On the surface, the Cyprus crisis was about money, but actually it was the result of conflicting political cultures: European, Greek Cypriot and Russian. The fissures exposed during the March 2013 crisis will leave a legacy of mistrust and enmity far beyond the eastern Mediterranean island that staged the drama. The underlying problem was that Europe had accepted a non-European entity (Cyprus) into its institutions and then failed to enforce upon it Europe’s standards of financial governance. Russian money became fuel for the catastrophe, but was not itself the cause. Money laundering and bank insolvency are both deplorable but are not the same thing.

Greek Cyprus (aka, Republic of Cyprus, as the Turkish north is not directly involved in this story) is a distinct political culture from mainland Greece. The Hellenic Republic is Greek and Balkan, while the Republic of Cyprus is Greek and Levantine. This is a distinction with a major difference. Greece was the Bad Boy of the European Union for a quarter-century, but Athens genuinely sought a European identity and vocation. The prime ministers during the country’s financial crisis, George Papandreou and Antonis Samaras, both worked hard to behave as responsible Europeans. If Papandreou had been as ethnocentric as most of his predecessors, he would have defaulted on his country’s sovereign debt early on and left the French and German governments to bail out their respective banks. Greek political leaders broadly accepted that their country’s crisis was the consequence of its own fiscal profligacy.

In contrast, Nicosia never treated its European citizenship as more than a convenience. Greek Cypriots consider themselves “European”—indeed, they regard their island as the birthplace of European civilization—but did not exchange their Levantine business model and practices for European standards when they joined European institutions. They believed they could have it both ways, manipulating their European partners while maintaining what the Germans call a “casino economy.” Until the very last moment, Greek Cypriots—from the streets to the presidency—anticipated a full bailout from Brussels and Frankfurt as theirs by right. No other Eurozone government approached the Troika (European Commission, European Central Bank, IMF) with such nonchalant self-confidence and indifference to accountability.

Two events set the stage for the transformation of Greek Cyprus from an island backwater into a thriving international financial brothel: first, Egyptian President Gamal Abdel Nasser’s expulsion of foreign communities from Egypt after 1956; and, second, the Lebanese civil wars. These developments dislodged Alexandria and Beirut as the regional financial entrepots, which they had been time out of mind. There weren’t many viable candidates to fill that role. Athens in those days was provincial and non-English speaking. Nicosia (along with Limassol and Larnaca) was even more provincial, but it offered the attractive combination of British commercial law and Levantine enforcement.

Then the disruptions caused by the 1974 division of the island into Greek and Turkish sectors reduced the Greek south to a haven for offshore business, a kind of Dubai in miniature. Cyprus provided not just accommodating financial services but also an ideal legal environment for shell companies, flag-of-convenience shipping, weapons and narcotics trafficking, and tolerance of Soviet bloc espionage. (Cyprus also turned a blind eye to various British and American activities conducted from the two British Sovereign Base Areas on the island.)

Among the myriad financial clients attracted to the island during those years was the KGB and its financial affiliate, the Soviet foreign trade bank Vneshtorgbank. For Soviet covert finances, Nicosia served its region as Vienna did central Europe. Thus it was natural that post-Soviet Russian oligarchs would take their loot there for laundering and investment. Obviously, Cyprus was only one of many such financial nodes around the world, but it proved especially popular with Russians because of its proximity, climate, beaches, and lifestyle and Orthodox Christian fraternity.

It bears emphasis that much of the so-called “Russian” money on Cyprus was in fact Russophone, as plenty of the funds came from Ukraine, Serbia, Armenia, Bulgaria, Georgia and Central Asia, as well as from traditional sources outside the former Soviet space. Russian money in time became the largest component of foreign funds on Cyprus, but the “casino economy” was in place and thriving before Russia even had oligarchs.

Russian financial activities on Cyprus took two distinct forms. First was what might be thought of as overt money laundering. Most Russian businesses, including those in the state sector, routinely employ offshore banking to obtain the range of financial services unavailable at home. To this end, VTB (formerly Vneshtorgbank) established an affiliate on Cyprus, the Russian Commercial Bank, in 1995. VTB is the second-largest financial institution in Russia and a parastatal entity. It moved onto Cyprus to service other Russian parastatal entities, of which Gazprom is only the most prominent.

