Net Assessment Bulletin: Cyprus

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ISRS Senior Researcher, Jas Mahrra provides an assessment of Cyprus – a strategic country connecting three continents.

 

Cyprus

Cyprus is a strategic country connecting three continents. It also has the possibility of reigniting an EU financial contagion if decisive action is not taken. Following our Net Assessment Bulleting (NAB) warning in November 2011 this is a slightly updated assessment:

 

~  Cyprus: Reigniting the contagion

Its exposure to the Greek debt and lending to the Greek private sector, as well as fiscal and structural problems within the island’s economy resulted in all three major credit rating agencies downgrading Cyprus to junk status.

The Cypriot taxpayer faces the prospect of a possible bank bailout package in the region of €10 billion, the equivalent to over 50% GDP of Cyprus. As a proportion of GDP it is one of the largest bailouts ever.

Russia offered a rescue package of a €2.5 billion loan to the Cypriot Government. As one of the main foreign direct investors into Cyprus, this loan is seen as a means of continuing investment.

 

~  UK & Russian Presence: geo-strategic positioning

Cyprus is a key financial centre for many Russian business elites but a large number of Russian nationals reside in Cyprus (estimates are between 8,000 and 40,000). The incentives for Russia rescuing Cyprus are obvious, less so, is the geo-strategic advantage. Russia’s only naval base in the Mediterranean is the Syrian port of Tartus which is no longer assured. Russia will do its utmost to maintain its only foothold in the Mediterranean. Cyprus could be the answer.

Although Cyprus gained independence in 1960, the UK has retained two Sovereign Base Areas indefinitely. These two sites provide the gateway to the Middle East. If tensions mount with Turkey and the Middle East, the UK could find itself at the interface of yet another uprising.

 

~  Economic / energy conflict: beyond Turkish-Cypriot dispute?

Cyprus until recently had no proven natural resources. The discovery of potentially 122 trillion cubic feet of gas in the Levant Region of the Mediterranean changes the regions energy zone. Cyprus is a bridge between three continents and has the potential to become a major destabiliser as tensions go beyond a Turkish-Cypriot dispute.

Israel has deepened its ties with Greece and has agreed with Cyprus on delimiting respective Exclusive Economic Zones and co-operating in oil and gas exploration. This energy find is a real revenue prospect for Cyprus but political policy decisions mean that funds are unlikely to materialise as quickly as Cyprus needs. Rather than building a pipeline to Turkey the plan is to export via an LNG terminal, which has not been built.

Turkish-Israeli relations have soured since the flotilla crisis where Turkish citizens were killed and tensions were raised soon after the first test drilling started last year. Turkey also started its own drilling exploration as they looked to enhance their own energy and economic agenda.

Turkish citizens no longer support the country’s EU membership. Turkey is moving eastwards, towards closer Turkish-Arab relations. It has much to occupy its attention with concerns for political demands from the Kurdish community (Iraq Kurdish Region may have been overplayed and the assassination of three Kurdish women in Paris derailing Turkish Government and Kurdish talks) and a civil war neighbouring on its border, in Syria.

The EU won the Nobel Prize for peace and can ill-afford Turkey disengagement. If Turkey moves away from democratisation at the same time that EU countries close off the nuclear power option, (Turkey is an energy corridor which the EU can ill-afford to lose), then this becomes a dangerous situation just as the Arab awakening is reshaping the balance of power in the region.

 

~  Germany: What is their decisive move?

Much of Germany’s wealth has been accumulated over the years through trade deficits other (mostly periphery) countries have run with Germany. Products have been dumped and the Landers Banks have provided credit to countries that could not be sustainable.

Germanyand its citizens are loath to bail out yet another government or foreign bank. Much depends on the outcome of the next general election. Whilst Angela Merkel retains much of her popularity, her premiership is not guaranteed as the prospective SPD dominated coalition is no longer certain.

The recent leaked report by its intelligence service which estimates that Russian’s oligarchs and ‘Mafiosi’ will be the prime benefactors of any bailout make any appeal to its citizens to support financial assistance unlikely. Angela Merkel has been steadfast in her decision that the EU must be saved at all costs. Will it stretch to supporting the investments of Russian oligarchs?

June 2012,Cyprusturned to the troika of EU, the ECB and the IMF for emergency aid of €10 billion. In turn, the troika have demandedCyprusreform its economy. Germany is insisting that the EAC (Electricity Cyprus) is sold off to pay Cypriot debts.