Turkish Cyprus sees way out of crisis

Financial Times (UK)  Tuesday, April 2, 2013, p. 6

By Joshua Chaffin in Nicosia

Divided island. The south’s woes may drive the two sides towards a settlement and new opportunities, says Joshua Chaffin

From his office in Nicosia, the divided capital of Cyprus, Hasan Gungor can almost watch the economic crisis unfolding across a barbed wire fence.

Mr Gungor is undersecretary for the presidency of the Turkish Republic of Northern Cyprus, which has been separated from the Greek south since 30,000 Turkish troops invaded the island in 1974, touching off one of Europe’s most protracted territorial disputes.

« It will be painful, » he said. « They will have to reorganise their economy and I don’t think they can just invent a ‘new thing’. »

This year marks the 50th anniversary of the Cypriot dispute and the 45th year of fruitless negotiations between the Greek and Turkish sides. Progress has been at a standstill since the south rejected a 2004 UN reunification plan that the north endorsed.

Following the ballot, Greek Cypriots saw their fortunes rise. They joined the EU and adopted the euro, cementing ties to the wealthy economies of western Europe. Smaller and poorer Turkish Cyprus, whose government is recognised only by Turkey, has laboured in semi-isolation.

Now the €10bn international bailout the south was forced to accept last month – and the accompanying economic shock – is shaking up the island and may present fresh opportunities.

Turkish Cypriots sound more sympathetic than scornful. In a strange parallel, they suffered their own financial crisis in 2000, which resulted in the closure of several banks and required a €256m bailout from Ankara that was equal to about 20 per cent of economic output.

« What has happened in the south is not very nice; it’s not very pleasing, » said Gunay Cerkez, head of the Turkish Cypriot Chamber of Commerce, sitting in a cavernous office with black leather walls and gold trim. « But the possible benefit of this could be that people face the facts and realities of the need to find a sustainable solution to the Cypriot problem. »

There are subtle signs of change at the border: Greek Cypriots are crossing into the north to use cash machines unfettered by daily withdrawal limits while Turkish Cypriot construction workers are leaving the south en masse because of a lack of work.

After losing some of the island’s best tourist and agricultural land in 1974, the south created the offshore financial business that is now at the centre of the crisis.

With that industry facing ruin, Mr Cerkez – who has interests in everything from swimming pool installations to the north’s only golf course – believes trade links with Turkey, 80 kilometres away, could be the south’s saviour. « This will open some real, immense opportunities for the Greek Cypriots, » he said.

The most obvious benefit of a settlement is that it would make it easier for the island to exploit potentially vast offshore gas finds in the Mediterranean that have so far been clouded by territorial disputes.

When Cyprus was still casting about for alternatives to the bailout, it considered issuing bonds backed by future gas revenues, an idea that drew a sharp warning from Dervis Eroglu, the president of the Turkish Republic of Northern Cyprus.

Mr Eroglu – with strong backing from Turkey – said the bonds would be invalid, and called it « another unilateral act by the Greek Cypriot side that deepens the lack of confidence ».

Mustafa Atatuzun, managing director of Semra, a construction and building materials company, uses many of the same suppliers as his southern competitors, and has been hearing about their struggles. « They’re in a really bad situation, » Mr Atatuzun said.

For years, it was a mystery to him how one side of an island bereft of natural resources, forced to import basic goods and burdened by high energy prices, was able to accrue such wealth. « I always thought: How can they be this strong? »

Part of the answer, it turned out, was that the south relied on Russian bank deposits lured by its low tax rate and light regulation, and which now seem destined to head elsewhere.

If the two sides were re-united, Mr Atatuzun said he would buy plenty of supplies in the south, where they tend to be cheaper because of a better port and the greater efficiency of the businesses.

« Before, they were holding all the cards: they were in the EU, they had a stable economy. Why would they want to come together? » Mr Atatuzun said. « They had no interest. Now, because of a weak economy, they do. »

But Mr Gungor, who has spent much of his career negotiating the economic chapter of the UN settlement, was less optimistic. The minuscule level of legal trade between the two sides has been falling in recent years and, despite EU promises, the north has not been permitted to trade directly with the rest of the bloc.

« I don’t think developments in the south will make Greek Cypriots more eager to solve the problem, » he said. « Worse than that, if things turn out really bad they may be even less willing to negotiate. »