News: Yesterday, Cypriot officials headed by Finance Minister Michael Sarris held meetings with the Russian Ministry of Finance and First Deputy Prime Minister Igor Shuvalov. Official comments on the talks were limited to Sariss's remarks that they were "constructive and honest". The talks are to continue today.

Meanwhile, Prime Minister Dmitry Medvedev has criticised the troika's handling of the Cyprus crisis, saying that the EU and the Cyprus government acted "like an elephant in a China shop", calling the proposed measures a "confiscation, unprecedented in its character" and drawing parallels with decisions made by the Soviet authorities in 1991. He called for ownership rights to be respected. Medvedev also criticised the decision to shut the whole banking system, not just the withdrawal from troubled banks. Moreover, he warned that the double-taxation treaty with Cyprus might be annulled. Cypriot banks are to remain closed until next Tuesday.

Our View: The situation is fluid and we would not presume to call the most likely outcome (of which there are a multitude of possibilities). Yesterday's comments by the Russian authorities can be seen as expressing significant frustration at the actions of the troika and the Cypriot government, and a clear reluctance to assume the burden of stabilising the Cypriot banking system given that depositors' trust has been undermined by the deposit levy announcement. Also, it was made clear that a blanket punishment on the depositors of all banks, including those which are solvent, is an unfair and unacceptable course of action. Hence, any constructive outcome needs to encompass a more differentiated approach by the Cypriot authorities.

Moscow talks aside, the key development today is the ECB Governing Council meeting, at which the matter of maintaining the Emergency Liquidity Assistance (ELA) for Cypriot banks likely will be evaluated by the ECB. It goes without saying that halting the ELA would dramatically narrow the Cypriot government's choices.

Source: bne