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Iceland Loan Looks Like A Strategic Win For Russia

The Landsbanki bank was nationalized in the crisis.
The Landsbanki bank was nationalized in the crisis.
Reports that Russia is considering offering a four-year, 4 billion-euro loan to Iceland hardly made ripples in the ocean of news coming out about the expanding global financial crisis. No one, it would seem, has too much attention to spare for the small, semi-mythical Iceland when the entire global market system is being rocked by one financial tsunami after another and Russia's own banking system is practically comatose. However, it may yet turn out that thanks to the crisis and the confusion it has provoked around the world, Russia will be able to make a very important geopolitical gain in Europe.

By becoming one of the first in the world to take measures to nationalize its banking system because of the threat of a national default, little, flourishing Iceland unwittingly became itself one of the catalysts of the current crisis. It wasn't that long ago -- just last November -- that, according to a UN ranking, Iceland was the most livable place on Earth. And it was this status as a country with a future that attracted hundreds of thousands of international depositors and investors to Iceland's banks.

At the same time, the aggressive expansion of Iceland's banks in Europe and the United States lead to the hypertrophy of the banking sector of this country with a population of just 300,000. As a result, the assets of the country's banks came to exceed its gross domestic product by a factor of 10. So, when the current crisis of liquidity broke out, it turned out that Iceland's banks had obligations worth about 100 billion euros and real reserves of just 4 billion.

Looking for a lifeline, Reykjavik turned to its Western neighbors, but found no sympathy: no one had extra cash lying around. Moreover, the nationalization of the banking sector was not well received in many European countries. Britain and the Netherlands, for example, froze the assets of Icelandic banks in their countries after Reykjavik refused to guarantee the deposits of their citizens.

And then Russia appeared on the scene.

Foothold In The West

First, Russia's ambassador to Iceland, Viktor Tatarintsev, announced that Russia would approve Reykjavik's request for a loan. That was followed by confirmations from Finance Minister Aleksei Kudrin and then-Prime Minister Vladimir Putin, according to the website of Iceland's Central Bank.

The Kremlin's unexpected responsiveness immediately produced a wave of vague rumors in Moscow to the effect that the interests of some influential Russian figures who had managed to "invest" in Iceland stood behind the whole story. Whether that is true or not is hard to say, but geopolitical interests alone would be sufficient for the Kremlin to want to establish a strategic connection with the island.

For one thing, Iceland has been a NATO member since 1949 and, like every member of the alliance, has veto power. It doesn't take a lot of imagination to think how the Russia loan might play out when it comes time for Iceland to vote on NATO membership for Georgia or Ukraine.

Also, Iceland is a member of the Northern Council, a regional organization that also includes Denmark, Greenland, Norway, Sweden, and Finland. Sweden, in particular, has expressed growing concern about Russian policies in the region, and Russia might be hoping that Iceland (together with "Moscow-friendly" Finland) could counterbalance Sweden within that organization.

Iceland also has colossal strategic military significance. The region is where the U.S. stationary acoustic naval-defense system -- the Faeroes-Iceland antisubmarine barrier -- is located, which denies the nuclear submarines of Russia's Northern Fleet unrestricted access to the North Atlantic. If Moscow were able to persuade Iceland to refuse to host this system, it would be a fundamental blow to U.S. national security.

Asked about the possible deal with Russia, Iceland's Prime Minister Geir Haarde said that his country will remain a member of NATO and is not considering expanding its military cooperation with Russia. He rejected the idea that Russia might be allowed to use the Keflavik air base that was abandoned by the United States in 2006. However, it is unclear whether Iceland's politicians will remain as resolute in the future, especially if they need to renegotiate the loan from Russia or seek another.

In short, considering all the economic, political, and military factors, it is easy to see that little Iceland is far from being a "distant land" in the strategic sense for Russia. The situation is reminiscent of Moscow's tactics during the recent conflict in Georgia: the center of that conflict was South Ossetia, but as a result of the crisis there, Russia also took over the economically attractive Abkhazia and a piece of the strategically important Black Sea coast of Georgia.