UPDATE 2-No debt restructuring for "persecuted" Cyprus
* Cyprus awaiting a bailout equal to its entire economy
* Wary of fallout, Commission rule out losses for depositors
* Eurogroup chairman says Russia may be involved in solution
By Leigh Thomas and Lefteris Papadimas
BRUSSELS/ATHENS Feb 12 (Reuters) - The European Union has no plans to restructure Cyprus's debt and will try to keep down the cost of its financial rescue, whose terms the island's outgoing president decried as persecution.
Crippled by its exposure to Greece, Cyprus needs 17 billion euros ($23 billion) from the euro zone to recapitalise its banks and to finance the government over the next three years.
That is almost as much as the whole Cypriot economy produces in a year, raising doubts whether the euro zone member state would ever be able to pay back the money.
Without external help, Cyprus would slide into default, risking the euro zone's credibility and threatening progress made last year in convincing investors that the bloc will not be overwhelmed by its debt problems.
EU Economic and Monetary Affairs Commissioner Olli Rehn said on Tuesday that under the terms of the emerging bailout, Cypriot government debt would not be restructured to impose losses on private creditors.
That should reassure private bondholders that they are not being singled out for losses by European policymakers, bolstering their confidence in buying euro zone bonds.
"The European Commission is not working on any PSI option for Cyprus," Rehn told reporters, referring to the Private Sector Involvement (PSI) that forced losses on holders of Greek debt in 2012. "Greece is a specific candidate and unique case."
Following a meeting of euro zone finance ministers in Brussels on Monday, Eurogroup President Jeroen Dijsselbloem, who chairs them, said Cyprus was not assured a generous deal either.
"We are trying to lower the amount which would be brought together by the member states," Dijsselbloem, who is also the Dutch finance minister, told Dutch broadcaster RTL 7 on Tuesday.
Cyprus asked for assistance in June 2012 and has spent the past eight months in negotiations with the European Commission, the European Central Bank and the International Monetary Fund.
Politicians in Germany, the biggest donor to the euro zone's bailout fund, are hesitant about granting Cyprus a rescue because of its status as a tax haven for rich Russians.
EU policymakers' tough stance on Cyprus, which holds a presidential election on Sunday, prompted its outgoing president to complain that the country was being mistreated.
"Cyprus feels persecuted," Demetris Christofias, who is not seeking re-election, told reporters in Athens. "We were forced to resort to a support mechanism, and instead of support, this is persecution."
Once elections have been held and a new Cypriot president is in place, talks on a rescue are expected to come to a head.
Rehn said euro zone finance ministers would decide in March.
Cyprus has blamed the decision to restructure Greece's debt for destroying its own economy, which was once buoyed by real estate and a strong services sector.
Cypriot banks have a large exposure to neighbouring Greece and had to write off around 80 percent of the value of their Greek bond holdings.
To help to meet its financing costs, Cyprus has already taken a 2.5-billion-euro loan from Russia which has built close ties to the island of 1 million people.
Dijsselbloem said on Tuesday that Moscow may be involved in the final bailout deal given the loan it had provided.
"We know that there are many account holders with a foreign background, (in Cyprus) and part of those are undoubtedly Russian. That plays a role (in a solution)," he said.
Policymakers have been less clear about the possibility of depositors in Cypriot banks losing money. Rehn said the Commission aimed to ensure a fair sharing of the cost burden.
On Monday, Cyprus's finance minister made it clear he did not wish to impose losses on bank depositors, saying talk of a so-called bail-in was "grossly exaggerated."