A year ago Cyprus was heading for disaster. The banking crisis had hit hard and predictions of where it would leave the country ranged from the sublime to the ridiculous. Hyperbolic headlines screamed that Cyprus would be forced to quit the eurozone and that everybody would be out of a job. Foreign investors would leave in droves, said the naysayers, so the island had better just go back to fishing and tourism as its mainstay.
Thankfully for the majority, and certainly for the Cyprus legal community, such prophecies have proved overdone. Depending on who you speak to there is really only a mix of cautious or, for some, more courageous optimism about where the Cypriot economy is headed and the benefits that will be realised in the next couple of years by its advisers.
Reversal of fortune
In February 2014, almost a year after Cyprus was bailed out by the European Central Bank to the tune of €10bn (£8.2bn), speculation was rife that Cyprus was set to relax stringent capital controls that have been in force to prevent a run on Cypriot banks.
In 2013 the Cypriot government negotiated with the EU to secure a deal which meant that those with savings of less than €100,000 (£85,000) had their deposits transferred to the Bank of Cyprus as the country’s second-largest bank, Laiki, was wound down. Those with savings of more than €100,000 lost a substantial chunk of their money.
Cyprus finance minister Harris Georgiades said recently there could be ‘significant relaxations of the restrictive measures’ after the island’s fiscal progress was applauded by mission heads representing its ‘Troika’ of lenders – the EU, the European Central Bank and the International Monetary Fund.
Although some restrictions have already been relaxed since the country’s near economic collapse, cash withdrawals are still limited to €300 a day and the cashing of cheques is banned, while large cash transfers also have to be vetted. In a first for a eurozone state, savers are also forbidden from breaking time deposits.
But in a sign that Cyprus is moving towards recovery, its central bank chief, Panicos Demetriades, has not ruled out all capital controls being lifted by the end of the year – if the country continues to make ‘substantive progress’ in implementing its economic reforms.
‘That is expected to happen, if all goes well, by the end of the year,’ he said in February, adding that he expected nearly all domestic controls to be removed in the next round of easing of controls.
This prognosis contrasts markedly to the bleak picture less than a year ago.
‘The contraction of the economy was only 5.5%, so not as bad as predicted; we easily passed the valuation of Troika and there has been increasing stability month-by-month,’ says Limassol-based partner Elias Neocleous, head of corporate and commercial at Andreas Neocleous & Co.
He predicts that although Cyprus will be in for another tough year this year, the economy is likely to bounce back in a more dynamic way in 2015 and will return to growth by 2016.
‘If we stick to the obligations under the loan agreement with Europe, the crisis is the best thing that could have happened to Cyprus because it means developing a modern social security and healthcare system and privatisation. The only bad thing was the bail-in,’ he says. ‘The crisis has given us an opportunity to create a much better and more dynamic business environment and focus on where we have a competitive advantage,’ he adds.
Stavros Pavlou, senior and managing partner at Patrikios Pavlou & Associates, says that the reaction in the legal market mirrors the rest of the economy. ‘It has proved to be a considerably better situation than expected but there is still a lot of anxiety and fear over what the future holds,’ he says. ‘Because of the work we are getting we have hired people, turnover has increased by 60% compared to the same period in 2013, returning to similar levels as 2012. The market has shown a considerable ability to absorb the shock of the crisis.’
Savvas Savvides, a partner at Michael Kyprianou & Co, agrees: ‘Cyprus is getting better, and better sooner than expected. I believe that with hard work and the correct strategy, everybody can get through this.’
Some firms have already done well out of the crisis, particularly international firms. Andreas Neocleous worked alongside Slaughter and May in advising the Central Bank of Cyprus on the restructuring of the banking sector and the redrafting of banking regulations, while Skadden, Arps, Slate, Meagher & Flom advised Cyprus Popular Bank in investment treaty claims against the Greek government. Offshore practice Harneys, the only global law firm to have an office in Cyprus – Harneys Aristodemou Loizides Yiolitis – also moved quickly to set up a group devoted to advising clients on the banking crisis.
However, lawyers are critical of whether capital controls and restrictions were really necessary to get Cyprus back on an even keel.
‘If Cyprus had not done the bail-in but just the restructuring, it would have already had growth in 2013 but we were not treated in the same way as our other European partners. The problems were deep but could easily have been corrected without the bail-in,’ argues Neocleous.
