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With the EU finally agreeing a bailout for the island state's struggling banks on March 17, Cyprus ordered all accounts frozen for two days in order to impose a levy on depositors that will cost them around 7-10% of their cash. The move poses a significant threat to Russian markets, given the large role Cyprus plays as an offshore financial haven.

The shock news broke on March 17, with the Cypriot parliament due to vote on the measure on March 18, and the unprecedented "bail in" of depositors has been widely criticized by the market, which worries it could reverse the rise in sentiment over the Eurozone crisis. Stock markets in Asia and Europe have dropped as politicians in Nicosia debate the €10bn bailout agreed by the EU and International Monetary Fund (IMF).

The levy on deposits is designed to reduce the total bailout bill from the €17bn initially proposed, however it is at odds with previous banking sector bailouts for the likes of Spain, Greece, Ireland and Portugal. Amidst a chorus of complaints, Russian President Vladimir Putin called the levy "unfair, unprofessional and dangerous", according to the BBC.

In commentary, the Financial Times insists that the plan to simply take 9.9% of deposits over €100,000 and 6.75% of those below breaks the fundamental basis of trust embodied in the EU's deposit insurance scheme - and hence the banking sector in general - that is supposed to protect small depositors irrespective of how much trouble their banks get into.

After the deal was thrashed out in Berlin, Cypriot President Nicos Anastasiades told media he had to choose between the "catastrophic scenario of disorderly bankruptcy or the scenario of a painful but controlled management of the crisis". However, he faces a tough fight to push the deal through the parliament.

It is widely understood that Germany led the calls for the special conditions on the bailout - although it denies that - with weariness over the cost of rescuing banks on the EU periphery meeting concern that European funds will be used to protect Russian money of questionable origin.

The effect on Russian banks, business and the market is one of the big unknowns. Cyprus is a major offshore financial haven for the Russian economy, but while many numbers have been bandied about, no one knows for sure how much Russian cash is held on the island.

As of January, €43bn of the €68bn in Cypriot bank deposits was held by domestic residents, according to the central bank. More than €20bn officially came from the rest of the world, with the bulk of that believed to be from Russia. However, many Russian companies are domiciled in Cyprus, and so technically count as domestic. Therefore, the volume of Russian cash in the banks is probably even more than €20bn.

As the potential deal is being debated, analysts say that the effects on Russia could spread way beyond a few disgruntled oligarchs. "Now hearing a lot of chatter/concern that this... could have more significant impact on Russia/Ukraine than first thought, depending on how long it goes on," writes Tim Ash at Standard Bank. "The focus has been on the potential haircut on deposits, which is small change from a Russia oligarchic perspective (only a small percentage of their cash is in Cyprus anyway). But if this thing drags on for a week or so, with the Cypriot parliament blocking the bail-out, and deposits stay frozen, this is going to impact on the use of Cyrpus as a transactions hub for Russian/Ukrainian corporations."

That could risk hitting the stock market, the analyst says, if leveraged Russian entities suffer margin calls. "I guess it would make sense now for Moscow to come out quickly with some [cash]to help the bailout. Maybe this is what this is all about - a trial balloon put out by the Troika."