Why will be losing in Cyprus bank deposits?

This story is getting more fascinating by the day it seems.  I think the most intriguing aspect of the bank and bank deposit issue is the light its shedding on Russian money and role in Cyprus.

I mean, this is a banking sector that's 8 times bigger than the Cyprus GDP.  Think about that...if that was in the US, that would mean a bank sector asset at over $100 trillion.  The GDP of the entire world in 2011 was only $70 trillion.

Why is Cyprus so big?  Apparently Russian oligarchs and rich hide their assets there.  That's very rationale as the Russian legal system is sorta at the whims of the government and losing favor there would mean losing everything.  For an example, see the case of Mikhail Khodorkovsky who is still in jail and broke after running afoul of Putin.  So why not hide your money somewhere?  Namely Cyprus, after all, its in the EU!  What can go wrong?

Per the NY Times:

Russian money flowing into Cypriot banks dwarfs the island’s $25 billion economy. About 25 percent of Russian foreign direct investment moves through Cyprus, according to an estimate by Morgan Stanley, frequently in a “round-trip” process that serves to lubricate the Russian economy. Cypriot entities, often owned by rich Russians, lent $40 billion a year to Russia from 2007 through 2011.
...
The stakes are particularly high for wealthy Russians: Moody’s, the rating agency, has estimated that Russian deposits in banks and loans to Cypriot companies total $70 billion, or about 4 percent of Russia’s gross domestic product. Some 42 percent of the value of Cypriot bank deposits is in accounts with more than half a million euros.

While the final plan for the deposit tax is not yet determined, some estimates range from 40-60% loss on deposits greater than 100k euros.  That is amazingly crazy.  While it seems like this will hit the Russians more than the Cryprus population, the loss of banking confidence and deposit insurance will be potentially crushing, especially if this spreads.  

Banks are incredibly dependent on trust and FDIC insurance in the US have made bank runs virutally all but nonexistent.  Bringing us back to the days before FDIC?  Potential collapse of the credit market...again.