The tiny, ethnically divided Mediterranean island of Cyprus has long been a flashpoint for Greek-Turkish tensions, but this week it finds itself at the center of a financial showdown between heavyweights Germany and Russia.

The European Central Bank (read: Germany) is willing to chip in €10 billion to a plan to bail out Cyprus’ troubled banking system in order to help keep it in the Eurozone. In exchange for this emergency funding, Germany is asking that Cyprus chip in €5.8 billion, which it would raise by garnishing bank deposits, to the tune of 6.75 percent for accounts under €100,000 and 9.9 above that, according to Bloomberg. In exchange for giving up cold hard cash involuntarily, depositors would receive an equity stake in these same banks that are in such bad shape right now that they need this type of extreme measure to stay alive.

Cypriots reacted as one might expect anyone to given news that bureaucrats have come to take their cash, with people lining up to drain ATMs and the country forced to extend its planned Monday bank holiday through Thursday to cope with the fallout. The UK actually sent an airplane loaded with cash to pay its servicemen stationed on the island in the event that electronic banking stopped working.

For its part, Cyprus’ parliament emphatically rejected the plan (even in a modified version which exempted the nominally insured under-€100,000 depositors).

Aside from Cyprus, the country angriest about this whole ordeal is Russia, which cares because its citizens make up an outsize proportion of retail depositors at Cypriot banks. As CNN reports, Russians have made good use of Cyprus’ favorable tax structure to stash an estimated $31 billion in euro-denominated accounts in the island’s banks.

Germans (somewhat justifiably) don’t want to bail out what they perceive is a disproportionate share of wealthy Russian account holders who may or may not have earned the cash they’re stashing in Cypriot banks via the most legitimate means. Russians (very justifiably) don’t feel like levying bank deposits (while leaving bondholders untouched) is fair nor a wise precedent to set in a still-unstable Eurozone. Cypriots feel screwed by Germany.

To that end, the finance minister of Cyprus flew to Moscow to try to find another way to plug the country’s budget hole without robbing Peter to pay Angela. One option may involve Russian energy behemoth Gazprom getting involved in a Eurozone country’s banking system, something Germany absolutely hates, as evidenced by what an “exasperated Eurozone official” told the Financial Times:

“It became clear that there are these business interests in parliament who are telling us that we need to protect the non-resident depositors.”

A Cypriot member of parliament told The Telegraph that having his country used as a pawn in this high-stakes poker game between Germany and Russia was not remotely in the best interests of people actually in Cyprus:

“Demetris Syllouris, a MP for the Cypriot European Party, accused Germany of designing bail-out terms to target Russian investors and destroy the banking sector in Cyprus.

‘Our lenders came not to support us, they wanted to annihilate the pillar of our economy which is the service sector. They (Germany) must find another way to resolve their differences with Russia,’ he said.”

One reason the Cyprus bailout proposal has incorporated this drastic bank deposit levy is that unlike countries like the United States, Cypriot banks don’t really rely on bond sales to fund operations. This results in a more predictable and simplified funding structure, but also means that when ends don’t meet, there are no lenders who took the risk to front money to banks that can be left unpaid to help close the gap. As the Financial Times reports:

“There is an added irony to the situation in the fact that, to the casual observer, the Cypriot banking system looked like a model for others to follow in the wake of the financial crisis. The island’s banks have about €68 billion of deposits, which they use to fund their lending, with only minimal reliance – less than €3 billion – on so-called wholesale funding in the bond markets.

People who defend the Cypriot plan say the funding structure was the reason why there was no alternative to hitting depositors – junior bonds, which are being wiped out, amounted to just €2.5 billion, while the €0.2 billion of senior unsecured bonds have been left alone, on the grounds that to give them a haircut would generate a negligible economic contribution but undermine investor sentiment.”

So instead, Germany acted to undermine consumer sentiment and turn Cyprus into a cash economy to avoid letting Russia get over on them. As befits its history, illiquid Cyprus is once again in the middle of a pissing contest.

Read more of Neon Tommy’s coverage of the Eurozone here.

Reach Editor-at-Large Matt Pressberg here.