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*Available between the hours of 0830 and 1700 Monday to Friday. Calls may be recorded for security reasons and so that we may monitor the quality of our service. Call costs may vary. Please check with your telecoms provider. Barclays offers banking, wealth and investment management products and services to its clients through Barclays Bank PLC and its subsidiaries. Barclays Bank PLC is registered in England and is authorised and regulated by the Financial Services Authority. Registered No. 1026167. Registered Offi ce: 1 Churchill Place, London E14 5HP. Barclays Bank PLC is authorised by the Central Bank of Cyprus to conduct banking and investment business.

Barclays.A bank with a tradition of strength.It’s a tradition that has lasted in Cyprus for over 70 years, delivering the highest levels of local knowledge combined with unrivalled international reach. As one of our clients you will have access to our team of highly experienced professionals who provide seamless banking and corporate solutions. They are your gateway to the vast range of support and expertise available from Barclays globally. Whether you operate locally or internationally, our tradition of strength will help you create a culture of success.

To find out more about how Barclays can help, go to barclays.com/wealth or call us on +357 22 654477* for our Nicosia office or +357 25 208000* for our Limassol office.

Gold ISSU

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ISSUE 22 JANUARY 2013PRICE €6.95

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THE INTERNATIONAL INVESTMENT, FINANCE & PROFESSIONAL SERVICES MAGAZINE OF CYPRUS

FINANCIAL CRIME Anti-Money Laundering Regulation in Cyprus

PLUS: MONEY / BUSINESSECONOMYTAX & LEGALLIFESTYLE / OPINION

WHEN BANKS FAILBanking crises since 1970

INTERVIEWSAnthony LivaniosRafique MottiarVyacheslav Shumskiy

+ RICHARD COOPER, ERNESTO PRADO, BARRY TOPF

International services have grown more than 40 times faster than tourism in the past 5 years

Companies that use Cyprus as a base have invested a cumulative €29.8bn in the country

For 2012 Cyprus ranks 28th out of 141 countries in the Global Innovation Index

In terms of business sophistication, Cyprus ranks 10th in the world for Joint Venture Strategic deals conducted

Cyprus is ranked 1st in the world for the number of new businesses registered per 1,000 population aged 15-64

There are over 10,000 lawyers and 5,000 certified accountants and auditors in Cyprus

International services employment grew at an estimated annual average rate of 3.9% per year in 2007-2011

International services grew on average by 8.3% per year in 2007-11

Implementing certain recommendations could add just over 9,700 new jobs in five years

GROWTHkeyto the

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More than just a holiday destination with pristine white beaches and 300 days of sun-shine, Cyprus can also cater to your business needs ranging from registering and setting up your company’s operations to managing your EU, North African and Middle Eastern clients at a considerably lower cost.

As well as being an EU country and a mem-ber of the European Monetary Union since 2008, Cyprus enjoys the lowest corporate tax rate in the EU of 10%. Cyprus belongs to those jurisdictions on the OECD White List which have substantially implemented the internationally agreed tax standard.

In addition to this, Cyprus provides efficient business services, has a transparent legal and regulatory system and is committed to sustainable growth.

Cyprus welcomes both visitors and investors to work here, so, if you are searching for a new business base, consider Cyprus. It’s more than just beaches and sun.

“Columbia’s growth and expansion over the years is attributed to the uniqueness of Cyprus; being the is-land’s strategic position at the cross-roads of three continents, its compre-hensive legal framework, double tax treaties regime, communication sys-tem, banking system, infrastructure in general and last but not least its highly educated labor force.”

Captain Dirk Fry, Managing Director Columbia Ship Management Ltd

“The favorable business climate, the excellent telecommunications infra-structure, the well educated and skilled human resources, the favorable tax rates and the proximity to the Middle East and Africa markets, were some of the key factors that enabled NCR to de-cide to move its regional offices to Cy-prus in the 80’s. Gradually, NCR man-aged to expand the office in Cyprus to cover also all the African Countries.”

