Features : At A Crossroads
Offering an increasingly transparent and business-friendly environment, Cyprus is attracting ever more investment from global corporations.


Features--ctry-reportNearly 30 years ago, Kardex, a Swiss-based corporation that has its roots as a US typewriter company, saw the benefits of placing an operating base in Cyprus. Now, as globalization increasingly becomes the mantra for corporate executives from New York to Mumbai, this maker of high-tech storage systems is reaping the benefits of setting up shop in a country that sits at the crossroads of Europe, the Middle East and Asia.

“Cyprus is centrally located and the last stopover before you leave Europe,” says Chris Koufaris, managing director of Kardex Systems in Limassol. “It has a legal system that is based on the British system, and its accounting standards are international. That’s a plus over other countries in the area where the legal and commercial arrangements are not so clear.”

And as it approaches the third anniversary of its May 2004 entry into the European Union, this Mediterranean island now offers executives the knowledge that it is meeting the high standards on transparency, banking and macro-economic stability demanded by European watchdogs nearly 3,000 miles away in Brussels.

“That may not be good in the beginning,” says Koufaris, adding that the myriad of EU regulations can initially cost companies time and money. Combined with Cyprus’ own zeal to shake off an unwanted reputation as a tax haven when petrodollars fled Russia after the collapse of the former Soviet Union, the mechanics of doing business in Cyprus has become a bit more complicated.

“I’ve heard the remark from business people that it’s easier to open an account in New York than it is in Cyprus,” says Koufaris, who is also president of the Cyprus International Businesses Association in Limassol.

New Image, New Opportunities

Neophytos Neophytou, a partner at accountants Ernst & Young, agrees that the image of Cyprus has changed over the past three years. “The entry into the EU has changed the image of Cyprus. The same rules that apply to the UK or Germany apply to us,” Neophytou says. “If you open a corporate bank account, bank officials want to know who is behind the operation.”

Adds Eleftheria Ioannou, an official in the Foreign Investors Service Center at the Ministry of Commerce, Industry and Tourism: “We’re a country in the European Union now. We’re not just an island in the Mediterranean.”

Armed with stable economic indicators and the prospect of joining the euro at the beginning of 2008, Cyprus is intent on expanding the more than $1 billion of foreign investment it garnered from companies around the globe last year.

“The entry into the eurozone is very positive because the currency is one of the most widely used. It offers more price stability, and foreign investors who invest in Cyprus will have more comparative advantages,” says Elias Mallis, economic officer with the Ministry of Finance. Corporations elsewhere in the EU, for example, will no longer face foreign exchange costs when doing business on this island known officially as the Republic of Cyprus.

Serious about avoiding inflationary pressures, economic officials are working to persuade businesses to refrain from automatically rounding up their prices after the Cyprus pound is converted to the euro. Cyprus has been a member of the Exchange Rate Mechanism II since May of 2005.

The country has long offered both international and domestic corporations economic stability and posted an annual growth rate of nearly 4% last year and a declining inflation rate that dipped to 2.4%, down from 4% in 2003. And after inching upward to 5.3% in 2005 from 4.1% in 2003, unemployment logged in at 4.6% last year and should remain steady until the end of the decade, Mallis says.

This solid growth has been fired by a booming services sector that was behind nearly 78% of the country’s gross national product in 2006 and embraces industries from shipping to tourism to financial services. The Cypriot government is intent on expanding the contribution of the financial services sector and tapping into a highly educated workforce that includes many lawyers, accountants and other professionals well versed in the English language.

It also offers foreign investors a favorable tax regime that includes the EU’s lowest corporate tax rate at 10%, no tax on dividends and the tax-free repatriation of profits. And as a corporate holding jurisdiction, Cyprus offers foreign investors setting up a Cyprus holding company the benefits of double taxation treaties with more than 40 countries.

Koufaris says the country’s entry into the EU will help it expand its financial services sector over the long run. “It puts Cyprus in the same league as other reputable countries,” he says, adding that its competitors as a corporate holding jurisdiction are countries such as Ireland, Holland and Luxembourg. The association is pushing for legislation that would create a one-stop shopping center for foreign businesses. “It would take care of issues like immigration, so companies could obtain visas for their employees without going separately to the immigration offices,” he says.

Yet the shift into the EU, which reclassified offshore banks as international banking units, isn’t expected to generate much foreign interest in the Cyprus banking system other than in neighboring Greece, with its similar culture and language. On the plus side, EU membership has generated greater confidence and stability in the local banking system and means Cyprus cannot favor local banks over foreign institutions. But the retail banking market is saturated, and opportunities for corporate lending are limited in a country of fewer than 900,000 people, banking executives say.

