LIMASSOL, Cyprus -- When European leaders engineered a harsh bailout deal for this tiny Mediterranean nation in March, they cheered the end of an economic model fueled by a flood of cash from Russia. Wealthy Russians with money in Cyprus's sickly banks lost billions.
But the Russians, though badly bruised, are now in a position to get something that has previously eluded even Moscow's most audacious oligarchs: control of a so-called systemic financial institution in the European Union.
"They wanted to throw out the Russians but in the end, they delivered our main bank to the Russians," said the Cypriot president, Nicos Anastasiades, in a June interview.
The March bailout hammered bank creditors and depositors in an early test of what has since become the official European Union policy of "bailing-in" banks. The policy is intended to force creditors and depositors to pay for a bank's mistakes and to spare taxpayers from picking up the entire bill.
The strategy, however, has generated unintended consequences in the case of Cyprus. The exercise was meant to banish what Germany and other northern European nations viewed as dirty Russian money from Cyprus's bloated banks. Instead, it has pulled Russia even deeper into Europe's financial system by giving its plutocrats majority ownership, at least on paper, of the Bank of Cyprus, the country's oldest, biggest and most important financial institution.
"Whoever controls the Bank of Cyprus controls the island," said Andreas Marangos, a Limassol lawyer whose clients include many Russians.
The biggest single chunk of shares -- around 18 percent -- is supposed to go to depositors who lost money in Cyprus's now-defunct Laiki Bank, but this stake is likely to be controlled by Cyprus's central bank. As a result of a forced conversion of Bank of Cyprus deposits into shares, however, a diverse and so far unorganized group of depositors, most of them Russians, will end up with a controlling stake.
Whether they want such a bank is another matter. Owning the Bank of Cyprus, which has been saddled with $11.7 billion in liabilities racked up by Laiki Bank, "is like owning cancer," said Irakli Bukhashvili, the head of a financial services company serving Russians here in Limassol, the business capital of Cyprus.
Despite its wobbly condition, the Bank of Cyprus still holds a uniquely influential position in the economic and political affairs of a sun-swept nation that sits on potentially large reserves of natural gas and straddles strategic fault lines between East and West.
President Anastasiades, in a June letter to the European Central Bank that pleaded for help to keep the Bank of Cyprus afloat, described it as a "mega-systemic bank" that, if it failed, could bring down the entire Cypriot economy. With 5,700 employees and around half of all the island's deposits, it dwarfs its rivals and reaches into every corner of the country through a vast network of branches, which now also includes the former offices of Laiki Bank.
Moscow, though furious over the billions lost by Russians in Cypriot banks, still sees Cyprus as a prize worth courting. The Russian government has pushed for access for its military aircraft to an air base in Paphos and for its warships to Cypriot ports.
When Cyprus first appealed for help from the so-called troika of international creditors -- the European Commission, the International Monetary Fund and the European Central Bank -- the main problem was Laiki, the country's second-biggest bank and one that was already effectively insolvent. Instead of just throwing Cyprus a financial lifeline, as it had done with Ireland after a banking crisis that led the government to guarantee all the banks, the troika demanded that Laiki and the Bank of Cyprus share the burden of any rescue deal.
Depositors with large accounts in Laiki Bank were initially left with just 100,000 euros each, about $130,000, and the rest of their money was confiscated as the bank shut down. Those with more than 100,000 euros in the Bank of Cyprus lost access to 90 percent of their cash, although they have since been promised future access to some of their frozen funds. But, under final terms announced on July 30 by the Central Bank of Cyprus, large depositors in the Bank of Cyprus will have 47.5 percent of their money forcibly converted into shares, up from 37.5 percent in an original plan.
Hardly anyone has yet received their share certificates. But, according to the nation's finance minister, Harris Georgiades, foreign depositors, mainly Russians, will ultimately hold a majority of the Bank of Cyprus's new voting shares. Lawyers representing clients with blocked money estimate that Russians as a group will end up with roughly 60 percent of the bank's new shares. Cypriot media reports estimate that 53 percent of the shares will be held by foreigners, primarily Russians, either directly or through law firms representing their interests.
Such an outcome, said Demetris Syllouris, a member of the Cypriot Parliament and president of the European Party, a once enthusiastic pro-Europe political group, is "exactly the opposite" of what European leaders, particularly Angela Merkel of Germany, wanted when they set out to cleanse Cyprus's banking system in March.
