A new hope for Cyprus’s recession-battered lawyers

Crisis is an overused term, worn out by endless repetition. For most European economies, it has meant a period of low or stagnant growth over the last decade and, in some cases, a year or two of negative GDP eventually followed by a welcome recovery. For Cyprus, however, the word has had even greater potency: between 2008 and 2015, GDP per capita declined by roughly 30%. On top of the global 2008-09 recession, Cyprus had its own domestic banking crisis in 2012-13, precipitated by the eurozone collapse. This led to a downgrade of its bond credit rating to junk status and a €10bn bailout programme from the troika of the European Commission, the European Central Bank and the International Monetary Fund.

It would be all too easy to dismiss Cyprus based on this performance – except that the island’s economy is experiencing a belated rebound. And what that means for investors in the medium term is significant. Despite financial services activity continuing to have a negative effect on the economy, latest GDP figures show a healthy 3% growth, which ‘surpasses all expectations’, according to finance minister Harris Georgiades.

Meanwhile, rating agencies recently raised Cyprus’ sovereign credit rating to a notch below investment grade – on the expectation that the economy will continue to develop at a reasonable pace over the next three years. Even more good news has arrived in a recent report from Transparency International, which found that Cyprus’ application of regulations has been so successful that it now disclosed the most complete set of anti-money laundering data among 12 countries analysed, including the US and the UK.

‘It’s perfectly transparent now: the banks are controlling every single penny moving around,’ says Andreas Haviaras, managing partner of Haviaras & Philippou. ‘They are doing business like everybody else in Europe from their offices in Cyprus; there is nothing secret or devious in this process. We haven’t created stricter laws, but the application of existing legislation is now stricter.’

Add to that the potential of offshore gas reserves and renewed discussion of possible reunification between the Turkish and Cypriot halves of the island after more than 40 years of partition, and the outlook for Cyprus looks brighter than at any time this decade. For local law firms, all this comes as welcome relief. ‘The economy was dealt an extremely serious blow,’ says Stelios Triantafyllides, partner at Antis Triantafyllides & Sons. ‘Clearly we have come out of the woods. It is apparent from the level of activity we see that trust has come back to the Cyprus economy, and our business has come back up to pre-2015 levels.’

‘It’s perfectly transparent now: the banks are controlling every penny moving around. There is nothing secret or devious.’
Andreas Haviaras, Haviaras & Philippou

At Elias Neocleous & Co, managing partner Elias Neocleous says: ‘There is hope that by the end of this year or early next year our sovereign debt will be taken out of junk status. We have been putting in tremendous effort, such as structural reforms, in correcting the balance sheets of the banks, in making sure the economy is becoming more competitive, and this is very positive. We’ve been registering decent rates of growth for the last eight or nine quarters – that is very good news.’

Pavlos Aristodemou, managing partner of offshore firm Harneys in Cyprus, agrees: ‘Growth and expected growth is giving a good momentum and allowing international institutional and private investors to look seriously at investing in Cyprus. In terms of IPOs, the stock exchange in Cyprus is not in the shape we would like it to be. Having said that, the Cypriot companies are still widely used as vehicles for IPOs and bond issues on foreign-regulated markets.’

 

Diversity drive

The Cypriot economy, the eurozone’s smallest, remains predominantly service driven. Prior to 2013, its position as a Mediterranean hub attracted significant international investment, particularly from Russia, with nearly half of all Cyprus bank deposits being of Russian origin. Moody’s estimated that figure to be $31bn – $12bn from banks and $19bn from businesses and individuals. As a precondition of its bailout, the troika imposed a haircut: a deposit levy for shareholders, bondholders, and depositors on accounts in the two biggest Cypriot banks.

An obvious after-effect has been an abundance of non-performing loans. ‘In terms of the banks, non-performing loans are a very high percentage of the country’s total gross loans,’ says Stelios Americanos of Stelios Americanos & Co. ‘This is one of the major problems that still needs to be tackled. We act for major international lenders that have provided significant loans through Cyprus holding companies for projects abroad. So when these loan agreements are in default, there is a need to enforce in Cyprus: that’s what we do on their behalf.’

The inevitable fallout has also caused a prolonged and predictable spike in litigation and insolvency work, particularly significant shareholder disputes.

‘One impact of the haircut was that businesses or projects, which were adequately financed at the outset, found themselves with no funds,’ notes Haviaras. ‘That inevitably caused internal conflicts between partners. We have a lot of litigation involving Russian entrepreneurs, mainly caused because of their disputes as shareholders in Cyprus companies.’ He confidently anticipates that this will continue to feed the volume of litigation work for up to ten years.

‘As the inflow of new companies has reduced, the amount of litigation has increased: half of our lawyers are doing litigation,’ adds Triantafyllides. A further spur should become evident with the creation of a new commercial court, for which there is currently a Bill pending. Americanos observes: ‘It is now for the government to speed up the process and for Cyprus to become a reputable litigation hub.’

Notwithstanding the high level of disputes, Russian investment in Cyprus as its preferred offshore centre remains strong, although the emphasis has notably shifted. According to Demosthenes Mavrellis, a partner at Chrysses Demetriades & Co, Russian clients have changed their approach to Cyprus: ‘Russian-focused business has not by any means disappeared and we now see more development of substantial presences, with the opening of offices and movement of actual staff to Cyprus. It must be said that this environment is now favourable for the larger firms with comprehensive and complex legal capacity.’