“The retail market is over-branched,” says Michael Kammas, director general of the Association of Cyprus Commercial Banks in the capital, Nicosia. And regulations are still restricting the development of certain banking niches, such as the mutual fund industry. Savvas Thalassinos, manager of the international business unit of the Bank of Cyprus in Nicosia, agrees: “The market is saturated. It’s very small.” With more than $28 billion in assets and deposits at the end of 2005, the Bank of Cyprus is the largest of the country’s 10 commercial banks and has 43% of the market.

Local Banks Look Abroad

The limited opportunities at home have encouraged Cypriot banks to start to head abroad. They’re particularly eyeing markets in Russia and the Balkans, including Serbia, Romania and Bulgaria. The Bank of Cyprus plans to open a subsidiary in Romania, which recently joined the EU, by this summer. The bank is also reportedly looking at opportunities in nearby Greece and in January rejected a takeover offer from Greece’s Piraeus Bank, which already owns just under 10% of the Nicosia-based bank.

With more than 5,000 people employed in its ranks, the shipping sector is another important part of the country’s services sector. Cyprus has one of the largest merchant shipping fleets in the world, with more than 1,800 ships, according to government officials, and the Cyprus merchant fleet makes up about 16% of the merchant fleet flying under EU flags. It also is a leading ship management center.

Based in Limassol, the shipping industry contributed 4%, or 572 million Cyprus pounds, to the country’s GDP last year, according to Capt. Andreas Constantinou, a senior surveyor of Cyprus ships in the Department of Merchant Shipping, part of the Ministry of Communications and Works. That’s up from 200 million Cyprus pounds in 2000 and 548 million Cyprus pounds in 2005.

“The shipping industry has enjoyed greater prosperity over the last two to three years. We’re attracting more quality-oriented companies,” says Constantinou, adding that the government has strengthened its safety and administrative controls to improve the quality of the ships flying under its flag.

And as the EU’s southeastern outpost to the Middle East, Cyprus can both reap the benefits and suffer the repercussions of being so close to this volatile region. While the recent turmoil in Lebanon temporarily dented the business of cruise lines passing through the area as well as Cypriot importers and exporters, Cyprus has generally benefited as companies intent on doing business in the region seek out a stable location.

“We’re a bridge between Europe and the Middle East,” says Kammas. “And we have good relationships with the Arab countries and with Israel. Companies are seeking opportunities in Cyprus and through Cyprus.”


ENERGY OFFERS PROMISE AND CONTROVERSY

One sector that holds out economic promise for Cyprus—even as it generates immediate controversy with the Turkish Cypriot community in the north—is the volatile energy sector. Last month the Cypriot government opened a five-month bidding process that will hand companies licenses to explore for oil and gas in 11 blocs in the Mediterranean Sea.

The potential of finding lucrative oil and gas deposits in 60,000 square kilometers off its southern coast is based on preliminary two-dimensional studies released by PGS, a Norwegian petroleum services company, in November of last year, says Stelios Nicolaides, an industrial geologist in the Energy Services division of the Ministry of Commerce, Industry and Tourism.

Right now, energy production makes a minimal contribution to the country’s gross national product, and the country imports about 2.8 million tons of oil annually.

Any possible discovery is years away as each company that receives a license to carry out three-dimensional studies has three years to conduct its exploration work. They each then have two renewal periods of two years each, says Nicolaides. Cyprus has signed separate exclusive economic zone agreements with Lebanon and Egypt to help delineate the underwater exploration rights between the three countries.

Leaders of the Turkish Cypriot community in the north have decided to use the potential of lucrative returns generated from oil and gas for some saber rattling of their own. Turkish Cypriot leader Mehmet Ali Talat in late January warned of rising tensions if any offshore finds were not jointly exploited by both Cypriot communities. Cyprus’ foreign minister George Lillikas quickly rejected the notion of sharing revenue from any potential oil and gas deposits with the north. The Turkish foreign ministry then entered the fray and said the Cyprus government had no right to sign international agreements and warned that the issue could have a negative impact on resolution of the Cyprus problem. The Cypriot foreign ministry spokesperson rebutted and said Ankara had no business questioning business agreements between states. European and US officials added their own input and said the dispute over oil and gas highlighted the need to resolve the Cyprus problem.

The island has been divided since 1974 when Turkey intervened and seized more than a third of the island in the north in response to an Athens-engineered Greek Cypriot coup in Nicosia. In 1983 the Turkish-held area declared itself the Turkish Republic of Northern Cyprus but is only recognized as such by the Turkish government The United Nations has maintained a peacekeeping force in Cyprus since 1964 to prevent a recurrence of fighting between the Greek Cypriot majority and the Turkish Cypriot minority, which reached a head in late 1963. UN officials are once again trying to broker talks between the two communities after the Greek Cypriots rejected a UN settlement plan in an April 2004 referendum.

Note: Travel and accommodation
expenses incurred by the reporter
covering this story were paid by the Cyprus Trade Association.
 

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