At that time, bailout-weary northern European countries wanted to not so much rescue the banking sector here as significantly shrink it, and end what they viewed as its reliance on suspect money from the former Soviet Union. A confidential report by the German foreign intelligence agency, known by its German initials as the B.N.D., painted the island as a haven for money-laundering. It is a picture that the government here has dismissed as grossly inaccurate, but one that has nonetheless helped shape perceptions of Cyprus's banking ills and also its cure.
These decisions initially caused outrage in Moscow, prompting angry protests from the Kremlin on behalf of Russians who lost money. But as the Russians' ownership shares have swelled, the Kremlin, which in March denounced the troika's approach as "unfair, unprofessional and dangerous," has stopped complaining, at least in public.
A spokesman for the monetary and economic affairs section of the European Commission, the union's Brussels-based executive arm, declined to comment on the prospect of Russians gaining control of Cyprus's principal bank.
The Central Bank of Cyprus, which is overseeing efforts to salvage the Bank of Cyprus and to work out its new ownership, said it could not "speculate" about whether Russians will control the bank in future. The new shareholders, it added, will meet to appoint a new board of directors on Sept. 9.
The bank's former shareholders, meanwhile, have been mostly wiped out. The biggest was a Russian tycoon, Dmitry Rybolovlev, who at one point owned a nearly 10 percent stake and, if he had substantial deposits in the bank, would be among the new shareholders. A spokesman for Mr. Rybolovlev declined to comment on his current position.
But most of the now largely worthless old shares are in the hands of Cypriots who bought them as a safe, blue-chip investment. Andreas Pittas, the chairman of drug manufacturer Medochemie, one of Cyprus's most successful companies, said he had over the years invested more than $9 million in what he considered "rock solid" Bank of Cyprus shares.
"This is all lost," he said, adding that he does not really care who now owns the bank so long as they can keep it afloat and avoid another crippling blow to Cyprus's already battered economy.
For months, however, the Bank of Cyprus has been caught in suspended animation. Theoretically, the bank is the property of its new, predominantly Russian shareholders. But in reality, it is still under the control of the Central Bank of Cyprus, whose governor, Panicos O. Demetriades, was appointed under the country's former Communist president and has often been at odds with its current leader, Mr. Anastasiades.
The central bank has named a new interim board for the Bank of Cyprus and also a new managing director. New shareholders were not consulted.
But there is some question as to whether the Russians have been stuck with a lemon. Though protected by restrictions that limit withdrawals to 300 euros a day, the bank is steadily leaking money as depositors, their confidence shattered, slowly drain their accounts.
The Bank of Cyprus is a "zombie bank," said Theodore Panayotou, director of the Cyprus International Institute of Management.
The central bank disputes this, asserting in a July statement that the Bank of Cyprus had been "fully recapitalized" thanks to the forced deposits-for-shares conversion and will now be able to "support the Cyprus economy."
Vangelis Georgiou, a Nicosia businessman whose company had millions deposited in the Bank of Cyprus, said depositors, having waited five months for clarity on the bank's exact ownership and future, have now mostly given up hope. Russian depositors, he said, now want to focus on building their own businesses, "not on saving the Bank of Cyprus." He added: "The game is lost."
All the same, Cypriot lawyers and accountants representing Russians with blocked money have scrambled to try to form a united front to the central bank, which they feel has paid little heed to their clients' concerns. "They want us to deliver the bank to them so they can assert their rights," said Michalis Moushouttas, one of several lawyers working to coordinate diverse Russian shareholders.
The Russians' main interest, he said, is to eventually get their blocked deposits back. But this means that they also have an interest in keeping their money in the Bank of Cyprus: yanking out what they can would only destroy a bank they now own, further hurting their chances of getting their money back. "They have no choice but to stay," Mr. Moushouttas said.
Michael Olympios, head of the Cyprus Investors Association, a lobbying group, said he did not see any serious risk in having Russians in control of the country's biggest, albeit gravely ill, bank. "We are not in the cold war anymore," he said.
"It is ironic," Mr. Olympios added. "The Germans tried to get rid of Russian money and they ended up with a shareholder structure stacked with Russian oligarchs."
Dimitris Bounias contributed reporting from Nicosia, and Andrew E. Kramer from Moscow.
This article originally appeared in The New York Times.