Investors left pining for a united Cyprus

Investors left pining for a united Cyprus
Nicosia bears the unwelcome distinction of being the last divided European capital.
By Will Conroy in Prague January 22, 2017

Cyprus is one of the most challenging frozen conflicts of Europe. Its largest city Nicosia, bisected for more than four decades by a United Nations-patrolled buffer zone, bears the unwelcome distinction of being the last divided European capital.

If the UN-brokered talks that took place in Geneva this week ultimately lead to a breakthrough and the reunification of the ethnically divided island, there would be an opening up of the energy potential in Cypriot waters and a raft of other enticing business opportunities. But analysts were generally downbeat as the negotiations broke up with no word on when they would reconvene.

As observed by Alpaslan Ozerdem, co-director at the Centre for Trust, Peace and Social Relations at Coventry University in the UK, the talks could not have taken place at a worse time.

“That’s considering the overall international political environment in terms of what is happening in the region and beyond in regard to the Syrian war and its refugee crisis, Erdogan's current attempt at regime change in Turkey, the instability faced by the EU due to the looming Brexit process, the security implications of an increasingly hawkish Russia and many unknowns regarding the prospective US foreign policy of the Trump administration,” said Ozerdem.

The failure of the talks would vex a good many business parties who hope for the unlocking of major trade and investment potential in Cyprus. The former British colony has been divided since 1974 between the Greek-Orthodox Christian majority and the minority Muslim Turks after Turkey invaded in response to a coup attempt by Greek Cypriot militants seeking union with Greece.

It was the discovery of gas offshore from Cyprus that encouraged observers to believe that Istanbul might be persuaded that reunification was now the way to go. Estimated at over four trillion cubic feet with a value of more than $50bn, the reserves - along with Israeli east Mediterranean gas that could conceivably be imported into Turkey via a pipeline passing through Cypriot waters - could allow Turkey and the EU to reduce reliance on Russian gas exports.

But optimism that Turkey's desire for the gas might provide the needed impetus to finally broker a Cyprus resolution has dissipated. Turkish President Recep Tayyip Erdogan’s new closeness to Moscow – which has, for instance, cleared the way for a revival of the Turkstream undersea pipeline project, designed to transport Russian gas to a Turkish hub and then on to Europe - and rows with Berlin, which have undermined Ankara’s prospects of progressing towards EU membership, proved a cold blast of reality in the run-up to the negotiations. Also damaging is Erdogan’s current pursuit of constitutional changes in Turkey that would allow him to become an authoritarian populist leader.

“It is really concerning that Turkey was not represented at a high level in the Geneva talks, and this was largely because the last thing Erdogan would want right now is to be seen as giving up large chunks of territory to Greek Cypriots,” noted Ozerdem.

However, Erdogan’s recent rhetoric that the 30,000 Turkish troops securing the self-declared Turkish Republic of Northern Cyprus (only recognised by Ankara) would be there “for ever” should not be completely rejected, he argues. “For the security of the Turkish Cypriot community in the short to mid-term, keeping Turkish troops on the island might be a good strategy to consider because it is important to ensure that what the Turkish Cypriot community faced before the Turkish military intervention of 1974 [during inter-communal violence] should not be repeated again,” said Ozerdem.

Participants in the talks spoke enthusiastically of a constitutional model for a reunified state that would amount to a “bi-zonal, bi-communal federation”. It would be based on deep decentralisation to the two communities and power-sharing arrangements at the centre.

Elephant in the room

Meanwhile, at the Global Economic Summit in Davos, Switzerland, the head of the European Bank for Reconstruction and Development (EBRD) gave an upbeat presentation on what reunification could mean for investment in Cyprus.

Appearing at Davos’s Reuters Global Markets Forum on January 24, EBRD chief Suma Chakrabarti said that if the peoples of Cyprus approved proposals for a united Cyprus in referenda, the development bank would expand its activities on the island. “The EBRD mandate now allows us to operate in Cyprus to the end of 2020 and should the referenda be positive then we will certainly aim to increase our investment, particularly in the north, to help economic development there,” he told the forum. 

Shareholders would have to decide on any extension of the mandate “but it's true that the north is much more underdeveloped than the south and will require years of investment to catch up, so we'll have to see if Cyprus makes the case for an extension of the mandate and how the shareholders will react”, he added. 

Data on the EBRD website shows that to date the bank has committed to five projects in Cyprus with a cumulative investment of €179mn; financial institution initiatives account for 88% of the capital, while energy and infrastructure projects represent 6% each.

Turkey is EBRD’s largest country of operations, while it has been present in Greece for 14 months, during which it has invested nearly €800mn, the bank head pointed out. He added: “We've made a strong start in the banking sector and I would like us to be able to do a lot more to be able to help corporates and SMEs, particularly those involved in exporting Greek goods to other countries.”

The elephant in the room during the talks was Russia. The Russian government offered to attend the conference, but there was no formal reason for its participation. There is, however, no shortage of informal reasons. Some 40,000 Russians or more live on the island of 800,000 people, owning real estate and businesses in both its Greek-run and Turkish-run parts.

What’s more, Cyprus amounts to a huge offshore haven for post-Soviet money that actually makes the diminutive island the biggest official source of FDI in Russia. The Russian central bank says that in Q2 2016, Cyprus accounted for $2.8bn in investment. 

So would Vladimir Putin be at all minded to let a reunification process proceed smoothly? The signs are not good, to put it mildly. Local press reported that Russian ambassador to Cyprus, Stanislav Osadchiy, turned up at an anti-unification political gathering, while a united Cyprus would prove a boon to the cohesion of Nato (of which both Turkey and Greece are members) and the EU, two organisations Putin seeks to undermine at every turn.

The prospect of Cypriot gas rivalling Russian supplies to Turkey might also not impress the Kremlin, while another little noticed factor is a Russian military toehold in the Mediterranean that might be put at risk by a deal. Cyprus in 2015 opened its ports to Russian warships involved in anti-piracy and anti-terrorist operations. There have since been claims that Russia has used the access to smuggle jet fuel to Syria despite an EU ban. 

Major differences that led to the partitioning of Cyprus might nowadays be seen by some analysts as bridgeable, despite the multitude of tortuous land and property disputes that would have to be resolved. And, should Erdogan be wary of being hugged too closely by the Russian bear, giving some ground on the Cyprus issue could preserve a measure of his influence with Brussels. But in the new geopolitical era, there is a pervasive feeling that nothing will happen without a nod from Moscow.