Managing Director of NCR Cyprus,Mr. George Flouros

Ministry of Commerce, Industry & TourismTrade ServiceTel: + 357 22 867100Fax:+ 357 22 375120www.mcit.gov.cy/[email protected]

Cyprus InvestmentPromotion AgencyTel + 357 22 441133Fax + 357 22 [email protected]


©2013 KPM

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6 Gold THE INTERNATIONAL INVESTMENT, FINANCE & PROFESSIONAL SERVICES MAGAZINE OF CYPRUS

08 1016

Issue 22 January

2013

FEATURES

AT LAST! CYPRUS HAS A FIDUCIARY LAW by George Savvides 18

TURNING JAPANESEby Savvas Savouri 44

THE TROIKA’S BANKING REFORMS FOR CYPRUSby George Theocharides 52

PYRAMID SCHEMES ARE NOT MARKETINGby Andros Christodoulou 60

THE ONLY WAY IS UPby Peter Economides 82

+ OPINION

34 | THE FINE ART OF INVESTINGThere will be good opportunities in 2013 for savvy investors, says Ernesto Prado.

36 | RUSSIA’S STRONG DIPLOMATIC PRESENCE

IN CYPRUS Interview with Vyacheslav Shumskiy, Ambassador of the Russian Federation to Cyprus.

40 | BREAKING UP IS HARD TO DOProf. Richard Cooper believes that the euro is here to stay.

46 | WHEN BANKS FAILSystemic banking crises since 1970.

54 | PREVENTION IS BETTER THAN CUREHow the Israeli economy has proved to be so resilient during the global financial crisis.

56 | LIFE’S A GASInterview with Anthony Livanios, CEO of Energy Stream CMG.

58 | NEGOTIATE. AGREE. IMPLEMENTEconomist Rafique Mottiar on the lessons learnt by Ireland.

EDITORIALUP FRONTFIVE MINUTES WITH…

62 | COMBATING FINANCIAL CRIME IN CYPRUSAnti-Money Laundering Regulation

46

56

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865

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thekeyto Investment in the Professional Services Sector

192

66 {money}

70 {business}

73 {economy}

78 {lifestyle}

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EDITORIAL

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Investment in the Professional Services Sector

John Vickers,Chief Editor

[email protected]

Unlucky For Some

If you are the superstitious type, the arrival of a year with the number13 in its name doesn’t bode well. However, even the most logical of us can see that 2013 is unlikely to be a great year for the economy – whether we are talking globally, regionally or locally – and it may be that our best hope is for it to pass as quickly and gently as possible. For Cyprus, this is the first year of the Troika-imposed measures that aim to rebuild the banking sector and get the economy back on course. Few of us, if any, will be unaffected by what are broadly seen as essential steps for the country’s long-

term survival and eventual prosperity. For some, no matter how necessary they may be for Cyprus, the effects of greater austerity are likely to be devastating.

But there is always another side to the coin and while the silver lining may currently be well hidden inside that dark economic cloud, there is reason to believe that it will eventually make an appearance. The Troika’s measures and the legislative amendments that have already been approved (which would never have even reached the House of Representatives for a vote had it not been for the crisis) will put an end to many long-held privileges of the few, push the island towards greater efficiency and transparency, and bring about a positive result that 50 more years of Cypriot party politics would never have achieved.

Next month there will be a new government in place, led by a new president who will be given a unique opportunity to show the extent of his leadership and statesmanship qualities by ensuring that Cyprus not only implements the terms of the bailout package but does so in a manner that demonstrates the country’s sincere desire to put its fiscal and banking houses in order. It is never easy for a politician to express support for unpopular measures but the start of a new term of office provides the perfect opportunity for the new man at the helm to show both the outside world and the Cypriot electorate that he intends to take the country through this difficult period and out of the austerity tunnel as soon as possible.

