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FM AMEMBASSY REYKJAVIK
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3871
RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
INFO RUEHMO/AMEMBASSY MOSCOW IMMEDIATE 0042
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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