Whether this constitutes money laundering depends on your definition. These financial services were entirely legal on Cyprus and officially sanctioned in Moscow. Russian Commercial Bank clients include many Russian private citizens who maintain accounts both at home and abroad. VTB is owned and operated by the Kremlin, so whatever “laundering” it may conduct on Cyprus is an act of state policy. In addition, the Russian Commercial Bank is financially secure and solvent. It was in no way responsible for the financial crisis.

The second form of Russian financing on Cyprus involved actual money laundering by Russian oligarchs (and Ukrainians, and Arab sheikhs, and Israeli businessmen, and . . . ). The scale of this activity is subject to conflicting estimates, but clearly it became huge (though whether it exceeded the activities of Russian parastatal entities is not clear). This was a for-fee service often conducted in cash, though gold and gems were also accepted. The decision of the new European Central Bank to issue a five-hundred Euro note favored Cyprus as a laundering center. Money laundering is not cheap, while trust is the essential stock in trade of those accepting unaccountable funds from persons with unaccountable incomes. Thus, massive fees were earned from these transactions. When Cyprus entered the European Union in 2004 and the Eurozone four years later, Cypriot banks could provide the very special service of legal entry into the European market for these moneys and their owners. Indeed, it has been reported that eighty Russian depositors were granted Cypriot passports with full travel and residency rights within the Schengen zone in return for maintaining major assets on the island.

The most important vehicle for the money laundering was Laiki Bank, the second-largest bank on the island and an institution well known in the eastern Mediterranean for the flexibility of its services. Among its other coups was removing the assets of Slobodan Milosevic and his family from Serbia to Cyprus. As banking institutions in Switzerland, Liechtenstein and elsewhere came under increasing pressure from Western governments to tighten up their standards, Laiki boomed. The largest share of the money flow was certainly Russian, but Russian money had lots of company.

Despite the tabloid headlines, Russian money did not cause the financial crisis on Cyprus. Money laundering and insolvency are different issues. The Cypriot financial sector grew to eight times GDP, as it had in Iceland and Ireland, but that was not the problem. (Iceland’s banks suffered insolvency with no record of money laundering.) Luxembourg has a financial sector twenty-two times GDP without loss of sleep, because the Grand Duchy maintains strict regulations to assure its financial institutions remain solvent.

But on Cyprus, financial insolvency resulted from irresponsible investment decisions by major banks (Laiki to the fore), the downgrading of Greek sovereign debt, plus systemic failures of financial governance in Nicosia and by Brussels/Frankfurt. The Russian and other foreign money scaled up the problem, but Greek Cypriot bankers and authorities caused it.

The source of the crisis was apparent at least two years before it hit. The Bank of Cyprus and Laiki Bank took on large amounts of Greek sovereign debt as security because the interest payments on Greek bonds were favorable. Indeed, Laiki massively bulked up its holdings of Greek bonds in 2009 just as Athens headed into its own financial crisis (similar to Wall Street firms buying derivatives just in time for their collapse). In common with other institutional holders of Greek bonds, Cypriot bankers assumed that Eurozone sovereign debt enjoyed an implicit Eurozone guarantee. They were wrong. The Cypriot holdings were small compared to those of major French and German banks. But they were dangerously large in relation to the capitalization of the Cypriot banks and the capacity of the government in Nicosia to bail them out. Laiki began 2011 with equity capital of 3.6 billion euros, of which 3.1 billion were in the form of Greek sovereign debt on which the bank took a loss of 2.3 billion. This contributed to a 2011 bank loss of 4.1 billion euros, half a billion more than its equity at the start of the year. Not surprisingly, Laiki then failed a Eurozone “stress test” and in June 2012 received a state bailout of 1.8 billion euros. But that was quickly wiped out by the bank’s continuing losses. The question, then, was not why Laiki was declared insolvent in March 2013, but how it had avoided that fate for so long.