Cyprus Inc
There is an ingrained perception among Cypriot lawyers that the crisis, subsequent intervention by the European Union and the media’s portrayal of events has led to an image problem for the country – something that needs to be repaired as quickly as possible because the reduction in new business has been significant.
Although as yet no smaller Cypriot law firms have been forced to close – something that was feared likely last year – it is rumoured some will have to consider closure or mergers with bigger firms. Even the large practices in Cyprus are considering options to minimise the impact on their own businesses.
Pavlou admits that his firm’s plans to expand by buying neighbouring office space have also been put on hold and last summer offshore law firm Conyers Dill & Pearman blamed the closure of its Moscow office, five years after its launch, on a drop off in work from Russian investors using Cyprus as a domicile for their corporate structures.
Harneys’ Pavlos Aristodemou agrees that Cyprus is suffering from a post-crisis image problem. ‘I understand why investors would have second thoughts, but I do think it is a good time to come and invest,’ he says. ‘The government and private companies have to make a combined effort to market Cyprus, but it will take some time – it has not even been a year since the crisis.’
Neocleous feels more effort should be made to remind international investors that the island can still be an attractive place to do business.
‘The communication and marketing of Cyprus is very important. Capital restrictions, for example, only apply to old funds so anybody bringing in money now is not subject to those restrictions – we need to make people are aware of this,’ he says.
That said, work has by no means dried up. Hedge and vulture funds, for example, are circling looking for distressed funds – a trend Neocleous believes is increasing. Indeed, Cypriot sovereign bonds emerged largely unscathed from the financial crisis and a large chunk of them have been bought by international hedge funds over the last year.
A. N. Papageorghiou & Associates advised Aristo Developers and Venus Rock Estates, subsidiaries of real estate investment firm Dolphin Capital Investors, on the sale of their interest in the Venus Rock Golf Resort project in Ha Potami to China Glory National Investment for €290m. The Hong Kong-based company was advised by Hadjihannas & Co.
‘Most of our departments have had solid results and experienced marginal growth in their workload,’ says Michalis Kyriakides, head of corporate at Harris Kyriakides. ‘On the other hand, some departments, such as banking and finance, have multiplied their assignments in the last 12 months. The increase of non-performing facilities and the default of many large organisations triggered substantial litigation and our teams have handled numerous multimillion banking litigation cases, representing almost invariably the claimants’ side. Our property department also preserved its figures in 2013, mainly due to the attractive real estate prices and the governmental incentives which, to some extent, stimulated real estate deals.’
‘We have not had a serious decline in 2013 as many groups have decided to keep structures with Cypriot-registered entities,’ says Demosthenes Mavrellis, a partner at Chrysses Demetriades & Co. ‘As a result of that we have seen one Cypriot-registered company making a very successful share offering in the US as well and Cypriot companies acting as security providers in high-yield bond transactions. There has been a significant increase in litigation involving Russian interests being fought in Cypriot courts. Furthermore, the shipping industry seems to be rebounding and we see an increase in related projects. We have also been involved in various onshore projects that are relevant to the hotel and tourism section which has seen a healthy year, irrespective of the March crisis.’
Inevitably, the impact of any economic crisis on legal work is that litigation and arbitration will increase. Around 50 cases have been filed with the supreme court in Cyprus, with businesses and individuals claiming that the measures placed on investors during last year’s crisis were illegal, and around 100 cases were filed in the district courts based on tort and breach of contractual rights.
Acting on behalf of a number of small businesses in Cyprus, the UK-based Anglo-Hellenic and Cypriot Law Association has launched a class-action suit against the Troika which they are taking to the Court of Justice of the European Union.
Both Harneys and Stelios Americanos & Co have also been heavily involved in such litigation. Americanos has filed several cases before Cyprus’ supreme court challenging the legality of the government decrees that implemented the haircut.
‘There has been tremendous activity in litigation,’ admits Demetriades. ‘There have been challenges brought on the validity of the Bank of Cyprus’ order for the haircut but so far the court has dismissed them and these have failed. In the district courts there are applications to sue everyone, including the European Central Bank, which will take time to process. There are efforts being made to sue officers and employees of the banks by those who say they were tricked into buying bonds.’
However, some worry that this run of work will not sustain lawyers for the long term – the legal industry needs long-term workflows rather than quick fixes.
