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### Viewing cable 08REYKJAVIK256, Iceland's Financial Crisis: The Russia Angle

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
08REYKJAVIK256 | 2008-11-03 16:51 | 2011-01-13 05:37 | CONFIDENTIAL | Embassy Reykjavik

`

    VZCZCXRO1934
    OO RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
    DE RUEHRK #0256/01 3081651
    ZNY CCCCC ZZH
    O 031651Z NOV 08
    FM AMEMBASSY REYKJAVIK
    TO RUEHC/SECSTATE WASHDC IMMEDIATE 3871
    RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
    INFO RUEHMO/AMEMBASSY MOSCOW IMMEDIATE 0042
    RHEHNSC/NSC WASHDC
    RUEAIIA/CIA WASHDC
    RUEKDIA/DIA WASHDC
    RUEHZL/EUROPEAN POLITICAL COLLECTIVE

` `

    C O N F I D E N T I A L SECTION 01 OF 02 REYKJAVIK 000256

    SIPDIS

    STATE FOR EUR/FO A/S FRIED

    E.O. 12958: DECL: 11/03/2018
    TAGS: PREL EFIN ECON PGOV RS IC
    SUBJECT:   Iceland's Financial Crisis:  The Russia Angle

    Classified by:  Ambassador Carol van Voorst for reasons 1.4 (b) and
    (d).

    ¶1. (C)  The announcement by Iceland's Central Bank on October 7 that
    Russia would provide a USD 5.4 billion loan created an international
    stir, unleashing a wave of speculation as to who had approached
    Russia, why and when the contact was made, and what the Russians
    could be contemplating as the quid pro quo.  The who and when
    questions seemed to have been put to rest by Prime Minister Geir
    Haarde's comment last week that he had discussed assistance with the
    Russians in August "on his own initiative."  As for the quid,
    everything from landing, refueling, maintenance or other rights at
    the former U.S. base at Keflavik, to advantageous exploration and
    exploitation rights in potential gas and petroleum fields under
    Icelandic waters, has been suggested.

    ¶2. (C)  Following the announcement, a team of Central Bank and other
    financial experts traveled to Moscow October 14-15 for talks.  They
    did not return with a deal, but did hold open the possibility of
    further talks.  Although we have been told there have been telephone
    and e-mail contacts, there have been no subsequent meetings.   In the
    meantime, Russian government comments to the press have been getting
    progressively bleaker, hinting at doubts concerning Iceland's
    creditworthiness.   There has also been casual talk that Iceland's
    failure to gain a UN Security Council seat last month may have
    lessened Russian interest.  International press stories outlining
    Russia's own financial difficulties appear to have significantly
    dampened expectations here.  As more time passes without a successful
    deal,  Russia's motives have been questioned, including suggestions
    that Moscow was never serious about the loan and offered it only as a
    public tions stunt to boost Russia's image and discomfit the West.
    (If so, this tactic has not worked all that well:  Icelandic polls
    taken in October 2006 and October 2008 show the same 39 percent of
    the population favorably disposed towards Russia, though the
    negatives in 2008 are slightly higher.)   Although the Icelandic
    government asserts in public that the deal is still on the table and
    bilateral discussions will continue, in private, high-ranking sources
    in the MFA and the Prime Minister's office tell us that the deal is
    on the back burner and they want it to stay there.   Iceland has no
    interest in a bilateral financial arrangement with Russia except as a
    last life-saving effort should friends and allies fail to come
    through with credit.  Icelandic leaders hope that any such loan would
    be included as part of the IMF bail-out, with Russia only one of a
    consortium of lender countries.   If it is a separate bilateral deal,
    however, the government has also repeatedly assured us and the public
    that the loan would be a purely financial transaction, with no
    foreign policy implications.  Few we have talked to believe that
    Russia would actually be so altruistic.

    ¶3. (C)  There has been no lack of theories and entertaining
    "informed" comment as to why the Russians would be willing to offer
    financial assistance for the first time to a NATO country.  Much of
    the speculation we have heard features one or all of the following:
    corrupt Russian oligarchs, Prime Minister Putin, shady bank dealings,
    money laundering, and secret accounts in the now-failed Icelandic
    banks.  One well-placed observer points to a purported close
    friendship between Russian Ambassador Victor Tatarintsev and PM Putin
    that supposedly inclined the Prime Minister to be generous to
    Iceland; other commentators suggest secret illicit connections
    between various oligarchs and the now defunct Icelandic banks or
    their European branches and subsidiaries. A story that circulated
    among the international press camped out in Reykjavik two weeks ago
    claimed that the Russian leadership offered the loan to recover
    Russian state property that had been illegally put up as collateral
    for a loan that a company closely tied to Putin had obtained from
    Iceland's Kaupthing Bank.

    ¶4. (C)  The matter remains a puzzle, and post can't claim to have a
    firm fix on any part of it.   The MFA Permanent Secretary told the
    Ambassador the MFA had no knowledge of any bilateral loan discussions
    before the Central Bank announcement.  A  senior MFA source blamed
    the whole business on Central Bank shenanigans, asserting that the
    Prime Minister did not know of the contacts between the central banks
    until very recently.  Yet another senior official told us that the
    loan offer started off as something quite different:  when an
    Icelandic citizen owner of a small bank in St. Petersburg complained
    of problems with currency transactions, the Russian Central Bank
    proposed to the Icelandic Central Bank that the two institutions
    discuss some sort of cooperation, presumably a currency swap.  At
    some point this summer, the Prime Minister was made aware of and
    became involved in the budding deal.  How the currency swap became a
    huge loan offer is left unclear.   What does seem certain, though, is
    that the Central Bank's announcement of the loan offer came as a
    surprise to many, including members of the Prime Minister's office
    and the Foreign Minister's inner circle.

    REYKJAVIK 00000256  002 OF 002

    ¶5. (C)  Of all the government representatives who have discussed the
    loan in public, Central Bank Governor David Oddson has been the most
    obviously enthusiastic.  If the Central Bank announcement was an
    attempt by this former Prime Minister and champion wheeler-dealer to
    pressure lagging friends - particularly the U.S. - into quickly
    offering their own loans, the game has not been successful.  Except
    for Norway, whose Foreign Minister announced a loan today, the
    Nordics and the rest of the potential lenders continue to mull over a
    decision.

    ¶6. (C)    There is little public or government support for the loan
    except as a last-ditch effort to rescue Iceland from financial ruin.
    Since the closing of the base at Keflavik in late 2006, the
    Icelanders have kept a wary eye on the increasingly visible Russian
    military activities in the High North.  They don't like the Russian
    presence in the North Atlantic and don't want to encourage it.  This
    government most particularly doesn't want to be beholden to Moscow.
    No letter to Russia was included in the flurry of missives sent last
    week to potential lenders, including the U.S., the European Central
    Bank, China, Japan, and the Nordics.  However, if the Icelanders
    can't find the USD four million they need to complete the agreement
    with the IMF from sources they prefer, then sheer necessity will
    dictate that they take whatever the Russians make available.   As to
    the terms of that loan, stated or implied, the deepening financial
    crisis and the pending social upheaval here suggests that the
    Icelandic government will be in no position to be too choosy.

    VAN VOORST

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