MELISSA BLOCK, HOST:
Cyprus, the tiny Mediterranean island nation, is torn between two allies: Russia and the European Union, and the trouble is money. Cyprus needs a bailout that could come from the eurozone, perhaps after Cyprus' presidential election next month, but it's not a given. There are some concerns in the EU that bailing out the Cypriots will end up bailing out some Russian oligarchs. It seems they've been keeping money in Cypriot banks. Joanna Kakissis has our report.
UNIDENTIFIED WOMAN: We welcome you to the official opening ceremony of the 7th Cyprus-Russian Festival.
JOANNA KAKISSIS, BYLINE: Every summer, the Cypriot port city of Limassol co-hosts the Russian-Cyprus Festival, a bicultural program of dancing and singing. The Russians love Limassol. They own multimillion dollar beachfront homes here, as well as a newspaper and restaurants.
MAYOR ANDREAS CHRISTOU: (Foreign language spoken)
KAKISSIS: Limassol's mayor, Andreas Christou, even speaks Russian. Russia and Cyprus strengthened their business ties after the Soviet Union unraveled in 1991, says Costas Apostolides, an economist in the Cypriot capital, Nicosia.
COSTAS APOSTOLIDES: Many Russian companies took advantage of what was then offshore company status, which was very low taxation of 4 percent.
KAKISSIS: Today, there are hundreds of Russian companies in Cyprus, and Russians hold about a fifth of deposits in Cypriot banks. Dimitris Christofias, the Moscow-educated president of Cyprus and the only Communist leader in the European Union, even secured a loan from Russia when Cyprus first started having debt problems.
But then Christofias turned to the EU for up to $22 billion, mainly for the country's ailing banks. And all the Russian cash in Cyprus suddenly became a problem. Here's how German lawmaker Joachim Pores(ph) described Cyprus on German Public Radio this week.
JOACHIM PORES: (Through Translator) This a country whose business model is based upon economic crime, money laundering and tax evasion. With the best will in the world, that's simply not acceptable.
KAKISSIS: The Cypriots say they have attracted foreign investment for decades and that the money is legitimate. Former Finance Minister Michalis Sarris warns against vilifying depositors in Cypriot banks.
MICHALIS SARRIS: Penalizing depositors because you have some sort of theory of where they got their money doesn't seem to make sense to me. And even if there was some grounds to do it, one would also ask, where does that stop?
KAKISSIS: It could stop with Russians pulling their money out of Cypriot banks. And that would be a disaster, says Guntram Wolff, deputy director of the Bruegel Institute in Brussels.
GUNTRAM WOLFF: I mean, if Russia pulled out their deposits, the Cypriot banks would have a huge balance sheet problem, and of course, they would have to find other sources of financing.
KAKISSIS: As Cyprus waits for EU financing, their president, Christofias, has resisted austerity measures. But he's not running for re-election on February 17.
PRESIDENT DIMITRIS CHRISTOFIAS: (Foreign language spoken)
KAKISSIS: Polls say his replacement will likely be conservative lawmaker Nicos Anastasiades, whose campaign commercials portray him as a strong ally of the EU. Anastasiades promises to expedite the bailout but not at the risk of damaging business relations with the Russians. For NPR News, I'm Joanna Kakissis. Transcript provided by NPR, Copyright NPR.