Gas powered
Many remain excited about the opportunities that may open up following the discovery of gas reserves in the country’s exclusive economic zone (EEZ) in 2011 and the subsequent exploration, which could mark the country’s transition from small hydrocarbons importer to substantial producer and exporter.
Thomson Reuters data shows Cypriot M&A in 2013 was dominated by oil and gas deals, accounting for 40% of all transactions and worth over €5bn in total. Russian involvement accounts for the majority of this, with investment from Russia in Cyprus’ oil and gas sector more than doubling from last year.
Russian oil giant Rosneft’s acquisition of the remaining 15% stake in oil and gas company RN Holding for €3bn was the biggest deal in Cyprus last year, which saw Harneys advising RN Holding.
Noble also completed a second stage of exploration at the Aphrodite well last September and more drilling is planned this year, with the first exploratory drilling by the ENI-KOGAS consortium due to start.
Managed efficiently, hydrocarbons could have a huge impact on the Cypriot economy. Reports suggest that there is enough gas to cater for the country for the next 180 years. Cyprus’ GDP is €17bn and one liquefaction plant is worth €10bn.
However, some lawyers are cautious about the opportunities. ‘It largely depends on what actual resources there are,’ says Aristodemou. ‘It will take a lot of time to know what the impact will be on the Cypriot economy, but if it comes to something it will be a game changer.’
And while the potential of natural resources in Cyprus is huge, Kyriakides believes that firms need to take care of their own health, regardless of the prevailing conditions. ‘I always believed that firms need to be constantly self-critical and try to get better in every aspect, regardless of the surrounding climate and regardless of whether we are living in an era of crisis or prosperity,’ he says.
Clearly, although Cyprus is still a long way from becoming a lucrative international legal market again, its lawyers continue to talk a good game. And while last year such a positive attitude could be dismissed as blind optimism in the face of crippling adversity, the signs in 2014 justify a more upbeat mindset. LB
The Cyprus problem
In February Cyprus’ estranged Greek and Turkish leaders revived stalled peace talks with the aim of once and for all reuniting the island.
Their first meeting, at Nicosia’s largely abandoned airport in the UN-patrolled ‘dead zone’, took place almost two years after the last round of high-level negotiations broke down.
The ‘Cyprus problem’ as it is commonly known, has defied resolution for the past four decades, and this summer marks the 40th anniversary of the invasion of Cyprus by a Turkish army avenging an attempt to unite the island with Greece. It is also more than 50 years since a power-sharing arrangement between the two communities collapsed in the wake of independence from Britain.
However, this time there is a sense of renewed optimism that the talks could come to something.
In Ankara, Athens and Nicosia, officials are describing the discovery in the eastern Mediterranean of vast oil and natural gas reserves as a game-changer that has made a settlement pressing. Washington, which played an unexpectedly active role in re-igniting the talks, waded in after it became clear that exploitation of the hydrocarbons would require regional stability not only in Cyprus, but between Israel and Turkey.
The cheapest and most expeditious way of exporting the reserves, discovered first by Israel and then by Cyprus, would be through an underwater pipeline to Turkey.
Analysts say Turkey’s beleaguered leader, Recep Tayyip Erdo ˘gan, would welcome a foreign policy success in Cyprus, at a time when his scandal-hit government is under immense pressure.
Cyprus’ president Nicos Anastasiades, meanwhile, calls the chance of peace a ‘win-win situation’.
Cypriot lawyers generally believe a resolution of the problem would be positive, not least because it would generate a significant volume of new instructions. Cyprus provides a key point of entry for Turkey into Europe and it will not be able to join the European Union while it has an occupying army in Cyprus. A resolution of the conflict will enable both halves of Cyprus to fully exploit the large natural gas reserves that have recently been discovered offshore.
Meanwhile, Lellos P. Demetriades partner, Achilleas Demetriades, believes that Cyprus’ vibrant shipping sector would also stand to benefit greatly from an accord. ‘In the shipping sector, a settlement of the Cyprus problem or Turkey opening up to the Cypriot flag would be an amazing confidence boost and would also bring renewed optimism.’
However, while the financial crisis undoubtedly increases the pressure on Greek Cypriots, the result of these latest peace talks will have to be put to national referendums first. The last time a similar referendum was held in 2004, Greek Cypriots overwhelmingly rejected reunification, despite the fact Turkish Cypriots voted in favour.