The Republic of Cyprus, with its 840,000 people, has been in the Eurozone for less than five years. It and its banks burned through mountains of euros faster than anyone could count. Now they need a bailout whose magnitude balloons every time someone blinks.

The financial problems came to a head last year when the markets refused to go along with the country’s profligacy. So Cyprus went begging to Russia and got a €2.5 billion loan last November. Which quickly evaporated. In June, banks began to crater. Bailout time. €2.3 billion would be required for the two largest ones. The bailout Troika, the despised austerity gang from the EU, the ECB, and the IMF, took a gander at the stuff the banks called “assets.” Costs jumped to €6 billion, plus €4 billion for a government bailout. Then rumors seeped out that the banks alone would need €9 billion, for a total of €13 billion.

In early August, a hullaballoo arose when it was leaked that Central Bank Governor Panicos Demetriades had told lawmakers of an even greater fiasco. He’d been appointed only on May 2, and when he opened the closet doors of the banks, he discovered the real mess: €12 billion would be needed for the banks—70% of the country’s shrinking €17 billion economy! Plus whatever the government would need. A total of €16 billion perhaps. 94% of GDP.

But plot twist: his predecessor, Athanasios Orphanides, lashed out at him. He’d been in office from January 1, 2008, when Cyprus acceded to the Eurozone, to May 2, 2012. During that time, he was also on the Governing Council of the ECB. He’d overseen the whole debacle, had let it happen, had encouraged it. So he accused his successor of an awful sin, namely shining some light on the banks, thus “creating the impression that our debt is unsustainable.”

Orphanides grew into that milieu in the cradle of financial shenanigans and bailouts. With his ivy-league education and a Ph.D. in economics from MIT, he worked as Senior Adviser at the Fed’s Board of Governors. And when the financial crisis erupted in the US, he left the Fed to become Governor of the Central Bank of Cyprus—to start all over again.

So now, with budget cuts taking their toll, the economy is shrinking faster than expected, warned Finance Minister Vassos Shiarly. But the ongoing bailout negotiations with the Troika “are in advanced stages,” he said. So perhaps by October, they might agree on a bailout memorandum that would require the usual medicine of painful structural reforms in return for bailout billions

But Cyprus needs the moolah now. It’s already raiding internal accounts and slowing disbursements to keep the lights on. And there’s hope. Apparently, the Russian government just approved a €5 billion loan—but not out of the goodness of its heart.

In October 2010, Russian President Dmitry Medvedev went to Cyprus to scratch the backs of Russian expats and the Cypriot elite. Cypriot President Dimitris Christofias, a communist, and educated in Russia, was there also. Turns out, the first half of that year, tiny Cyprus had been the largest foreign investor in Russia, ahead of the Netherlands, Luxembourg, and Germany.

It wasn’t Cypriot money flowing into Russia. It was Russian money flowing back. Russian companies have long established their headquarters in Cyprus to benefit from its status as a tax haven, a trend that picked up when Cyprus acceded to the EU and then the Eurozone. According to the Russian Embassy in Cyprus, via Kathimerini:

In the last five years alone, the Russian economy has seen Cypriot investments of over $52 billion, of which $41.7 billion was invested in the 2007-10 period, or 2.7 times more than German investments in Russia in the same period.

At the same time, Russians are investing in Cyprus, among them businessman Dmitry Rybolovlev who bought a 10% stake in Bank of Cyprus, which is getting bailed out. And the offshore natural gas resources have attracted a slew of Russian companies [read…. Manna for Bankrupt Cyprus].

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