Wednesday, September 24, 2014
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A New Business Model for Cyprus

MADRID – Once again, Europe has peered into the abyss. But the tentative agreement between Cyprus and the troika (the European Commission, the International Monetary Fund, and the European Central Bank) probably means that the worst has been avoided. Big losses for large depositors in Cypriot banks will now be imposed, and the country’s second-largest bank will be shuttered. Looking ahead, however, Cyprus has the means not only to recover, but even to heal its longstanding division with the Turkish-backed statelet in the north of the island.

Cyprus, of course, is just the latest country to be hit by the economic crisis surging through the Mediterranean. For years, Cyprus had an immense banking bubble, with the sector’s assets estimated at roughly seven times the country’s GDP, as foreign money poured into a tax haven within the eurozone’s secure environment.

The design of the bailout has been shaped both by domestic pressures faced by eurozone leaders and by the exceptional nature of the Cypriot banking bubble: many European leaders suspect that the island had become a money-laundering center for Russian individuals and entities, which pumped an estimated one-third of the €68 billion into the country’s banks. Regardless of the details of the ultimate deal, the risk is that the ghost of Russia’s bailout of Cyprus in 2011 could provoke severe side effects across Southern Europe, both for governments’ borrowing costs and for small savers.

Nevertheless, it is imperative not to lose sight of some very valuable assets that Cyprus holds – assets that could mean the country’s economic salvation.

In 2011, the American energy company Noble discovered some 200 billion cubic meters of gas in the Eastern Mediterranean – the value of this block, known as the Aphrodite gas field, has been estimated at some €80 billion. Work has already begun on extraction, with production expected to commence in 2018. Experts say that the reserves could provide some 100 years of energy for Cyprus – and an alternative supply source for energy-hungry Europe. In fact, in the search for an acceptable bailout package, the future revenues from these assets were at one point considered as possible guarantees.

The United States Geological Survey has estimated that the Levant Basin, which extends across the Israeli, Cypriot, and Lebanese seabed, contains some 3.45 trillion cubic meters of recoverable natural gas and 1.7 billion barrels of oil. Given their geographic location, however, these incredible reserves can be uncapped, extracted, and exported only on the basis of inter-state cooperation.

As with all marine gas and oil deposits, the rights to the waters and the riches below are critical. And, given such riches, competition might appear lucrative at first sight. But cooperation stands to enlarge the pie.

Moreover, economic agreements may promote closer cooperation in other realms. Energy matters have already led to an unprecedented warming in relations between countries such as Israel and Cyprus in recent years, with an agreement signed in 2010 formally delimiting these states’ respective exclusive economic zones. It is not unimaginable that this type of cooperation could be extended to include other neighbors around the Levant.

The good news is that Cyprus’s newly elected president, Nicos Anastasiades, may be open to such an agenda. Naturally, much will depend on how he fares politically in the current turmoil surrounding the bailout package. Anastasiades, a member of the pro-European Dimokratikós Sinayermós (Democratic Rally) party, won 57% of the popular vote on a platform that emphasized economic recovery, and this will naturally be his top priority. Nevertheless, a cautious look beyond the current turbulence – and into Anastasiades’s history – provides grounds for optimism.

In 2004, Anastasiades and his party supported the Annan Plan, developed by former United Nations Secretary-General Kofi Annan and supported by the European Union. Annan’s reunification proposal provided the blueprint for a “United Republic of Cyprus” comprising a federation of two states.

When put to a referendum, roughly two-thirds of the island’s 250,000 Turkish Cypriots in the north supported the Annan Plan, but 76% of the 860,000 Greek Cypriots in the south rejected it. It is not inconceivable, however, that Anastasiades’s victory could provide impetus for reopening the dialogue between the island’s north and south – that is, once the current crisis has passed.

Such an outcome would be a major breakthrough for Cyprus and the region. Resolving the island’s longstanding division would nest Cyprus more comfortably in the EU, and the economic effects would be manifold, extending throughout the eastern Mediterranean.

For example, both Turkey and Greece could reduce their military spending (though naturally to varying degrees, given their respective geopolitical environments). Greece is the second-largest defense spender, relative to GDP, in the EU; clearly, in today’s economic climate, savings here could provide hugely welcome budget relief. And the Kurdish rebel leader Abdullah Öcalan’s recent call for a ceasefire is an encouraging sign that Turkey, too, stands to benefit from a peace dividend.

Greek Prime Minister Antonis Samaras’s visit to Istanbul earlier this month was a heartening sign that tensions between Greece and Turkey are already beginning to ease. A deepening of cooperation in the eastern Mediterranean would provide myriad economic opportunities, not least the many related to developing the region’s cross-border maritime gas reserves.

Anastasiades has endured a perfect economic storm during his first month in office, and the current crisis is certain to continue to dominate his agenda. But, beyond today’s tempest, there is light on the horizon. Cyprus, and its neighbors, must now pull together to reach it.

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  1. Commentedgeorge kamberis

    SOLANA MENTIONS THAT MR ANASTASIADES AND HIS PARTY SUPPORTED THE ANAN PLAN. THIS IS INCORRECT.ONLY 24% OF THE ELECTORATE VOTED FOR THE PLAN. FROM SURVEYS IT APPEARS THAT 66% OF THE PARTY DIID NOT SUPPORT THE ANAN PLAN. WHEN SOLANA SAYS THE PARTY PERHAPS HE HAD IN MIND 1 OR 2 OF ITS LEADERS. NOT EVEN ALL OF THEM.

