Demetris Christofias, who was educated in Moscow and is the EU's only communist head of state or government, dismissed suggestions that his tight relations with Russia could damage his ties within Europe and said it was perfectly normal for a country to look to all its allies for help.

"We need money to develop our economy and we need money to recapitalize our banks," he told Brussels-based reporters on a visit to Cyprus as it begins its six-month presidency of the EU.

"The Russians, as good friends of Cyprus, want to take care of us," he said, adding that he was prepared to take money from both Moscow and his partners in the euro zone if it would help put the island's small and vulnerable economy back on track.

"We could combine both," he said when asked if he would rather take aid from Russia or the European Union.

Cyprus's banking sector is under severe strain largely as a result of its exposure to the Greek economy, with at least two banks needing to be recapitalized as soon as possible.

Estimates from finance officials suggest the country, with an economy that generates a little over 17 billion euros in gross domestic product annually, may need 10 billion euros for its banking and financial sector alone.

Inspectors from the European Central Bank, the European Commission and the International Monetary Fund, together known as the 'troika', are in Cyprus this week to make a first assessment of its needs before any bailout is finalized.

But it is far from certain that Christofias, elected in 2008, will sign up to an EU/IMF package, particularly as it is likely to come with strict conditions, including demands for reforms to pensions policies and labor rules.

Cyprus has already received 2.5 billion euros from Russia, with the 4-1/2-year loans carrying an interest rate of 4.5 percent, but no other apparent conditions.

Loans extended by the EU/IMF to Greece, Ireland, Portugal and in the coming weeks Spain vary in their interest rates and repayment schedules but mostly cost less than 4.5 percent and can be repaid over a longer period of time.

Perhaps to put pressure on the EU and IMF to provide the best terms possible, Christofias is keeping his mind open.

"Both can be combined," he said of lending from Moscow or Brussels, smiling broadly. "Let's just hope we manage both."

SYRIA

Cyprus finds itself taking over the EU presidency, a largely ceremonial role but one that requires it to plan the bloc's agenda and chair many of its meetings, at a difficult time.

Not only is the economy teetering, but there are a range of geopolitical issues that have put the island in the spotlight.

The most pressing is Syria, with concerns among Western diplomats that Cyprus is being used by Russia as a shipment route to supply arms to the government of Bashar al-Assad.

Russia has not denied delivering arms to Syria, where it maintains a military base, but Christofias denied that Cyprus was used as a conduit.

"There are a lot of fairy tales circulating about Cyprus's role in shipments to Syria," he said.

"There is not a trace of truth that Russia is circulating arms through Cyprus in any direction."

During more than an hour of questioning, Christofias was at pains to describe Cyprus as a perfectly normal economy enduring short-term difficulty. Its biggest problem, he said, was the decades-long process of finding a solution to the dispute with the Turkish Cypriot north.

Glossy magazines in Cyprus portray the island as a Mediterranean paradise where the jet-set can invest in beachfront properties and enjoy a low-tax environment. Many Russians and other nationalities have taken up the invitation.

Despite the banking problems and the need for a bailout that is likely to total 60 percent of output, Cypriots appear keen to paint everything as normal. Moreover, the discovery of lucrative gas fields in their territorial waters could dramatically change fortunes in the years ahead.

In its in-flight magazine, Cyprus Airways is even running an item about how the airline is collecting clothes, shoes, blankets and food to help impoverished Greeks.

(Writing by Luke Baker)

• A Permanent Economic Emergency