Euro zone and Russia near debt compromise on Cyprus

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By Annika Breidthardt | January 29, 2013 2:00 AM EST

Europe and Russia are close to a deal on how to involve the latter in bailing out indebted Cyprus, which has close ties to Moscow, after Russian Prime Minister Dmitry Medvedev signalled willingness to help.

Medvedev was quoted as saying on Monday that Russia could provide support to Cyprus under certain conditions but the island itself and the European Union would have to take the biggest share in a potential bailout.

The help could come in the form of an extension to a 5-year 2.5 billion euro loan Moscow granted Nicosia in 2011.

Cyprus said earlier this month it had formally launched a request for a 5-year extension to repay that debt, a step that could take the immediate heat out of Nicosia's financial woes and that, according to a German government document, euro zone finance ministers support.

"We think the main burden to solve these problems should be taken on by Cyprus and the EU states," Medvedev told the German business daily Handelsblatt in an interview held on the sidelines of the World Economic Forum in Davos.

"But we are not refusing to help under certain conditions. The conditions must be agreed first. Before that, there can be no money from us," he added.

The Mediterranean island, waiting for a multi-billion euro bailout after heavy exposure to debt-crippled Greece, has had to contend with misgivings from lender states on how committed it is to fighting money laundering and why the island is a magnet for Russian money.

Cyprus offers the euro zone's lowest nominal corporate tax rate and has had close political ties with Russia for decades. Some politicians, especially in Germany, have accused Cyprus of being a hub for money laundering and a shadowy tax haven.

Cyprus, one of the smallest euro zone economies, applied for financial aid from the European Union and the International Monetary Fund in June last year after its banks were hurt by an EU-sanctioned writedown of Greek debt held by private investors.

While European Central Bank board member Joerg Asmussen told Reuters last week Cyprus could derail the euro zone despite its small size, others still have doubt that a default in the country, with gross domestic product of just 0.2 percent of the euro zone's output, could unsettle the bloc as a whole.

German Finance Minister Wolfgang Schaeuble is not yet convinced it can be seen as a systemic risk, which is a precondition for a bailout.

Preliminary estimates of a draft bailout deal put the bill at 10 billion euros for bank support. On that basis, its total bailout, including fiscal needs, could reach 17-17.5 billion euros, equivalent to the island's annual economic output.

In November, Der Spiegel magazine cited a German intelligence agency report as saying "Russian oligarchs, business people and mafiosi" would benefit most from any bailout and that Cyprus was a "gateway for money laundering in the EU".

(Additional reporting by Matthias Sobolewski and Reinhardt Becker; editing by Ron Askew)

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