Wind back 12 months and the mood from the Cypriot legal community was undeniably improving. The island was meeting the terms of its €10bn bailout from Europe, following near economic collapse in 2013; the discovery of gas reserves offshore looked particularly favourable; and even the Turkish and Cypriot halves of the country had begun reviving stalled peace talks with the aim of once and for all reuniting the island.
Once again, though less happily this time, what a difference a year makes. Twenty four months on from the EU-imposed haircut, a feeling of pessimism has returned to Cyprus – certainly among its legal elite.
Political wrangling over proposed new legislation accelerating foreclosures on business loans and mortgages – which will enable banks to foreclose on errant borrowers more quickly and which was a condition of International Monetary Fund (IMF) funding – continues and many Cypriots are keenly frustrated by the inability to affect their own destiny.
Pavlou puts this down not only to the knock-on effects of the collapse and uncertainty over the foreclosure law, but also wider global events, including the Ukraine crisis and sanctions on Russia, which historically has used Cyprus as its offshore jurisdiction of choice. This issue has been compounded by the Russian government’s legislation, aimed at preventing Russian businesses from avoiding paying taxes at home.
Observes Pavlou: ‘A number of new ventures are not being undertaken, people are not spending as much because they are scared of not having any money in hard times and, while the government says that economic recovery is coming, nobody believes them.’
Revising expectations: Cyprus’ gas reserves come up short
One area of intense speculation in the last couple of years for Cyprus has been the exploration and discovery of hydrocarbons and gas in its waters after a gas field was discovered in the Leviathan area of the Levantine Basin in the Mediterranean in 2010.
However, the subsequent drilling carried out by oil giants Noble Energy, Total and Eni has so far proved disappointing.
While US-based Noble has found five trillion cubic feet of natural gas in a single bloc of the Aphrodite field to the south of Cyprus, other digs have come up short.
Officials estimate there may be as much as 60 trillion cubic feet of natural gas in Cypriot waters and there are hopes for potentially more in the huge fields of the eastern Mediterranean shared with Israel, the biggest discovery of natural gas in the world this century. Italy’s Eni plans to drill in neighbouring blocs this year, and France’s Total in 2016.
But Chrysses Demetriades & Co partner Demosthenes Mavrellis guards against getting overexcited. ‘While the exploration and discovery so far will bring some money in for the Cypriot government, it has not been as big as everyone thought,’ he says. ‘It helps in trying to diversify the Cypriot economy, but it is not a game-changer.’
Stavros Pavlou, senior and managing partner at Patrikios Pavlou & Associates, agrees. ‘The oil companies have been discouraged from drilling and are considering their options. There certainly are not a lot of people rushing to get into this,’ he says.
And, according to Kinanis’ Irene Christodoulou, Cypriot law firms would not profit greatly from the work generated in the energy sector.
‘As with privatisation, it will be the international firms that see the bulk of the work, while local firms will be drafted in to advise on labour law and other Cyprus-specific legislation.’
It had also been hoped that the discovery of energy reserves might help to resolve tensions between Cyprus and Turkey.
Talks aimed at reuniting Greek and Turkish Cypriots were resumed early last year after a ten-year hiatus, amid expectation that the undersea reserves would facilitate resolution of the West’s longest-running diplomatic dispute.
With pipelines to be built through Turkey – by far the cheapest and most effective way of transferring the oil and gas to Europe – there was hope that the discovery would at last bring an end to the dispute. In May 2014, US Vice President, Joe Biden, underscored those hopes with the first visit to the island by a senior US official in almost 50 years.
But instead of galvanising the feuding communities to conciliate, the prospect of finding alternative energy supplies appears to have widened the gulf between them.
Quarrelling over hydrocarbons found in the area’s waters has intensified after the leaders of Greece, Cyprus and Egypt signed an agreement in Cairo in February to boost energy co-operation and supply Egypt with natural gas.
The agreement was arrived at days after Israel stepped up security co-operation with Cyprus. After the discovery of its own vast reserves, Tel Aviv desperately needs safe export routes through pipelines that go via the island.
Yet, within minutes of the accord with Egypt being announced, Cyprus’ president, Nicos Anastasiades, accused Turkey of ‘provocative actions’ by sending a surveillance vessel and war ships to search for natural resources in the island’s exclusive economic zone.
