Cyprus: Our friends in the East
23 June 2014 | By Jonathan Ames
Energy could shelter Cyprus from the worst headwinds coming from long-term partner Russia. Will a surge of global firms follow the power line?
Limassol and Nicosia may be the best part of 1,500 miles from Moscow, but Cyprus has become hugely dependent on Russian money and investment. And, say local lawyers, ripples from the turbulence between Moscow, Kiev and the West are not welcome.
A striking example comes from the tourist sector. A partner in a large Cypriot firm tells of a boutique hotel owner who took most of his 2014 bookings from Russians in roubles before the Ukraine crisis. The rouble’s value has dropped dramatically – by at least 10 per cent against the dollar since the beginning of the year – meaning, says the lawyer, that the hotelier’s profit margin has “completely vanished”.
But it is not just Russian tourists in search of a spot of Mediterranean sun that has bolstered the Cypriot economy in recent years. The 2013 bailout of Cyprus by the EU and IMF exposed just how intertwined the jurisdiction is with Russia. Media reports during the crisis suggested that as much as 50 per cent of all deposits in Cypriot banks could be traced to Russia. Indeed, ratings agency Moody’s was cited as claiming a year ago that Russians had about £21bn salted away in Cypriot banks.
Perhaps more importantly, Russian companies have also used Cyprus as a sunny offshore jurisdiction from which to invest back home while benefitting significantly from a friendly tax regime. Because the Ukraine crisis is slowing business generally in Russia – thanks in part to a range of US and EU sanctions on Moscow – investment from Russians with offshore companies in Cyprus has evaporated to a trickle.
The Ukraine effect
The negative impact of that slowing has been only slightly offset by wealthy Ukrainian individuals – and some Russians – looking to get their money into a safe Mediterranean haven.
“Ukrainians have been flying into Cyprus with money to get away from the conflict,” explains Harneys’ Cyprus managing partner Pavlos Aristodemou. “But that’s a private client matter.
“In terms of international transactions, Russian and Ukrainian businesses have naturally put projects on hold. The big question is how long that will last. That seam of work is important to the Cyprus legal profession because those investments in Russia are often structured through Cyprus. Cyprus is the biggest venue for holding companies for those countries, so if it slows there, it slows here.”
Ironically, tensions between Moscow and Kiev could expedite moves around a recent development that, as far Cyprus is concerned, could consign to history its reliance on investment from CIS countries.
Some four years ago a potential gas field bonanza was discovered in the Leviathan area of the Mediterranean. According to the US Geological Survey the entire Levant basin, part of which borders Cyprus, could conceal some 120 trillion cubic feet of gas. So far, only a fraction has been located but Cypriots estimate that enough gas is within striking distance to meet the island’s energy needs for the next 800 years.
As no country plans that far in advance for its own needs, the Cypriots will clearly be looking to become big gas exporters in the near future.
Local Cyprus lawyers say EU energy mandarins have recently given the green light to further consideration of an energy route through the eastern Mediterranean as an alternative to the corridor from Russia and Azerbaijan. Indeed, Italian and French energy giants ENI and Total are already camping out in Cyprus, sharpening their drill bits.
Energy tempter for global firms
Some local lawyers predict that an oil and gas rush to Cyprus will result in global law firms taking a greater interest in the jurisdiction, with some even planting flags on the island.
“So far, the global practices would rather work with local firms,” says Pamboridis senior partner George Pamboridis. “But that approach is bound to change in view of the growing energy industry, which is bringing with it a rising demand for specialist, high-end legal advice. Likewise, the infrastructure projects that go with drilling will increase the demand for high-end advice that can’t be obtained locally.”
Pamboridis has a close relationship with DLA Piper, but, in common with other Cyprus firms, it takes referrals from a range of UK and US global players.
“If you have a client as big as ENI, BP, Noble Energy or Halliburton,” says Pamboridis, “and that client decides to invest in Cyprus to the tune of between $500m and $3bn, wouldn’t it be worth continuing to support that client by setting up something in the vicinity? It’s client-driven. You can’t isolate the jurisdiction and say it is or is not worth going there. You have to assess whether clients require services in a certain jurisdiction. If they do, you just go there.”
Many lawyers on the island are understood to be nervous at the prospect of global players training their sights on Cyprus. But others maintain that even if two or three UK or US firms launched a local presence, it would ultimately benefit the wider profession.
“I don’t think it’s likely,” says Andreas Neocleous & Co corporate head Elias Neocleous. “Most of the energy work in Cyprus continues to be done in London or New York. For the time being they outsource the local part of the work to competent Cypriot law firms, and it’s not likely that the Cyprus element will be enough to lure global firms to open local offices. But in the medium term that could change – we could see the Singaporisation of Cyprus.”
As far as Pamboridis is concerned, global firms arriving in Cyprus on the coat-tails of Big Energy “wouldn’t be disruptive to the local profession – it would benefit local lawyers. Only short-sighted lawyers see foreign competition as a threat”.
He maintains that even if a couple of big players had local outposts they would still need local expertise.
Others are more reticent, maintaining that predictions global firms will cut ribbons on Cypriot offices have swirled ever since the Russians started using the island as an offshore jurisdiction.
“The reason the big foreign firms don’t set up in Cyprus,” says Alexandros Economou, partner at Chrysses Demetriades & Co, “is that people get good professional advice from local law firms at less cost.”
Bouncing back after bailout
Local anxiety about global law firm moves is understandable. The Cyprus legal profession – which numbers no more than 2,000 lawyers spread over mostly tiny practices – is under pressure to consolidate as it is. But regardless of global law firm intentions, the general business mood in Cyprus is much improved since the EU and IMF rode to the rescue.
In the dark days of the Cyprus banking crisis, the experts compiling the bailout forecast local GDP would contract by a stomach-churning 12 per cent – or, points out one Cypriot lawyer, nearly the same drop as countries afflicted by war.
However, that forecast was revised to a contraction of 8 per cent, and in the end the Cypriot economy shrank by only slightly more than 5 per cent – still enough to hurt but not enough to sink the island. A local economic sentiment survey last month showed that business confidence had risen to 2010 levels.
Lawyers anticipate steady work over the next year or so. They are looking forward to package-dictated privatisations and work around restructurings, non-performing loans, administrations, liquidations and receiverships. In addition, the tourist sector remains relatively buoyant, despite the suffering rouble, while the Island’s shipping history still produces a reasonable flow of maritime instructions.
“Many people thought international business would abandon Cyprus but that turned out not to be the case – people have said that if Cyprus was able to sustain such a shock to the pillar of its economy and still stand, it must be a great place to continue to do business,” concludes Neocleous.
Russia and Cyprus: a close relationship
25% of Russian capital stock abroad was held in Cyprus in 2011
13% of all foreign investment to Russia between 2005 and 2011 came from Cyprus
Cyprus was the largest foreign direct investor into Russia – investing some $41.7bn in the country between 2007 and 2010 (excluding the financial sector)
6,015 Cyprus companies invested in Russia between 1997 and 2011– 30% of the total
54% was Cyprus’ share of the value of total foreign investment into Russia between 1997 and 2011
Key figures: Cyprus
Life expectancy at birth: 80
Unemployment rate: 16%
Source: World Bank, Cyprus Statistical Service