You will see that this month’s issue of Gold features a number of optimistic articles, in particular our cover story (page 18) on the Professional Services: Driving Jobs and Growth in Cyprus report, whose authors explain that this is not only the sector that has thrived while others have failed but the one that can literally create thousands of new jobs, provided that its very reasonable proposals are implemented. There is an article on Ireland (page 58), which is increasingly being seen as the Troika’s success story, and an interview with energy expert Anthony Livanios (page 56) which suggests that, while it will take time, the eventual revenue flows from Cypriot natural gas will also transform the economy. Professor Richard Cooper is upbeat about the future of the eurozone (page 40), and the Ambassador of the Russian Federation to Cyprus gives his full backing to the island’s financial system (page 36).

2012 was definitely not a year to remember if we are looking for positives but it is over. Welcome to 2013. Unlucky for some? Certainly, but it will be lucky for others. I hope that you will be among them. Happy New Year!


MANAGING DIRECTOR: George Michail

GENERAL MANAGER: Daphne Roditou Tang

MEDIA MANAGER: Elena Leontiou

EDITOR-IN-CHIEF: John Vickers

SENIOR EDITOR: Kyproula Papachristodoulou

CONTRIBUTORS TO THIS ISSUE: Andros Christodoulou,

Peter Economides, Elena Frixou, Chloe Panayides, Alexandros Pericleous,

Savvas Savouri, George Savvides, Dr. George Theocharides,

Antonis Vidakis.

ART DIRECTION: Anna Theodosiou

SENIOR DESIGNER: Maria KyriakouPHOTOGRAPHY:

Olesia Constantinou, Jo MichaelidesMARKETING EXECUTIVE:

Kevi ChishiosSALES & BUSINESS

DEVELOPMENT EXECUTIVE: Phivos Karayiannis

ADVERTISING EXECUTIVES: Irene Georgiou, Christopher Constantinou

OPERATIONS MANAGER: Voulla Nicolaou

SUBSCRIPTIONS: Kevi Chishios

PRINTERS: Cassoulides Masterprinters

CONTACT:5 Aigaleo St., Strovolos 2057, Nicosia, Cyprus

Mailing address: P.O.Box 21185, 1503, Nicosia, Cyprus

Tel: +357 22505555, Fax: +357 22679820e-mail: [email protected]

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UP FRONT


WORLDWIDE ACHIEVEMENT FOR PWC TRAINEE IN ICAEW EXAMS

Marina Vakana, a trainee accountant of PwC Cyprus, gained First Place and won the Leo T.

Little Prize in the Taxation paper in the recent examinations of the Institute of Chartered Accountants in England & Wales (ICAEW). Marina, a graduate of the Department of Public and Business Administration of the University of Cyprus, joined PwC in October 2011 and is currently working for Assurance & Advisory Services in Limassol. Evgenios Evgeniou, CEO of PwC Cyprus and Philippos Soseilos, Head of Human Capital, congratulated Marina on her outstanding achievement and presented her with a plaque in recognition of her accomplishment.

EMIRATES MARKS 18 YEARS IN CYPRUS

Emirates Airline recently celebrated the 18th anniversary of its l994 launch in Cyprus. In the last 12 months alone, it has carried over 60,000 passengers, 2.5 million kg of exports and 1.8 million kg of imports. As the major scheduled

operator eastbound out of Cyprus, Emirates operates two daily flights from Larnaca to Malta and Dubai respectively. In addition Emirates SkyCargo carries 13 tonnes of cargo per flight in and out of Cyprus, including cars, live animals, valuables, general items and refrigerated goods including fish, flowers, and vegetables.

Although the various Emirates’ long haul destinations (China, India and Australia) are increasingly appealing to travellers from Cyprus, Dubai remains the top selling destination for holidays and business. Emirates now flies to 126 destinations in 74 countries and has significantly expanded its global reach since Cyprus joined its global network as its 32nd destination in 1994. Emirates’ rapidly growing fleet has 180 passenger aircraft and 8 freighters with another 212 aircraft on order worth over US$62 billion.

