Oil moves higher as EU debates Cyprus

Russia to the Rescue?

To Russia with love and cup held high. Cyprus goes to Russia to avoid a raid on bank deposits and one might wonder if this is what the EU and the IMF had in mind all the time. In what could be a high stakes game of political chicken, it is possible that perhaps the threat to raid Cypriot bank accounts was a ploy by the EU and the IMF to get Russia to pony up to protect what is in essence a Russian satellite bank.

Seeing that almost half of the €70 billion deposits in Cypriot banks are Russian and some of that from tax evaders and money laundering, perhaps the threat was a ploy to force Russia to clean up the mess that they helped create. The EU often at odds with Russia perhaps balked at being a backstop for Russian financial shenanigans. Cyprus's finance minister Michael Sarris claims progress but no deal in a last ditch effort for Russia to come to the rescue.

The EU is talking tough as German Chancellor Angela Merkel is still demanding a raid on bank accounts is the only way to solve the issue. It almost like she would be happy to allow Russia to take over the Cyrus banks completely.

There is also an energy component underlying this story other than the risk-on/risk-off component that could have significant ramifications across Europe. Cyprus may be offering up its energy resources to Russia in return for a bailout. Cyprus has been banking on an economic renaissance based on the fact that a major natural gas discovery that may be there or may not be. Noble Energy drilled a well that has at least 7 trillion cubic feet of reserves leading to predictions of even more gas as high as perhaps another 30 to 70 trillion Cubic feet. Russia of course may move to try to solidify its suddenly shaky natural gas monopoly over Europe.

One report from the Financial Post claims that Russian energy giant Gazprom has offered the Republic of Cyprus a plan in which the company will undertake the restructuring of the country's banks in exchange for exploration rights for natural gas in Cyprus' exclusive economic zone, local media reported. They are saying that the company submitted the proposal to the office of Cypriot President Nicos Anastasiades already.

The problem is that Cyprus has already sold a significant amount of those reserves to Turkey. It is possible that Gazprom is buying something that has already been sold. This game of chicken by the powers that be in the EU and the IMF by threatening to raid bank accounts has created a risk that may damage their longer term credibility. They may have also hurt relations with Russia that still can hurt them economically if they decide to cut off their gas supply in a tiff.

This brinksmanship will provide some cover for the doves in the Federal Reserve that are getting increasing criticism for its bound buying and QE program. Oil is up a tad as the EU seems to not to be in a real hurry to pull the plug on Cyprus. The EU did promise to provide liquidity based on the existing rules. This has provided a bit of support along with a supportive energy report from the American Petroleum Institute. 

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