Cyprus will not ease off fiscal austerity measures required by its European Union partners if it secures a 5-billion-euro loan from Russia, its foreign minister said on Tuesday.

The Mediterranean island, with an economy that generates a little over 17 billion euros in annual gross domestic product, may need 10 billion euros to rescue a financial sector hammered by its exposure to Greek debt.

Although it is in talks with international lenders from the European Union, the International Monetary Fund and the European Central Bank - together known as the «troika» - Cyprus has also sought aid from Moscow, a close business and political ally.

Cyprus declined on Tuesday to confirm a newspaper report that Russia has approved the lifeline to the island, which sought a bailout from its EU partners in June.

Cyprus President Dimitris Christofias, who was educated in Moscow and is the EU's only communist head of state or government, has dismissed suggestions that his tight relations with Russia could damage his ties within Europe.

Foreign Minister Erato Kozakou-Marcoullis said a Russian loan deal, if signed, would have no political implications and would not change Cyprus' plans to secure help from the troika.

"It will be a bilateral loan with interest -- no strings attached,» she told Reuters in Cairo where she is due to represent the EU at a meeting of the Arab League on Wednesday. «This is not something that only Cyprus is doing. Other members of the EU have taken bilateral loans."

Russia granted Cyprus a 2.5 billion euro loan in late 2011, after Nicosia's access to international capital markets was cut off because of high yields on its traded debt.

The EU bailout, if agreed, is likely to come with much stricter conditions than the 2011 loan from Moscow.

Kozakou-Marcoullis said the new Russian loan would help stimulate the economy, making for a less painful adjustment to the debt crisis sweeping the eurozone.

"Cuts will be made, because it is important to make a number of long-term adjustments, and of course we will cooperate with the troika,» she said. «But at the same time a loan could help us create more development projects ... to create jobs."

Three rounds of budget cuts totalling around 800 million euros have cut Cyprus's budget deficit from 6.7 percent of gross domestic product to around 4 percent.

The government was still trying to get the deficit down to 3.5 percent this year, said Kozakou-Marcoullis. «From what I understand, a new date for a troika visit will be set after September 17 so this process will continue for some

time to arrive at an agreeable package,» she said.

The cash-strapped island is looking hopefully ahead to 2017 when it aims to start commercial drilling for offshore natural gas deposits that represent a potential export windfall.

Progress in exploiting large natural gas reserves beneath the eastern Mediterranean was held back while Cyprus hammered out agreements with neighbours Lebanon, Israel and Egypt on exploration rights.

Kozakou-Marcoullis said a first phase of exploratory drilling had revealed deposits of 7 trillion to 9 trillion cubic feet in one area alone.

"We have concluded the second round of licensing and we are in the process of examining 33 applications from major companies,» she said. «Hopefully by year-end we will give more licenses."

Regional rival Turkey says Cyprus has no rights over the hydrocarbon deposits and that, by pressing ahead with drilling, it is jeopardizing negotiations on reuniting the island, divided for decades between the Greek south and Turkish north.

Kozakou-Marcoullis disputed the claim, saying the Turkish Cypriot leader had refused to continue the negotiations not because of the energy exploration but in protest at Cyprus assuming the rotating presidency of the EU in July.

"All our partners in the EU support the sovereign rights of the Republic of Cyprus to conduct exploration and exploitation of its natural resources,» she said.

[Reuters]