ECB intervenes in Cyprus

On the 24^th of March the European Central Bank (ECB) intervened to restrict all business of RCB Bank and oversee the transfer of its assets to the competing Hellenic Bank. Founded in 1995 as the Russian Commercial Bank in Limassol, the RCB has been a focal point for dealings between east and west. While during the cold war the world was divided in a communist and free part, there were many exchanges between blocs. Cyprus played a particularly important role in transactions between the Soviet Union and countries in the Middle East. Through the years the Russia-Cyprus relationship continued until the recent sanctions on Russia following their invasion of Ukraine.

On the 30^th of March, ECB chief Lagarde personally flew to Nicosia to oversee the operation. During the visit she made time to give a speech for the Central Bank of Cyprus. Christine Lagarde made a sobering speech about the economic effects of the Ukrainian war and the associated sanctions. While readers are probably aware of the importance of Russian oil and gas exports, Russia and Ukraine together also account for 30% of global wheat exports. Belarus and Russia produce a third of the world’s potash, a vital ingredient for fertilizer. Europeans will therefore be faced with higher food prices while the situation for food importing countries in Africa will be downright tragic. In the meantime industries will face shortages of Russian palladium and Ukrainian neon gas (vital to semiconductors).

While Cyprus is losing its role as Russia’s gateway to Europe it remains dependent on tourism. The sector is already hit hard by the pandemic and Cyprus looks especially vulnerable as in 2021 27% of its tourists were Russian. Over the last years many Russians apparently fell in love with the scenery and applied for a Cypriot (and therefore EU) passport. These so-called ‘ golden passports’ could be acquired through a Citizenship by Investment scheme. In such an arrangement a foreign national has to invest €300,000 in Cyprus to become a citizen. Cyprus ended this scheme in 2020, Bulgaria is drafting a law to end it while in Malta it remains an option. A vote in the European parliament to end the practice was unsurprisingly opposed by the Maltese delegation. Perhaps more surprising is the fact that the Identity and Democracy group, including French presidential candidate Marine le Pen’s Rassemblement national, mostly abstained or voted against. Could it be Le Pen is afraid to offend Vladimir Putin, a man to whom Le Pen owes much? It is unlikely to make her more popular at this crucial moment.

The only good news Lagarde could offer for Cyprus was that financing for its infrastructure is underway: the Next Generation EU facility, the ECBs 750 billion fund, could be used to finance the green transition. Apparently, the financing of a new Liquefied Natural Gas (LNG) import terminal near the Vasilikos Power Station is great for the environment. First, the fossil fuel is extracted by an authoritarian regime, then it is converted into LNG, then transported by ships run on clean oil, to then finally be unliquefied.

The ECB is no longer limited to carrying out monetary policy in the interest of price stability. It is de facto carrying out economic policy at a scale larger than France and Germany combined, without the pesky hassles of parliaments, elections or a critical press corps. Be that as it may, the ECB carried out its Cyprian operation successfully and has plugged another leak in the European financial system. Although one can dispute the ECB’s authority, in this case we should at least approve of its competence.