  We consider implications of a possible presence of a Thomson-thick,
low-temperature, plasma cloud surrounding the compact object in the binary
system Cyg X-3. The presence of such a cloud was earlier inferred from the
energy-independent orbital modulation of the X-ray flux and the lack of high
frequencies in its power spectra. Here, we study the effect of Compton
scattering by the cloud on the X-ray energy and power spectra, concentrating on
the hard spectral state. The process reduces the energy of the high-energy
break/cut-off in the energy spectra, which allows us to determine the Thomson
optical depth. This, together with the observed cut-off in the power spectrum,
determines the size of the plasma to be 2x10^9 cm. At this size, the cloud will
be in thermal equilibrium in the photon field of the X-ray source, which yields
the cloud temperature of 3 keV, which refines the determination of the Thomson
optical depth to 7. At these parameters, thermal bremsstrahlung emission of the
cloud becomes important as well. The physical origin of the cloud is likely to
be collision of the very strong stellar wind of the companion Wolf-Rayet star
with a small accretion disc formed by the wind accretion. Our model thus
explains the peculiar X-ray energy and power spectra of Cyg X-3.