Antonios Achilleoudis, Group Managing Director of Axia

Ventures Group (AVG), was one of the panelists at the recent Alternative Asset Valuation Symposium entitled ‘Learning from the Past, Managing the Present, Planning for the

Future’ in New York. He took part in the discussion on ‘Tackling the Global Valuation Challenges: Crisis in the Eurozone’ with Robert Sheehy, Deputy Director, Monetary and Capital Markets Department, International Monetary Fund, and Max Ziff, Managing Director,

Houlihan Lokey. The discussion focused on issues such as determining fair values in countries where the sovereign is itself distressed, identifying risk free rates in countries which do not control their own monetary policy, and building prices of potential sovereign default into

asset values. Axia Ventures Group is a privately-owned investment banking boutique providing financial advisory and capital market-related services to corporate and institutional clients, mainly in Greece, Cyprus and the broader region. AVG is headquartered in Nicosia.

(L-R) Evgenios Evgeniou, CEO of PwC Cyprus, Marina Vakana, Philippos Soseilos,

Head of Human Capital.

AVG participates in NY Alternative Asset Valuation Symposium

T axand, the world’s largest global organisation

of tax advisors to multinational businesses, has been highly commended for the fourth year running in World Tax 2013, the annual directory of the leading tax advisory and law firms published by International Tax Review. The comprehensive annual guide recognised 43 Taxand locations, including Taxand Cyprus (which is

Eurofast), for high quality tax advice. Two thirds of Taxand locations are ranked in tiers one or two, highlighting the firms’ international reach and leading reputation in Argentina, Australia, Chile, China, Columbia, Cyprus, Denmark, France, Greece, India, Indonesia, Ireland, Japan, Luxembourg, Malaysia, Malta, Philippines, Poland, Portugal, Romania, Russia, South Africa, Spain, Sweden, Switzerland, Turkey and Ukraine.

TAXAND LOCATIONS

RECOGNISED FOR HIGH

QUALITY TAX ADVICE

up_front.indd 10 28/12/2012 16:13

THE INTERNATIONAL INVESTMENT, FINANCE & PROFESSIONAL SERVICES MAGAZINE OF CYPRUS Gold 11

ForexTime Ltd (FXTM) has been awarded a CIF license by the Cyprus Securities and Exchange Commis-sion (CySEC) and will be officially open for business early in 2013, offering trad-ing and other investment services in Forex, commodi-ties, precious metals, shares,

indices and other financial instruments. The company has been established by Andrey Dashin, founder of the Alpari brand. The new venture, which stems from his ambition to be instrumental in setting new high standards for Forex trading in the ever-changing global marketplace, solidifies Dashin’s reputation as a business leader in the international finance industry. The new company is good news for Cyprus as it comes with a multi-million euro investment that is expected to bring a number of economic benefits to the island in a difficult economic climate, including new job openings and a substantial corporate tax revenue.Dashin said: “It is my ambition for ForexTime to be

a game-changer. I know that ForexTime is go-ing to change the industry for the better as my team and I possess the combined experience and commitment needed to elevate the indus-try to another level. With the current global crisis having created a unique set of conditions in the Forex market, ForexTime represents an adaptation to an evolving market by fulfilling investors’ and traders’ new demands and ex-pectations. We are already developing products and services that are ground breaking and will result in a better trading experience and faster execution for traders”.

