A New Business Model for Cyprus

Cyprus,
of course, is just the latest country to be hit by the economic crisis
surging through the Mediterranean. For years, Cyprus had an immense
banking bubble, with the sector’s assets estimated at roughly seven
times the country’s GDP, as foreign money poured into a tax haven within
the eurozone’s secure environment.

The
design of the bailout has been shaped both by domestic pressures faced
by eurozone leaders and by the exceptional nature of the Cypriot banking
bubble: many European leaders suspect that the island had become a
money-laundering center for Russian individuals and entities, which
pumped an estimated €68 billion into the country’s banks. Regardless of
the details of the ultimate deal, the risk is that the ghost of Russia’s
bailout of Cyprus in 2011 could provoke severe side effects across
Southern Europe, both for governments’ borrowing costs and for small
savers.

Nevertheless,
it is imperative not to lose sight of some very valuable assets that
Cyprus holds – assets that could mean the country’s economic salvation.

In
2011, the American energy company Noble discovered some 200 billion
cubic meters of gas in the Eastern Mediterranean – the value of this
block, known as the Aphrodite gas field, has been estimated at some €80
billion. Work has already begun on extraction, with production expected
to commence in 2018. Experts say that the reserves could provide some
100 years of energy for Cyprus – and an alternative supply source for
energy-hungry Europe. In fact, in the search for an acceptable bailout
package, the future revenues from these assets were at one point
considered as possible guarantees.

The
United States Geological Survey has estimated that the Levant Basin,
which extends across the Israeli, Cypriot, and Lebanese seabed, contains
some 3.45 trillion cubic meters of recoverable natural gas and 1.7
billion barrels of oil. Given their geographic location, however, these
incredible reserves can be uncapped, extracted, and exported only on the
basis of inter-state cooperation.

As
with all marine gas and oil deposits, the rights to the waters and the
riches below are critical. And, given such riches, competition might
appear lucrative at first sight. But cooperation stands to enlarge the
pie.

Moreover,
economic agreements may promote closer cooperation in other realms.
Energy matters have already led to an unprecedented warming in relations
between countries such as Israel and Cyprus in recent years, with an
agreement signed in 2010 formally delimiting these states’ respective
exclusive economic zones. It is not unimaginable that this type of
cooperation could be extended to include other neighbors around the
Levant.

The
good news is that Cyprus’s newly elected president, Nicos Anastasiades,
may be open to such an agenda. Naturally, much will depend on how he
fares politically in the current turmoil surrounding the bailout
package. Anastasiades, a member of the pro-European Dimokratikós
Sinayermós (Democratic Rally) party, won 57% of the popular vote on a
platform that emphasized economic recovery, and this will naturally be
his top priority. Nevertheless, a cautious look beyond the current
turbulence – and into Anastasiades’s history – provides grounds for
optimism.

In 2004, Anastasiades and his party supported the Annan Plan,
developed by former United Nations Secretary-General Kofi Annan and
supported by the European Union. Annan’s reunification proposal provided
the blueprint for a “United Republic of Cyprus” comprising a federation
of two states.

When
put to a referendum, roughly two-thirds of the island’s 250,000 Turkish
Cypriots in the north supported the Annan Plan, but 76% of the 860,000
Greek Cypriots in the south rejected it. It is not inconceivable,
however, that Anastasiades’s victory could provide impetus for reopening
the dialogue between the island’s north and south – that is, once the
current crisis has passed.

Such
an outcome would be a major breakthrough for Cyprus and the region.
Resolving the island’s longstanding division would nest Cyprus more
comfortably in the EU, and the economic effects would be manifold,
extending throughout the eastern Mediterranean.

For
example, both Turkey and Greece could reduce their military spending
(though naturally to varying degrees, given their respective
geopolitical environments). Greece is the second-largest defense
spender, relative to GDP, in the EU; clearly, in today’s economic
climate, savings here could provide hugely welcome budget relief. And
the Kurdish rebel leader Abdullah Öcalan’s recent call for a ceasefire
is an encouraging sign that Turkey, too, stands to benefit from a peace
dividend.

Greek
Prime Minister Antonis Samaras’s visit to Istanbul earlier this month
was a heartening sign that tensions between Greece and Turkey are
already beginning to ease. A deepening of cooperation in the eastern
Mediterranean would provide myriad economic opportunities, not least the
many related to developing the region’s cross-border maritime gas
reserves.

Anastasiades
has endured a perfect economic storm during his first month in office,
and the current crisis is certain to continue to dominate his agenda.
But, beyond today’s tempest, there is light on the horizon. Cyprus, and
its neighbors, must now pull together to reach it.