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NICOSIA (Reuters) - Cyprus expects to return to international markets late next year but cannot rule out testing the waters earlier to gauge the appetite for Cypriot debt, the president of the bailed-out Mediterranean nation said on Wednesday.
In an exclusive interview with Reuters, Cypriot President Nicos Anastasiades said an "economic dependency" on Russia - common with other EU member states - could have an impact should the bloc decide to tighten sanctions on Moscow in its standoff with Ukraine.
He also said there should be offsetting measures for those countries whose economies could be directly hit if the crisis escalates and further sanctions are imposed. That could include leaving it to the discretion of member states over what additional curbs to apply, he said.
Just a year ago, Cyprus teetered on the brink of default from a banking system crippled by its exposure to Greece and a cash-starved government deprived of access to international markets.
It became the first nation in the history of the euro zone to impose capital controls to prevent a collapse of its banking system.
Cyprus lost a foothold in markets in May 2011 after yields on benchmark 10-year bonds spiked rapidly. But from a high of close to 15 percent last March, yields have now tumbled, quoted at 5.13 percent on Wednesday, according to Reuters Eikon data.
"We hope to be in a position to enter the markets towards the end of 2015. It is a very short period of time compared to countries under similar (bailout) programs," said Anastasiades, who assumed the presidency last year just two weeks before being catapulted into handling the island's worst peace-time crisis since independence from Britain in 1960.
Asked if the republic could consider putting out feelers with a small issue beforehand, Anastasiades said that could be considered taking into account a further reduction in spreads.
"It is something which we could look at, at a time when we feel it would be successful to try," he said.
Capital controls are gradually being dismantled, Anastasiades said. By the end of May domestic controls were expected to be fully eased, before full relaxation of transactions abroad by the end of the year.
"I believe we are on the right path...we have managed to overturn forecasts which were considerably worse than what we eventually achieved," he said.
Defying forecasts of a 9 percent slump in output in 2013, Cyprus's economy, among the smallest in the 18 nation euro zone, contracted by 5.4 percent last year. The European Commission expects a 4.8 percent contraction this year before a gradual recovery in 2015.
But the island still suffered high unemployment, with thousands of Cypriots now on state assistance. Coaxing foreign investment back into the country was a priority, Anastasiades said.
Among euro zone rescues, Cyprus stands out for its treatment of depositors who were forced to forfeit uninsured savings to prop up failing banks. This formula is now the template for future bank rescues throughout the EU.
But while one bank, Laiki, went bust, the second, Bank of Cyprus BOC.CY now has many wealthy Russians on its board whose deposits were converted to equity, highlighting the depth of ties between the island and Russia.
Since Russia's annexation of the Black Sea peninsula of Crimea, the European Union has imposed sanctions against the closest allies of President Vladimir Putin, and Group of Seven governments have suspended top-level contacts with Russia.
Further sanctions are being prepared in case Russia's conflict with Ukraine escalates, but these could leave Cyprus in a bind.
"It is well known that as a result of the long-running ties we have with Russia that there is an economic dependency, if you like, and it does not only apply to us," Anastasiades said.
He said the EU should take into account repercussions on the economies of its member states from any additional policy action and ways to handle that.
Otherwise, each EU member state should use its own discretion in applying additional sanctions against Moscow.
"It is not only we who are clear about this, but other European states too. Any new package of sanctions against Russia - and I do not wish for this to happen - must take into account the particular circumstances, the damages, and generally the consequences to each country," Anastasiades said.
"There should be a series of offsetting measures, but also the right of each country to choose... regarding implementation, and of what measures," he said.
Reporting By Michele Kambas; Editing by Toby Chopra