In the early hours of the morning in Europe, the Eurozone and the IMF announced a $10 billion bailout for Eurozone member Cyprus, whose economy is tied closely to Greece's, and who was in a similarly dire state. The details are here.

A key angle here is the Russian angle.

You may remember that along the way during the crisis, Cyprus has sought aid from Russia, which was unusual. Well the reason for that is that (Island of) Cyprus is a place where Russians are believed to do a lot of money laundering, which involves parking cash in Cypriot banks.

What's stunning about Saturday's bailout is that depositors with over 100K euros in a Cypriot bank will see a 10 percent tax instantly before banks reopen on Tuesday.

That will infuriate domestic savers, and it will mean that a lot of Russian oligarchs/mobsters/money launderers/etc. will take big hits.

This is by design. As C4 economics editor Faisal Islam notes:

Sony Kapoor of the think tank ReDefine Europe has this grim take:

The pseudonymous @pawelmorski has more in a brilliant post titled Cyprus: A Brutal Lesson in RealPolitik, which concludes that ultimately it's not that bad for Russians. It's basically a one-off 10 percent tax on the money-laundering business, and that actually there's also a smaller tax on account holders with less than 100K EUR, which means it's not just rich Russians taking the burden.

And the Russians? The reason small depositors have been hit is that the losses inflicted would be much bigger if a) only large deposits b) only non-EU deposits were haircut. The data on Cyprus deposits is here (MUMs = Monetary Union Members). I would guess the thinking is that 10 percent is seen as a cost of doing business when it comes to money laundering, but 30 percent would probably finish Cypriot banking for good. If the infliction of losses on small depositors has a purpose, it’s probably to reassure the Russians that they are not being discriminated against. Yes, I may have thrown up a little in my mouth typing that. *

So: senior bondholders and Russians helped at the cost of smaller locals. There’s more logic here than there appears at first glance — the primary aim of this programme is to hold the European banking sector together whilst having a vaguely realistic programme, not placing another huge bill on the core/Germany not ending the viability of Cyprus as an offshore banking sector. My own judgement is that inflicting costs on depositors in principle is an extremely important one, but that not sparing the small depositor is worse than a cruel piece of realpolitik — it is in fact a mistake.

For Pawelmorski's full post, see here >