Turkey’s decision to dispatch a research vessel into disputed waters this year not only resulted in talks being broken off, but has exacerbated the row over drilling rights.
According to Michael Kyprianou & Co’s Savvas Savvides, Turkey ‘criticised the Cyprus government’s attempts to exploit the island’s natural resources without deliberating with the Turkish Cypriot minority. This has also led to some aggressive actions by Turkey in the last year.’
Reasons to be cheerful
In December, the IMF held back the expected tranche of €88m (£69m) in bailout funds to Cyprus after the island’s parliament delayed the new foreclosure law. The law is intended to make it easier for the country’s banks to start collecting on bad loans, which account for around half of all debt.
Co-publishing feature
The use of a Cyprus International Trust (CIT) as a business vehicle
– Andri Tsangarou and Andrianna Solomonides, Kinanis LLC
However, enactment of the legislation has stalled as its finer details are thrashed out in a game of political ping pong between the country’s government and parliament.
According to Savvas Savvides, managing partner of the Paphos office of Michael Kyprianou & Co, the delay is being caused because the Cypriot parliament wants to ensure that ordinary individuals who cannot pay their mortgages will not be evicted from their homes.
‘As you can appreciate, homeless individuals and families would cause a humanitarian concern in addition to our present societal struggles. I believe that the Cyprus parliament had a good reason for suspending the foreclosure law and I am certain that the appropriate solutions will be found,’ says Savvides.
Yet until the furore erupted at the end of last year, it was Cyprus’ steadfast adherence to the terms of its rescue programme that had been attributed to the country consistently beating dour projections regarding its post-bailout economic performance.
The Cypriot economy is projected to grow 0.4% in 2015, which would bring an end to a three-year recession that has been shallower than expected.
Savvides says that the legislation is also expected to generate interest from international companies interested in large commercial properties in Cyprus. ‘This modification of the market will involve new opportunities of work for lawyers,’ he comments.
And while Cyprus continues to fulfil its borrowing obligations, Cypriot lawyers are also looking forward to an expected flurry of privatisations over the next 18 months. Last March, the government finally passed a bill to privatise three state-owned utilities. It needs to raise €1.4bn (£1bn) by 2018 through privatising the Electricity Authority of Cyprus, the telecoms utility, Cyta, and the Cyprus ports authority, which manages the ports of Larnaca and Limassol, with work expected to start imminently.
However, Irene Christodoulou, partner and head of corporate at Nicosia-based firm Kinanis, says that companies looking to take advantage of the opportunities generated from the state privatisation programme are only likely to use Cypriot firms for local legal matters, such as labour law. She adds that Cypriot lawyers simply do not have the experience of advising on large-scale privatisations.
Expected to be more fruitful for domestic firms is the long-awaited casino resort bill, which lawyers hope will come into play over the next year. At the end of much debate that followed the government announcing proposals to create an integrated casino resort in Cyprus in 2013, the executive passed the bill to parliament just before Christmas 2014. Once passed, the legislation will allow for the ‘establishment, operation and monitoring’ of casinos in Cyprus.
Thirteen operators have expressed interest in the Cyprus casino project, which is expected to cost some €500m, with serious interest coming from the US, Singapore and China.
Elias Neocleous, head of corporate and commercial at Andreas Neocleous & Co, says he expects to see ‘good high-end legal work for Cypriot firms’, creating the necessary legal framework to allow casinos to open in Cyprus.
Deal-wise, 2014 was somewhat of a schizophrenic year for Cyprus, with a range of sectors from professional services to technology, financial services and the leisure industry involved in the largest M&A deals. What is noticeable is the absence of substantive local legal advice on the largest deals, with companies instead preferring to turn to international firms.
According to Mergermarket, the largest Cypriot deal of last year saw Portfolio Recovery Associates acquire Aktiv Kapital from Geveran Trading Co for £786m. Freshfields Bruckhaus Deringer, Swedish firm Gernandt & Danielsson and Norway’s Wiersholm advised Aktiv. Geveran was advised by Canadian firm Blake, Cassels & Graydon, Finland’s Dittmar & Indrenius Attorneys, US firms Fried, Frank, Harris, Shriver & Jacobson and Sidley Austin, Germany’s Gleiss Lutz, Norwegian practice Thommessen and Austria’s Wolf Theiss. No Cypriot lawyers were involved.
