouts, and a solvent Cyprus is one that will neither drain the German wallet nor invite Russia into the Eastern Med.
It’s not as though European governments have been shy about weighing in with private companies and each other on matters of energy policy. And as Sarah Palin has pointed out, companies sometimes have to be pushed by governments to go ahead and exploit oil and gas from leases they are simply holding onto, waiting for exploitation to be more profitable. I suspect Noble’s lackadaisical pace is due largely to the fall in global gas prices, which would make it less profitable to bring up Cypriot gas right now. Noble hasn’t slowed down in the pursuit of the Israeli gas next door, but Israeli gas isn’t imperiled, as Cyprus’s is, by threats from Turkey, and Israel isn’t insolvent or facing a financial crisis. In a down market, the relative factors favor Israel.
These factors aren’t things no one has the power to do anything about, however. They are exactly the sort of disadvantage that the interest of friendly nations can mitigate. What is the EU for, if not to help Cyprus help herself? Ensuring the security of offshore drilling in the face of Turkish intimidation, and forcing drillers to drill or sell their leases to someone else, are exactly the kinds of things small nations can’t always do, but big nations and alliances can. If the EU, or at least a consortium of some of its members, had a vision here, what it would be doing is, precisely, helping to move the Cypriot gas industry along as a key element of a “bailout” restructuring.
The dream of a world in which such things aren’t necessary could only thrive in the context of the Pax Americana. During the Pax, it wasn’t necessary to the general peace that the issue of divided Cyprus be resolved. Without the Pax, however, it is on just such issues that nations will have to bring national power to bear.
Cyprus is in a tough spot, her economic and political viability dependent on the patronage of larger powers. Her situation has been allowed to languish unresolved for nearly 40 years; the cost of propping her up is the price of that policy. Both Turkey and Russia want to be able to use Cypriot territory for their own purposes. The EU can act like an alliance and protect and support the Republic of Cyprus, or it can see Cyprus effectively ceded to Ankara or Moscow. What it cannot do now is treat Cyprus like a pain in the neck and assume that nothing else will change.
Politicians throughout the developed world have had the luxury for too long of triangulating against the existing order, as if it is a permanent fixture that will survive no matter how it is resented or undermined. In fact, all forms of order, whether good or bad, are maintained only through keeping a steady strain on the lines in choppy seas. Russia and Turkey already know what they want out of Cyprus – and it’s not what the European powers have historically wanted. If the EU doesn’t want to see its geopolitical reality altered out from under it, now is the time to begin acting like statesmen rather than hall monitors.