Because they Do Not Want to Pay to Get Screwed

It appears the the Russians are not going to be extending additional credit to Cyprus, nor are they going to drop the interest or extend the loans that they have already made.

Felix Salmon is perplexed:

Paul Murphy, watching Cypriot finance Minister Michael Sarris returning empty-handed from Moscow, says that “Medvedev and co could not have played a worse hand during this crisis — and it’s not immediately clear why”. His point is that the most likely outcome right now — he calls it “popping the red pill” — is that big depositors at Laiki Bank (read: rich Russians) are likely to lose some 40% of their money. Since that will make Russia very unhappy, why is Russia doing nothing to prevent it?

I don’t pretend to understand Russian politics, but this move seems to me to be a classic high-risk, high-aggression play; think of Medvedev as a geopolitical hedge-fund manager or poker player, and it begins to make a bit more sense.

Firstly, it’s worth noting that Russia is actually moving backwards on the amount of help it’s likely to extend to Cyprus. When the bailout plan was first announced, it included Russia extending its existing €2.5 billion loan to the country by five years, as well as reducing that loan’s interest rate. Now, Russia is refusing to agree even to that.
More generally, Russia is taking an absolutist stance with respect to Cyprus. No, we won’t restructure the money you owe us. No, we won’t buy a bank off
you. No, we aren’t interested in your natural-gas reserves. And underlying it all, of course, an unspoken — and all the more powerful for being unspoken — physical threat to any Cypriot who causes powerful Russians to lose billions of euros.

I think, and noted in the comments, that there are a number of motivations for the Russians:

• Medvedev and Putin believe that Frau Merkel (sound of horses whinnying) will demand a haircut of the Russians under any circumstances, both for political advantage, and because of the natural hostility of former residents of Warsaw Pact nations, who will gladly cut their nose off to spite the Russian face.
• The second reason is that if the ultra-rich Russia tax evaders get dinged, in the future, they may decide to keep assets in, and pay taxes in Russia, because they see the cost of taxes being less than the cost of an IMF and an EU determine to f%$# them.
• The third reason is that the Russians have been VERY concerned about their western near-abroad for centuries, it’s where they have been invaded from, and they feel that any expansion of the EU presages and expansion of NATO, which they see as a ring of steel intended to threaten them. If Cyprus, and honest hardworking depositors get boned, it is far less likely that places like the Ukraine, Georgia, Moldova, etc. will join the union.

Note that the reasons above are orthogonal, so it might be all of the above.

I do think that any tighter government integration in the EU will have to include some sort of government structure which prevents German hegemony, something like the bicameral structure of the US Congress, because this whole "Germany runs Europe" thing is working about as well as it did the last time.