However, there are plenty of health warnings about Cyprus’ recent dependence on Russia, particularly given the effect of EU and US sanctions. As a result of these and low commodity prices, Russia has experienced negative growth. This year, Russia is predicted to register a modest rate of growth with the attendant benefits for all countries it does significant business with, including Cyprus. But, says Neocleous: ‘From our standpoint there is a certain danger in over-relying on any particular market or type of work. For several years, our firm has therefore followed a deliberate policy of diversification: we are trying to build links with, and develop work from other countries such as China, India, the Middle East, Africa, even South America.’

His sentiment is echoed elsewhere. Harneys, which benefits from strong referrals from its international network, is the only major international offshore firm to have an office in Cyprus. ‘The origin of clients has changed,’ says Aristodemou. ‘Although the majority of corporate clients are still from Russia and the CIS, different countries are catching up and now there are more US, UK and Asian clients. We see more instructions from China, Hong Kong and Europe. Together with an increase in the volume of our work, the geography has altered.’

‘Although the majority of corporate clients are still from Russia and the CIS, different countries are catching up. The geography has altered.’
Pavlos Aristodemou, Harneys

Americanos concurs: ‘There is more diversity. The volumes are not what they were, but we have some structures coming from all over the place: Eastern Europe, Canada – structures related to the Gulf region.’ Haviaras has seen an increasing flow of business from Balkan investors financed by Austrian banks, as well as ‘a big leap forward in investment from China to create wealth – houses, flats, bonds – a lot of Chinese investors trying to meet the relevant criteria to enable them to claim a Cyprus passport.’

Meanwhile, Aristodemou points to the double taxation treaty with India, agreed by Cyprus last November, as providing enormous opportunities, ‘although we have not yet seen the fruits of it’. The large number of such double taxation treaties – nearly 50 – makes Cyprus different from most other offshore jurisdictions. Their general effect is that Cyprus-registered offshore entities that have tax exemptions in Cyprus will also enjoy the same exemptions in the treaty countries.

Neocleous, however, offers a further note of caution, suggesting the future of Cyprus depends on its ability to maintain an attractive business and tax-friendly regime. This may not be entirely within its control: as part of the EU and the eurozone, Cyprus may be forced to change laws, or its tax regime, in a way that will make incentives less friendly or unavailable to entrepreneurs. ‘That is a threat that concerns us: it is vital for Cyprus to continue to offer tax incentives so that foreign investors can come here,’ he concludes.

In the broader economy, the oil and gas industry is singled out as an exciting and potential area of growth. Last December, ExxonMobil, Total, Eni and Qatar Petroleum were among those to win licences to explore and drill for oil and gas off Cyprus’ southern coast. The gas located there to date provides estimated reserves exceeding four trillion cubic feet worth over $50bn. While it has huge potential, Americanos says this is just groundwork so far – companies exploring possibilities – so there is no real impact yet, but this is something that everybody expects to be developed, and the government is committed to finding reserves.

Nevertheless, Haviaras is sceptical about the impact for local firms. ‘The oil and gas sector will definitely put money in the box,’ he says. ‘But if Cypriot professionals want to be honest with themselves, they must admit that they do not have experience in this sector, simply because: we didn’t have gas yesterday. So I see room for international firms, which do have the experience from the UK and US – they could jump into this field, employ or co-operate with Cypriot firms, either generally or for specific projects, for the benefit of both.’

Neocleous goes further, identifying oil and gas as a possible incentive for reunification. ‘If we were able to hit any major new discoveries that could be a catalyst,’ he says. ‘Everybody would realise that this is the best opportunity to reunite in peace, to create more business opportunities for everybody and for the citizens of the island and for all the neighbouring countries.’

 

Better together?

Reunification talks have been taking place for several months under the auspices of the United Nations in New York. Cyprus has been partitioned since the summer of 1974 when Turkish troops seized the northern third of the island; the two parts are divided by a UN buffer zone. According to former US vice-president Joe Biden, who has been personally involved, the two sides are ‘close to resolution’.

Triantafyllides suggests that reunification discussions are not having a direct impact at present and nobody has seen any difference in the level of business activity. However, the hope is that if there is a solution, this will obviously create a lot of development and growth. According to Aristodemou: ‘Any proposed solution will need a referendum to be agreed on both sides. Many people put natural gas in the equation. It will, of course, open up a huge market: Turkey. You would see a huge momentum in FDI – the northern part of the island needs major construction projects and infrastructure.’

Further privatisation will help bolster the public purse while also providing work for lawyers but, as Triantafyllides points out, it cannot go on forever. Presently, the privatisations of Cyprus Telecommunications Authority (CYTA) and the state-owned electricity company (EAC) have been delayed by the adjustment programme. The European Bank for Reconstruction and Development, which began operations in Cyprus in 2014, has listed privatisations among its key targets. The port in Larnaca is likely to be privatised this year, with plans to sell the country’s state lottery also progressing.

Neocleous concludes by offering a picture of Cyprus in its geographical context. ‘If you look around us, literally there is volatility and turbulence in almost all the neighbouring countries and therefore we are viewed as an oasis of stability: a country that is within the EU; a country that has a system that everybody can rely on. Therefore, many people, including entrepreneurs from these turbulent countries, can come here and create a place of business, or a second home as a reserve solution in case something goes wrong in their home country. That is now providing many benefits to Cyprus.’ LB