COMMENT: Cyprus reunification could be salve on Russia-Turkey spat

COMMENT: Cyprus reunification could be salve on Russia-Turkey spat
A Cypriot coffee cup.
By Gary Kleiman of Kleiman International February 23, 2016

2016 looks as though it could be a game-changing year for the divided island of Cyprus, which is entering the final phase of its IMF-EU rescue amid a tentative economic turnaround, as well as reunification negotiations that could end the island’s more than 40-year split. Progress for Cyprus could also help foster reconciliation between Russia and Turkey, who hold huge influence on the respective Greek and Turkish sides of the island

In Davos at the World Economic Forum in January, the president of the Republic of Cyprus and the president of the self-declared Turkish Republic of Northern Cyprus (TRNC) appeared jointly to pitch investors on the benefits that could come with a diplomatic deal this year. They include a banking and real estate recovery, offshore energy, and peace dividends from infrastructure and tourism investments. Such deals could refocus Moscow and Istanbul business ties on joint projects, which would help overcome the commercial and financial losses stemming from Turkey’s downing of a Russian military jet in November.

Turkish Deputy Prime Minister Mehmet Simsek has estimated the 2016 toll of Russia’s sanctions at $3bn, although tourism industry experts believe the absence of millions of visitors will alone cost that amount. Leading Turkish lender Is Bankasi puts the range at $4.5bn-7.5bn. Turkey’s agriculture ministry calculates the food import ban alone is costing almost $800mn. Moscow has also suspended work on the Turkish Stream gas pipeline as well as that on a $20bn nuclear plant in Turkey.

According to the Turkish government, exports to Russia in 2015 were around $4bn, topped by fruit and vegetables, textiles, and autos. Russian sales of commodities, including natural gas, iron and steel came to $20bn for a large $15bn bilateral trade deficit. TRNC citrus producers in the north recently claimed their own suffering as tens of thousands of tons of oranges were left to rot with the harvest season near completion.

This year’s continuing recovery in the Greek Cypriot economy would help all sides. Cyprus’ €10bn IMF-EU bailout agreed in 2013 is due to end in May, but the Cypriot finance ministry has indicated an earlier exit and will not draw on €2bn that is still available. The ‘Troika’ representing official lenders recently completed its likely last review, with the European Commission and European Central Bank urging a reduction of the 45% non-performing loan level at the two main surviving banks as the “number one priority”, after a 40% deposit outflow since the crisis erupted.

Privatization is another major unfinished structural reform in Greek Cyprus, with the state telecommunications and electricity companies yet to be prepared for sale, possibly through the stock exchange where the index has dropped 100% from its 2007 peak through end-2015. Growth should continue at 1.5% on persistent deflation, and tourism revenue at 12% of GDP was up over 15% through September of last year. Moody’s Investors Service raised the sovereign rating from ‘B3’ to ‘B1’ in late 2015 , enabling the issuance of a 10-year €1bn Eurobond at a 4.25% yield, and local bonds may soon be eligible for the ECB’s €1tn bond buying programme.

Russian investors have regularly bought bonds to help cover Cyprus' high public debt and current account deficit, now respectively at 100% and 5% of GDP. However they were the main targets of haircuts imposed on wealthy depositors to defray the cost of the bank cleanup. According to a February bilateral conference in the capital of Nicosia, low tax offshore banking and business operations support €1.7bn in annual service exports to Russia, but future growth is at risk in the aftermath of the confiscation and ongoing economic squeeze in both countries. Tighter money-laundering rules are another complication in contrast with the previous hands-off approach. The OECD’s Financial Action Task Force describes illicit fund screening as “largely compliant”, but formal information-sharing between Cyprus and the group will not begin until 2017.

Isolated

The Turkish part of the island is only recognized by Ankara, which maintains 30,000 troops, and has been commercially isolated since the 1974 conflict that divided the island. A 2004 referendum on reintegration was approved by this poorer population of TRNC, but rejected by the Greek side. Turkey has been reluctant to compromise historically, and EU accession has been tied to direct negotiations between both Cypriot presidents that accelerated under UN sponsorship over the past six months. The push came as a natural gas discovery in disputed Eastern Mediterranean waters holds the promise of joint exploitation, and Turkish officials are tiring of the TRNC’s airline and water demands. A federal agreement could ease defense and fiscal burdens and unlock €3bn in immediate Cyprus-Turkey trade, according to government and private sector representatives.

The parties are now racing against the clock ahead of scheduled May parliamentary elections, and President Nicos Anastasiades expects a settlement later this year. Greek Cypriot land restitution in the north, and compensation to residents there remain key sticking points. Currency unification could proceed smoothly with the euro, which is also widespread in the Turkish zone alongside the Turkish lira.

Business and labour laws are similar and the IMF and World Bank teams have been asked to examine the range of policy and practical “new Cyprus” issues. Northern tourism could quickly double from the current 1mn visitors, according to industry experts. Russia, the US and EU have encouraged continued negotiations despite their own sanctions battle.

However the two sides are also requesting billions of euros in future aid and investment to rebuild their economies after the long split and recent banking crisis – an unlikely prospect as long as Russia and Turkey are mired in self-defeating commercial recriminations. A Cyprus breakthrough would have value on its own, especially weighed against adjacent Mideast troubles, but it could also help unblock fresh obstacles that its most influential neighbours Russia and Turkey have placed on normal business dealings, as well as extraordinary conflict resolution. 

Opinion

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