The Cyprus solution is not logical. Groucho Marx noted: “Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly and applying the wrong remedies.” What the ‘troika’ has done to Cyprus is about politics, not finance or economics.

The BBC has a simple Q&A explainer on Cyprus. The basic situation is that the two largest banks are in trouble, the largest second largest, Laika, in the most serious trouble. The troubles were caused by a loss in assets as a result of a local real estate bubble, and, in the case of the largest bank Laika, the ‘solution’ that the ‘troika’ created for bailing out Greece. The Laika had a lot of Greek bonds whose value was cut in half.

OK, the government of Cyprus is struggling, like most governments around the world, from a loss of revenue due to current economic conditions. They were doing great before the Global Financial Collapse. As a result they don’t have the money to bail out the banks on their own in exchange for an ownership stake in the two banks, so they applied to the European Commission, European Central Bank, and the International Monetary Fund, the ‘troika’ for assistance.

As Robert Peston notes, the solution the ‘troika’ is imposing on Cyprus makes no sense if they are trying to stabilize the Euro. There are signs that the seizure of deposits is causing concern in Spain and Italy, and will certainly cause capital flight in Cyprus, which will bankrupt the other banks on the island that weren’t in trouble to begin with.

If you listen to the ‘troika” and Angela Merkel you might think that Cyprus is a tax haven like the Cayman Islands, and the big Russian depositors are all part of the Russian criminal class. A regular over at Naked Capitalism took the time to research the tax haven claim, and it just isn’t true. Russia isn’t upset about people having accounts in Cyprus, because Russia knows all about them due to a bilateral treaty with Cyprus.

Here’s reality – The ruble, the Russian currency, is not convertible. No one outside of Russia accepts rubles, so the Russian companies that buy and sell in Europe need accounts in European banks. For a lot of reasons they tended to choose banks in Cyprus. Frankly I just can’t imagine any Russian organization opening an account in a German bank, for historical reasons. Given the amount of natural gas that Europe buys from Russia, there is a lot of money involved, and a good deal of it passed through Cyprus, which would certainly annoy the Germans.

This ‘solution’ was clearly designed to take money from the Russian depositors. Next autumn Europeans may discover the cost of this action, because Russia could require payment in dollars and jack up the price for this insult. Vladimir Putin is not a forgiving person. [The irony of using ‘troika’, the Russian word for threesome or triple, isn’t lost on me.]