Jim Armitage: Need to keep Germany sweet pulls the plug on Russia's Cyprus rescue

It was in the mid-1990s that Cyprus started to gain a nickname among wealthy Russians: "Ofshornye Bank". You don't need to be fluent in the language to get the joke: for a certain class of Russian, Cyprus has become little more than an offshore bank. For two decades, it has welcomed its fellow Christian Orthodox friends – and their large bank balances. Russians, attracted by the super-low tax rates and "easy" regulatory environment, established their businesses there – even if their actual activities were in Russia.

Fearing a repeat of the collapse of the Russian banking system in 1998, they put their savings into Cypriot banks. They escaped the Russian winters on the beaches of Limassol, where the restaurants and bars these days feature more menus in Russian than in the language of that other great invading nation – the English.

Now, depending on whose statistics you trust, Russians have between $19bn (£12.5bn) and $25bn in Cypriot bank accounts. Most of it corporate cash.

Given that Russian citizens and companies have so much at stake from the European-led bailout plan being hatched this weekend, it seems initially surprising that Moscow decided not to help when the Cypriot Foreign Minister came out with his begging bowl. After all, a collapse of the Cyprus banking system would have a marked impact on the Russian economy.

But on closer inspection, it is perhaps not so strange.

Like his British political peers, faced with a flagging economy and an eye for a popular cause, President Vladimir Putin has been turning up the rhetoric against tax avoiders for months.

He has repeatedly urged wealthy Russians to bring their money back home, and told state officials that they should ditch their foreign assets altogether.

Mr Putin knows that the wealthy Russians likely to lose money in Cyprus are not the most popular among the mass of his people. A haircut on their Cypriot savings could be seen as a fair punishment for avoiding Russian taxes.

Meanwhile, with a feeble 0.1 per cent annual gross domestic product growth these days, Russia can ill afford to sprinkle billions of dollars around in foreign bailouts. Global politics will also have played a big part in Russia's decision not to help. Cyprus was said to have been prepared to gift its offshore gas assets to Russia as part of the deal.

Depending on the price, of course, this must have been tempting. However, was it really worth jeopardising Russia's relations with Germany? Probably not.

Angela Merkel, facing an election at home, had very publicly warned Cyprus not to seek a Russian solution.

Moscow, which has already seen relations chill worryingly with Germany in recent years, will have heard that message just as loudly and clearly as Nicosia.

Ever the cautious pragmatist, Mr Putin realised this was not worth the fight.