Salmon: Could Cyprus Go the Way of Ecuador?

NEW YORK ( Reuters Blogs ) -- A small country that has adopted a major global currency finds itself with massive debts and insolvent banks. Its only real hope is that it controls areas rich in hydrocarbons; the problem is that it has neither the wealth nor the expertise to exploit those hydrocarbons on its own. The result: It ends up essentially selling itself to an omnivorous global superpower that is interested only in access to resources rather than in domestic economic growth and prosperity.

This is the narrative which might well end up playing out in Cyprus. The local population is so unhappy with the euro that they're seriously looking to bitcoins as an alternative, despite the fact that there is no real bitcoin economy, and insofar as there is one, it's inherently deflationary. Much of the country's political, economic and religious elite is seriously talking about leaving the euro. If they decided to do that, Cyprus would probably become even more controlled by Russia than it is already -- especially given that Gazprom is by far the most obvious candidate when it comes to finding a partner that can exploit Cyprus' natural gas reserves.

If you want to see an example of what this story looks like in practice, just take a look at Ecuador, which adopted the dollar as its national currency back in 2000. Since then, it has had a brutal debt restructuring, causing most foreigners to give up on putting their money into the country. Predictably, China stepped into the vacuum and is now by far Ecuador's largest source of funds.

The latest development is that Ecuador is probably going to sell about three million hectares of pristine Amazonian rainforest -- that's about 12% of the total area of Ecuador -- to Chinese oil companies. Ecuador might not be drilling in Yasuni -- yet -- but this new parcel is right next door, and if the Chinese come in to drill for oil there, the effects on Yasuni can't possibly be positive.

Ecuador's indigenous population is up in arms , but is effectively powerless in the face of China's tsunami of cash. For its part, China has no real interest in Ecuadorean economic growth or the well-being of its people; it just wants to control Ecuador's natural resources, and is willing to pay many billions of dollars to do so.

If Cyprus once again restructures its debt and/or leaves the euro, could we end up in a world where Russia controls Cyprus to anywhere near the degree that China controls Ecuador? The answer to that has to be yes, given Russia's imperial ambitions and the degree to which Russia's wealth dwarfs anything in Cyprus right now. Cyprus has already announced that its harsh capital controls are going to be in place for at least a month ; realistically, they're likely to stay much longer than that. So long as they remain in place as the Cypriot economy suffers the deepest recession in the history of the eurozone, it's going to be very difficult to persuade Cypriot voters to accept the status quo.