    DOES HE BELIEVE THAT PRO EUROPEAN ANASTASIADES WAS WELL TREATED BY EUROPE OR WAS HE TRAPPED AND PRESSURED INTO PERHAPS DESTROYING THE WHOLE OF THE BANKING SYSTEM IN CYPRUS.

    AS TO GREECE AND TURKEY THEIR PROBLEMS ARE VERY MUCH MORE THAN CYPRUS. THERE IS THE AEGEAN WITH GREECE DEPENDING ON INTERNATIONAL AGREEMENTS AND LAWS AND TURKEY ON ITS SIZE AND ITS ARMED FORCES.

    JUST TO LET THE COMMENTATORS KNOW A MILITARY COUP WAS CARRIED OUT IN CYPRUS BY THE GREEK JUNTA WHICH ALSO CONTROLED THE CYPRIOT NATIONAL GUARD ON 15 JULY 1974. THERE WERE NO CONSEQUENCES FOR THE LOCAL TURKISH POPULATION FROM THE COUP. FIGHTING OCCURED AFTER THE TURKISH ARMED FORCES INVADED CYPRUS ON THE 20 JULY 1974, UNDER VERY INCREDIBLE CIRCUMSTANCES. THE CYPRIOT AND GREEK FORCES WERE NOT ALLOWED TO OPPOSE THE LANDING. TO BE ABLE TO INVADE 5 DAYS AFTER THE COUP THE TURKISH FORCES MUST HAVE BEEN INCREDIBLY EFFICIENT OR ALREADY ON THEIR SHIPS ON THEIR WAY TO CYPRUS BEFORE THE COUP.

  2. CommentedAndre Heggli

    Fact check: according to Brookings insitute's article "is russian peter being used to pay the cypriot's paul", the russians deposited "nearly $20 billion" and according to the FT (many articles) the total depisits from non-eurozone members was 67.5 bn in February. Are you saying Russians alone "pumped an estimated €68 billion into the country’s banks"?

  3. CommentedMargaret Bowker

    The Cypriot economy is beginning the process of rebalancing and as in the UK, where the public sector is slimming down and jobs being created in the private sector, the Cypriot banking sector is contracting and the non-banking sector will need considerable support to take up the slack. The vibrancy and lending capacity of the Central Bank of Cyprus will be very important. A growth package from the European Ivestment Bank and others would be appropriate until the country's energy assets come in. There doesn't seem any template issue because a very firm statement was made that the recent bailout was a one off. The Euro Group Chair was evidently theorising and any pan Euro-zone, non-specific change of this magnitude would need to come before the EU.

  4. CommentedAvraam Dectis

    .
    Perhaps the better solution to the reunification of Greece would be for Turkey to withdraw its forces from Cyprus and allow the restoration of the occupied lands by the government of Cyprus.

    Turkey is occupying part of a member of the European Union while at the same time trying to join the European Union.

    That is absurd. It must choose.
    .

      CommentedBurak M

      With regards to the comment below, perhaps Turkish soldiers wouldnt be there to begin with had Cypriot Greek militants backed by the Greek junta at the time did not commit atrocities to the Turkish civilians indiscriminately killing woman and children inclusive.
      Ironically, even after this incident, it was again the Greek side which voted no to a unified Cyprus. This is evidently indicative of the majority of the Greek side wishing to see a Greek dominated or nothing Cyprus which Turkey will never allow. The EU's blunder in this regard was telling the Greek side that its ok and whatever you select, you will be joining the EU regardless.

      As for the articles insistence on a more diplomatic and balanced approach to the regional old time rivalries inclusive of big power players such as Israel, it is an encouraging piece of advise for all the diplomats in the regions concerned. Not only is a peaceful solution more desirable in the sense of regional stability but it also halts the relentless security costs associated with wanting to control all relative resources.

      The mentioned regional powers and peripheries alike would be wise to take your advice Mr Solana.

  5. CommentedZsolt Hermann

    At the moment the activity in the Eurozone is constant fire-fighting, or running around on a common ship trying to plug the cracks on the wall.
    But the activity is still disjointed, still based on individual or national self-calculations.
    The title of the article "New Business Model For Cyprus" is a good example, as if there was a model for Cyprus, another model for another country and so on...
    Not only Europe but the whole global world is locked into an interconnected and interdependent network.
    In such a network there are no local, national events, plans, models, actions any more.
    Even the smallest, least significant action is influencing the whole network in a very significant, fundamental way.
    The case with Cyprus was a very good example of this, how it shook the whole market, and we saw the same with Greece, or other non-European examples.
    The only way out of this futile day to day problem solving is to switch to a completely different model, where individuals, nations do not compete with each other wasting resources, seeing themselves and each other separate, but start mutually complementing each other like cogwheels joining together to create a well functioning machine reaping benefit for everybody.
    Whether we like it or not our evolution brought us to this state where the whole global humanity resembles a single living organism, thus in order to survive we have to take example of all the successfully surviving, developing natural systems, where all parts work for the benefit of the whole and only taking for themselves what is necessary for their optimal function.

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