Waiting for the next green light

Many places have identified themselves as strategic hubs, and Cyprus has marketed itself this way for many years. It can do so especially because it is located on the fringe of both Europe and the Middle East. What has been its record in terms of attracting inward investment in the past ten years? Are there any recent features of the investment regime to mention?

Cyprus began to internationalise in the late 1970s. Back in those days it was essentially a tax haven, focusing on financial services. Following accession to the EU and tax harmonisation we moved away from that particular ‘etiquette', and now we are a country with a fully-compliant EU and OECD tax system and we are competing legitimately, if we may put it that way, with the likes of Ireland, Luxembourg and so on.

Cyprus has the lowest tax rate in Europe, a flat rate for corporates at 10 per cent. Its success is not in terms of attracting foreign direct investment, owing to the country's small size, but in terms of attracting companies, with holding structures, working out of and through the island.

The location of Cyprus and its tax incentives have been a catalyst for many companies to come here in the past decade, covered by the term ‘international business companies', belonging to non-Cypriots. In this respect the statistics show, for instance, Cyprus as ranking third in facilitating investment into Russia; number one regarding Ukraine and number three with respect to India. The numbers themselves refer to flows through Cyprus rather than remaining here.

There have been no major changes in the regime, but there has been a constant and high growth rate in the relevant statistics through 2007. We had a drop in 2008 and 2009, but a pickup in 2010 with the revival in international markets, which we hope will continue. At its peak in 2007 we registered close to 30,000 new companies in Cyprus. In 2009 that fell by almost half; in 2010 it reached close to 20,000 again.

There is no typical business to describe these companies. Activities can range from oil and gas, through other heavy industrial investments.

We have seen more and more of these companies establishing fully-fledged offices on the island. For them it is not just a matter of avoiding a kind of ‘brassplate' identity — which we would not want to encourage — but actually to have substantive business presence here. Both geographically and from a resource standpoint, we are a centre where business can not only take place but also can support business internationally.

Cyprus is one of the best places to set up a company, because, having been a British colony, we have a government that works, accounting and legal systems based on the English system, and if you talk to the various international investors here, they will tell you they feel supported by this professional background.

As a member of the Eurozone, but on its periphery, what has been Cyprus' economic performance, especially in the key indicators of growth, inflation and budget deficit? Most recently the rating agencies have indicated a stabilised situation, and the EU said Cyprus is now off its deficit watch list. But is there political stability and policy consistency behind the strategy?

Traditionally Cyprus hasn't had any problem with inflation or unemployment. The problem we have is the public deficit and the increasing size of the public payroll that has surfaced and been aggravated by the financial crisis. The government has been trying to commit the unions to remedial action, and there is a lot to be done on that front, although several steps have been taken in the right direction. When certain rating agencies downgraded Cyprus, it was more to do with the fact that some banks have meaningful exposure to Greece.

Unfortunately there is no policy consistency between the political parties, so the deficit situation may still deteriorate. The government has taken only the absolute minimum measures to pass the EU's scrutiny; much more drastic action is needed. It might have been easier with a socialist government in power now, but it is not evident.

How comfortable is the banking system, considering that the West has suffered a traumatic crisis, which is not yet resolved and, not least in Europe, perhaps continues to carry significant risk?

On the banking side we have been quite lucky or clever, as the banks have not been affected by the toxic exposures seen among other international banks elsewhere. The banks here have not needed the support of the government; we are far away from that. The exposure to the Greek market is important but not critical. The local banks were hoping for expansion there. The two or three biggest banks are now looking to the Russian — and more recently the Chinese and Indian — markets and making investments there, which may be a positive sign if we assume a positive growth outlook for Russia.

As to why the banks have been relatively safe, prior to accession into the EU there were exchange-control restrictions, and the tendency to invest abroad was almost zero. That kind of mentality continued. Also, the banks have been quite well regulated by the central bank, particularly in the past five years.

Substantial capital inflows of Russian money have also been supportive. The banking industry here is looking to build on those figures, assuming stability on the island.

What is the general appeal of Cyprus with regard to Arab and Gulf investment? Can you identify specific developments to illustrate in most recent times?

Cyprus has been friendly with the Arab nations for decades. We have managed to have close relationships despite the different religions and the Turkish issue [i.e. in particular the divided island]. We currently have a full political relationship with the UAE — with an embassy in Abu Dhabi for the past two years, overcoming political sensitivity associated with Turkey — as well as in Qatar, and have recently signed new tax treaties with both.

Cyprus can be a stepping stone into the Arab world for inward investors. Having said that, with no taxes in most of the Gulf nations, the use of Cyprus in this respect is less important. From the point of view of outward investment, Cyprus is physically close to the Gulf investor but also part of the EU. An Arab investor with a base in Cyprus faces an open EU market.

Such business used to be mostly trading operations. Now we are trying to attract Islamic funds into Cyprus, and are working to promote such ideas to the sovereign funds both directly in the Gulf and with their London operations. The Cyprus Investment Promotion Agency (CIPA), of which I am a board member, is also actively promoting this.

The current discussion with Qatar for a hotel and leisure complex in Nicosia is a transaction that we would very much like to happen. The investment itself is not so huge, but its importance is in establishing a relationship, as a project like this gives rise to following investments, with a knock-on effect, for instance, in terms of flights and tourism. (As an example in passing, the mosque close to Larnaca airport is historically significant to Muslims.) We have a beautiful climate most of the year. What we need to do is develop infrastructure.

There are not many large projects to interest large investors. Yes, we have marinas and the airports as completed projects, and real estate projects, but apart from those not so much.

Cyprus is still functioning mostly as an intermediary in the investment sense.

As for shipping, we rank high globally in the registration of ships, and in Limassol we have a number of large ship management companies. For investment coming from outside, there are funds trying to attract Arab finance, but again these are not funds that will reside in Cyprus as such.

The project for Larnaca's marina was awarded to an international consortium. The offshore energy prospect is interesting both financially and politically. The first Block has been awarded to Noble Energy a company of US interests and one of the biggest oil and gas exploration companies in the world. There is hope of substantial reserves. There has been some cooperation with the Israelis to try to promote that prospect together.

Please describe the profile of the Cyprus-GCC trade association. Has it proceeded on an ad hoc, private basis, or is it driven in conjunction with government? What are its current priorities?

One of the associations established under the Cyprus Chamber of Commerce is the Cyprus-GCC Business Association to develop trade and investment business both ways. It began four years ago. We try at least once a year to visit the Gulf for promotion and presentations. We have visited Sharjah, Abu Dhabi, Bahrain and Dubai. We intend to be in the UAE again and Qatar within the first half of 2011, with a minister-led delegation.