Hollywood on Thames

A Disneyland-style theme park is set to be constructed in the UK if the ambitious project is approved. Planned to be built near the M25 motorway, a few miles away from the Thames

Estuary, it is being called “Hollywood-on-Thames” by enthusiastic supporters who believe it could be Europe’s leading entertainment destination, attracting hundreds of thousands of visitors to the UK and creating tens of thousands of jobs. US entertainment group Paramount Pictures proposes to spend £2 billion transforming the vast site in south-east England into a super-park to rival Disneyland. Twice the size of the 2012 Olympic Park, the 350-hectare pleasure park – described as a project “to create a world-class entertainment” – if approved, will open in 2018, say developers. If it gets the go-ahead, Hollywood-on-Thames will be able to boast of having Europe’s largest indoor water park, roller coasters, live music venues, theatres and cinemas, restaurants and hotels – and be built on the doorstep of Ebbsfleet international rail station, a 17-minute journey from London and two hours from Paris. The ambitious resort is expected to be located on a disused cement works industrial site in Kent on the Swanscombe Peninsula. The resort would see 17,000 jobs created at the park, with another 10,000 among suppliers and service organisations. The proposal for the Paramount Pictures theme park has been assembled by a consortium of top companies, including Lafarge, the French cement maker, on whose land the site is planned; Development Securities, a UK developer; and the Canadian contractor Brookfield Multiplex.

Manchester in north-west England has been ranked the most attractive location in Europe from a tax perspective. Over the past two years, the United Kingdom’s tax competitiveness has

improved the most among major economies examined in a study conducted by KPMG International. It came up with a total tax index for all locations it looked at, covering corporate income tax, capital tax, sales tax, property tax and statutory labour costs. Manchester was placed ninth globally, ahead of London, which was in 15th spot. KPMG’s report Competitive Alternatives 2012, Special Report: Focus on Tax assesses the impact of all business taxes in 14 countries worldwide, building on data compiled for 10 countries in 2010. Comparing this year’s results with the scores two years ago shows that the UK is the most

improved. KPMG studied the business-related tax costs in 113 cities globally to produce a league table. The only other European cities in the worldwide top 40 were St Petersburg (10th), Moscow (12th), Amsterdam (13th) and Rotterdam (14th). The top three cities with the lowest total tax index according to KPMG’s report were Chennai, India, Vancouver, Canada and Chengdu, China. In the UK, the survey examined Manchester and London. Manchester was given a total tax index (TTI) of 66.7, some 13 points lower than London. The difference was largely due to lower rates for “other corporate taxes” and “statutory labour costs” that are both based on actual business costs that would be incurred in the location and thus reflect the relative costs of labour and property values between Manchester and London.

ALPARI FOUNDER ESTABLISHES NEW FOREX COMPANY Andrey Dashin’s multi-million euro investment

Europe’s most attractive tax city is…Manchester?

Andrey Dashin

up_front.indd 11 28/12/2012 16:14

UP FRONT

On the occasion of the

official visit of President Christofias to Lebanon, the Cyprus Chamber of Commerce & Industry and the Ministry of Commerce, Industry & Tourism are co-organising a Trade Mission and Business Forum in Beirut on 10 January. President Christofias will address the Forum, the objective of which is to promote

the further development of commercial and financial cooperation between Cyprus and Lebanon. Those taking part from Cyprus include companies offering financial and consultancy services, private hospitals and health care providers, universities, companies involved in Renewable Energy Sources and firms active in the industry, tourism and transport sectors.

IT DIDN’T HAPPEN…

Not surprisingly, 2012 was an eventful year around the world, one that kept the experts

busy making predictions about which way things were heading. From hugely optimistic forecasts to worst-case scenarios, we heard and read them all but not all the expectations went according to plan. CNBC came up with a list of nine major predictions that failed to materialise in 2012.

FACEBOOK HYPEFacebook’s $16 billion initial public offering (IPO) – the third-largest ever in the US – was a market love affair that quickly turned sour. With a subscriber base of one billion people – or around 40% of the world’s Internet population –the social network site had investors salivating over its earnings potential. The share price fell almost 11% within 48 hours. Since November, shares have risen 30% but at $27.70 they are still far below the $38 offer price.

