WHEN IT comes to foreign investment anything remotely positive is talked up to the maximum. Over the years this has resulted in a succession of potential or actual foreign investors being saluted in turn as the “next big thing” for our economy.
However, a distinction needs to be made between those actual investors who came to Cyprus for reasons of their own, and potential investors who have been courted since Cyprus joined the EU in 2004.
Under the first category of investor, three waves of investment stand out.
The first began with the outbreak of war in Lebanon in 1982. According to several estimates, more than one million Lebanese left their country following the war, and after virtually all foreign embassies in Beirut closed their consular sections, most of them passed through Syria and Cyprus, at the time the only two neighbouring countries that did not require a visa. In 1989, 40,000 Lebanese were estimated to still be in Cyprus, many of them choosing to put down new roots. Trade with Lebanon has developed steadily since the 1980s. Lebanese exports to Cyprus amounted to $889,000 in 2001, growing to $2.1 million in 2006. Lebanese imports from Cyprus for the same period ranged between $7.4 million and $9.4 million.
The second wave of “investment” came courtesy of Milosevic’s efforts to avoid UN-imposed sanctions on the former Yugoslavia between 1992 and 2000. During this period, at least $800 million, much of it in cash, was spirited out of the country and flown to Cyprus. Papers filed at the war crimes tribunal in The Hague say that Milosevic and co-conspirators set up eight Cypriot front companies, which allegedly set up some 250 bank accounts in Cyprus and Greece and funnelled money to more than 50 countries, including Liechtenstein, Luxembourg and Switzerland. Much of it was used for to buy weapons and military supplies from companies in the US, Russia and Israel. How much remained in Cyprus and fed into the local economy is anybody’s guess.
The third wave also began in the 1990s, with the break-up of the former Soviet Union. A large number of newly-rich Russians used Cyprus as a base through which to invest in Western markets or back in Russia. According to one estimate, by the end of 1994 the flow of money from Russia to banks in Cyprus had reached $1 billion a month. By 1996, 16,000 Russian companies had registered here, most of them offshore. This generated a massive surge in the real estate market in Limassol, and also benefited the retail and services sectors. Even after the demise of its offshore status following its EU accession, Cyprus continues to play an important role for Russian investors, as companies set up corporate vehicles here in order to list themselves on the world’s stock exchanges, like London and New York.
The second category of investor is less problematic, but arguably less tangible.
To prepare for its entry into the EU in 2004, Cyprus brought in legislation that strengthened rules against money laundering, requires greater transparency in business dealings and discourages tax evaders. Since Cyprus “went legit”, as some would put it, every effort has been made to advertise the island as an attractive destination for investment.
Successive Commerce Ministers and Finance Ministers have done their job in trumpeting the country’s strategic geographic location, its macroeconomic stability, the lowest corporation tax in the whole EU at 10 per cent, the framework of double taxation treaties, the highest percentage of university graduates in Europe, and so on.
It remains to be seen what will be the long-term results of these continuing efforts.
One immediate result has been the strengthening of Cyprus’ significant relationship with the Russian Federation. Seven bilateral agreements on economic and other issues were signed in November 2008. This relationship was put under strain by the government’s failure to prevent Cyprus from being put on Russia’s tax “black-list” on 1 January 2008, on the grounds that Cyprus was an “unco-operative territory”. Despite periodic announcements from the government regarding “progress” on the matter, Cyprus is still on the list.
