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COMMENT: Cyprus’ painful pivot west: can we turn it into an opportunity?

31 July, 2014

By Fiona Mullen, Director of Sapienta Economics Ltd

A new cold war is upon us. And once again little Cyprus finds itself in the middle of competing powers.
So as we start to head off for our summer holidays, it is time for a re-think about Cyprus and its future. This involves business-people as much as it involves the political leaders. Because how businesses respond will also affect how well Cyprus adapts to this new and more uncertain world.
On the one side of this new cold war is Russia, Cyprus’ largest partner for business services, the fastest-growing market for tourism and with a longstanding friendship that goes back at least as far as Byzantium.
But Russia is heading for economic trouble. The Russian Central Bank has raised interest rates three times this year already and the economy is barely expected to grow in 2014. Add to that the growing list of sanctions, including indirect hits on Russian interests (you know what recent action I am referring to) and doing business with Russia does not look like such a profitable prospect right now.
On the other side is the EU (the guys with the money) and the US (the guys with the clout). EU membership is unquestionably a good thing for Cyprus. But size matters. Any systemic risk that Cyprus might have posed to the eurozone shrank during the months in which the previous government took its time and big EU banks got their money out. It evaporated entirely as soon as the Greek branches were sold. The result was the unprecedented haircut on depositors.
We also learned in the past two weeks that the new US strategic partnership, while a welcome safety net in a volatile region, also comes with its costs. As has been pointed out elsewhere, big household names have been caught red-handed money-laundering but got away with little more than a fine. One notice of “reasonable grounds” for a bank that represents less than 2% of assets and little Cyprus is forced to shut it down.
Since this is Cyprus, we should also consider a third “side” in the new cold war, namely Turkey, whose own relationship with all of the above is also in a state of flux. In my worst nightmares, the Turkish leadership becomes ever more autocratic, picks a fight with Israel or the US and uses Cyprus’ gas facilities as the bait.
So how do Cypriot businesses survive and prosper in this new uncertain world?
As I see it, there are three steps to doing this.

DIVERSIFICATION STEP 1: REDUCE DEPENDENCE ON RUSSIA
The most pressing need is to diversify from over-dependence on Russian business.
You might know that your client is the cleanest person on the planet, whose only concern is to build a secure future for his children.
But Cyprus’ paymasters and partners do not see it that way. Somehow the West will always see Russian money, especially Russian money in Cyprus, as suspect.
Your client is now a reputational risk, which means a business risk, and you need to find new ones.

DIVERSIFICATION STEP 2: FOCUS ON THE REGIONAL BASE FOR OIL AND GAS COMPANIES
The best way to find new clients in the short term is to grasp the opportunity presented by establishing Cyprus as a regional centre for oil and gas service companies.
Given the uncertain direction of gas prices, offering a base to massive companies serving the growing eastern Mediterranean oil and gas industry should be far more profitable in the long term than depending merely on Cyprus’ gas exports. Aberdeen is a good example. It is still prospering long after the oil and gas reserves have dwindled.
A regional hydrocarbons service hub, with state-of-the-art infrastructure and services in transport, transit, exploration and management would open up opportunities for Cypriot firms to build capacity and gain the trust of multinationals as diligent partners.
If Cyprus does this right, Halliburton and Schlumberger will be followed by others.
But getting it right needs a proper plan. It needs robust, independent oil and gas oversight bodies that can keep politicians’ short-sighted business interests at bay.
It also needs strong governance. If multinationals are to base themselves here they will expect the highest international standards. Only with transparent international procurement standards, for example, will they be encouraged to base themselves here and partner up with locals for infrastructure and services.
This plan needs to be written not by ministry officials but by those with plenty of international experience. This plan also needs to be put in place fast, before Turkey, Israel, Greece or Lebanon do it for themselves.
So grab the business while you can but lobby the government to create the right conditions for you to flourish.

DIVERSIFICATION STEP 3: NURTURE RELATIONSHIPS IN EAST MED AND NORTH AFRICA
Now, since most of the oil and gas service companies are from the US, Cyprus risks swapping one dependency for another. So during the “seven fat years” of building ourselves as a service hub for hydrocarbons, we should also be developing relationships with those countries around us.
As Cleopatra Kitti, a senior advisor to governments and multinationals on market entry and investment strategies pointed out to me the other day, the establishment of the European Bank for Reconstruction and Development (EBRD) in Cyprus presents a new opportunity for organic relationship-building with the countries in our region in which the EBRD is also present.
Egypt, Tunisia, Morocco and Jordan have a combined population of 133 mln and combined GDP of USD 440 bln, according to Economist Intelligence Unit statistics.
But among all of these countries, only Cyprus is the consistently stable one in which business-people would be happy to bring up their families. The opportunities for conferences, regional bank headquarters, schools, healthcare, sports facilities, transport and so on are immense. But again they need a proper plan.

THE LAST MILE: PUT THE CYPRUS PROBLEM TO BED
Once we have achieved all of this, there’ll remain only one more thing to do, namely to take away those nightmares I referred to above and put the old national problem to bed.
This would open up yet another market, namely Turkey with its population of 75 mln people and GDP of USD 830 bln.
Solving the Cyprus problem also requires new thinking that focuses more on Turkish Cypriot interests than those of Turkey.
But that is an article for another day.
Wishing you happy and thoughtful holidays.

For monthly analysis on the Cyprus economy, banking system and politics, visit
www.sapientaeconomics.com