The most significant transaction involving a Cypriot firm saw Andreas Neocleous & Co advise Austria-based construction firm Strabag on its acquisition of the £76m stake held by the Bank of Cyprus in the JW Marriott Bucharest Grand Hotel, alongside Romanian firm Vilau & Mitel. The Bank of Cyprus was advised by Deloitte Legal.
Meanwhile, the £44m sale by Ermes Department Stores of its 50% stake in Cyprus’ airport duty-free shops to Ireland’s ARI subsidiary, CTC-ARI, saw Cypriot firm Ioannides Demetriou Law Offices advising Ermes, while ARI was represented by Irish firm Arthur Cox and Dr K Chrysostomides & Co in Nicosia.
Russian dynasties
But while there are still reasons to be optimistic about potential dealflow once certain political and economic hurdles are overcome, the reliance of the Cypriot economy on Russian investment looms large.
During the financial crisis, reports speculated that nearly half of all deposits in Cypriot banks were at their source of origin Russian, with ratings agency Moody’s putting a figure of £21bn on the amount of money Russians had saved in Cypriot banks.
The Russian government’s recent decision to bring in stringent ‘de-offshorisation’ legislation has left Russian businesses very cautious and, in turn, their Cypriot legal counsel worried about the significant and long-lasting consequences for themselves and the national economy.
Pavlou admits that he is concerned about the Russian tax legislation because it is a disincentive to Russians maintaining offshore companies, of which there are some 150,000 in Cyprus. ‘We have seen a number of companies closing down because it has become too costly for them to comply with the new Russian tax regime. Those that stay are consolidating and trimming down their structures. They are withdrawing any excess companies that are not needed,’ he comments.
Heavyweight Russian companies, including metal producers Rusal and Metalloinvest MC, telecoms giant Mobile TeleSystems, electricity generator RusHydro and vehicle manufacturer Kamaz, have all said that they will play ball with their government, by either closing down their offshore entities or relocating their operations to Russia.
And despite the fact that, in the short term, the consolidation and restructuring of Russian businesses in Cyprus is creating work for Cypriot law firms, Pavlou is anxious that fewer companies will ultimately mean a reduction in clients.
‘Even in litigation, business is starting to suffer because there are fewer instructions, and I know that firms in the fiduciary business are already having to lower their fees and let people go,’ he says.
Christodoulou says there is a lot of movement with Russian holding entities being closed or restructured and consolidated, which is creating work, but de-offshorisation aside, she is particularly concerned about the impact that the Ukraine crisis will have on the island. She says while the 2013 financial crisis ultimately did not shake the trust of Russian investors in Cyprus, EU sanctions on Russia, which Cyprus must adhere to, are likely to have a more significant impact. It is an indication of just how important Russian money is to the country that most of the top-tier firms now have a dedicated sanctions team advising Russian clients.
‘We are going to be affected by the war in the Ukraine, the sanctions against Russia and the depreciation of the rouble, because all of this means that Russians are not investing or looking at opening new ventures,’ she says.
‘Law firms that work exclusively with the Russian market or where Russian clients contribute to a lot of their work will have big, big difficulties,’ he says. ‘There will be less work from Russia and the ongoing recession in the local market will mean lawyers will have to offer services for lower fees.’
Pavlou is frank in his admission of the effect Russia’s problems are having on fees. ‘We have Russian clients asking to pay in roubles rather than euros, but we are not in the market to take on the rouble risk.’
He adds that the current value of the Russian rouble means that, for Russian clients, fees have effectively doubled over the last 18 months.
‘Clients are asking for discounts, they are shopping around and firms are having to compete heavily for business,’ Pavlou says, adding that he is willing to offer Russian clients who settle their bills promptly a ten to 15% discount on his €500 per hour rates.
For Cypriot lawyers, it appears the black dog of depression is biting again. For now it seems they will have to play the waiting game to see how macro-political factors play out between Russia and the West, with the express hope that the island is not forced to face an even bigger calamity than it did two years ago. LB