Mekel 22March2013 cyprus issue
German Chancellor and head of the Christian Democratic Union (CDU) Angela Merkel (L) talks with Finance Minister Wolfgang Schaeuble before a joint parliamentary faction meeting of the CDU and its sister party, Christian Social Union (CSU) to discuss a Cyprus bailout plan in Berlin, March 22, 2013. Reuters

"It must realize its current business model is dead.”

That’s what German Chancellor Angela Merkel told lawmakers on Friday, according to Luke Baker at Reuters. But she wanted Cyprus to remain in the euro zone, parliamentary sources said.

Cyprus has already thrown its international reputation as an offshore banking hub -- known for its low tax policy and lax bank regulations -- into peril after considering a bold plan for assessing a one-time levy on bank deposits.

Over the years, Russian companies and individuals have poured billions into Cyprus, enticed by a tax treaty that makes it easy to move profits between the two countries and corporate structuring rules that keep transactions discreet.

Moody’s estimates that Russian depositors have socked away as much as $31 billion in Cypriot banks, or about one-third of all bank deposits on the island.

“So far the E.U. together with the Cyprus parliament have unfortunately acted like a bull in a china shop,” Russian Prime Minister Dmitry Medvedev said this week. “I think all possible mistakes which could’ve been made in this situation have been made.”

Russia rebuffed Cypriot entreaties for aid on Friday. Cypriot Financial Minister Michalis Sarris asked for Russia's financial support in exchange for Cyprus' offshore natural gas industry assets, and offered Russian investors the opportunity to buy shares of Cypriot banks, but Russia showed no interest.

"We have heard their proposals. Our investors were not interested in it," Russian Finance Minister Anton Siluanov told reporters on Friday commenting on talks with his Cypriot counterpart.

The clock is ticking for the smallest euro zone country. The European Central Bank warned the nation Thursday that it had until Monday to find $7.5 billion needed to qualify for a financial bailout.

Merkel told a closed-door meeting of legislators in Berlin on Friday that she’s annoyed the Cypriot government hasn’t been in touch with the troika of international creditors for days, Bloomberg reports, citing an anonymous party official. Cyprus’ decision to test Europe is unacceptable, Merkel said.

According to Reuters, a leading conservative ally of Merkel said on Friday that Cyprus was "playing with fire and needed to come up with a workable proposal for plugging a multi-billion-euro financing gap urgently."