HARD LANDINGSeveral months of growth deceleration in China, and a slump in the country’s housing market, gave rise to speculation that the world’s second-largest economy was heading for a so-called ‘hard landing’ in 2012. Economic data for the first nine months of the year kept observers on edge but, with a new leadership signalling economic reforms and policy changes, experts are now predicting that 4th quarter growth will be over 8%.

“GREXIT”An inconclusive Greek election in May, which saw anti-bailout parties make big gains, led to speculation that Greece’s membership of the eurozone was over. But the widely-cited forecast of a Greek exit (‘Grexit’) from the eurozone did not materialise and, following parliament’s approval of a tough 2013 budget in November, fears of this scenario have faded. The latest deal to help reduce the country’s debt levels is expected to cover

Greece’s financing needs until 2014.

GOLD RUSHThose who predicted that gold would hit the $2,000 per ounce level by the end of 2012 were in for a big letdown. At the end of December, the price was still about $300 away from their target. It was argued that massive quantitative easing would push investors to gold – seen as a hedge against price rises. However, this has failed to materialize. Moreover, Indian and Chinese gold consumption fell during the year.

EURO PARITY AGAINST THE DOLLARThe volatility in the euro since the start of Europe’s debt crisis made it a target during market selloffs and led several strategists to predict that it would fall to parity against the US dollar in 2012. But while the it fell more than 12% since hitting a peak of $1.49 in May 2011, the euro remained resilient at around $1.30 at the end of the year, nowhere near the calls to parity made by market watchers.

JAPANESE DEBT CRISISMany commentators predicted that yields of Japanese government bonds would rise dramatically in 2012, leading to a debt crisis. Japan’s government can still borrow money for 10 years at under 1%, despite a public debt more than twice the size of its economy, negative growth and an aging population. But Japanese bonds continued to firm and the benchmark 10-year yield could go lower after Shinzo Abe won the December 16 elections.

END OF THE WORLDIf you are reading this, it means that the prediction that the world would end on December 21, 2012 didn’t come true either. The date, regarded as the end of a 5,125-year-long cycle according to the Mayan calendar, had been misinterpreted, according to scholars. Nonetheless, a global poll carried out in May last year found 10% of those interviewed said they were experiencing fear or anxiety about the end of the world in 2012.

Ekaterina Vavilova, owner of the Vavilova Clinic in Limas-sol, won the

2nd Russian Businesswoman of the Year award in the Corporate Business category last month. The Awards, founded by Janice Ruffle in 2005, are administrated in five cultural categories: Cypriot, British, Russian,

South African and “Crème de la Crème” Business-woman. The winner in the second Russian category (Professionals/Creative) was Victoria Gladunova, Hotel Spa Manager at the Colum-bia Beach Resort. Ekaterina Vavilova is pictured (2nd left) receiving a specially designed crystal glass silver-lined bottle of Filfar from Elena Ghalanos, flanked by award judges Anya Debnam (l) and Tatiana Kusnetsova (r).

RUSSIAN BUSINESSWOMAN OF THE YEAR

CCCI Business Forum in Beirut12 Gold THE INTERNATIONAL INVESTMENT, FINANCE & PROFESSIONAL SERVICES MAGAZINE OF CYPRUS

up_front.indd 12 28/12/2012 16:14

Focus on tomorrow,starting today

www.pwc.com.cy

© 2013 PricewaterhouseCoopers Ltd. All rights reserved

We listen. We learn what you want to do and we help you create the value you are looking for. Value that is based on the knowledge that our almost 1.000 local professionals draw from 180.000 experts in 158 countries. We focus on the provision of Assurance, Advisory, Tax and Global Compliance Services.

UP FRONT


up_front.indd 14 28/12/2012 16:15


INTERVIEW

W hy did you decide to write Hydrocarbons of the Republic of Cyprus? At the end of last year Ni-

cos Anastasiades asked me to prepare a brief for him on all the legal and political aspects of a possible discovery of hydrocarbons in Cyprus. In the end, the “brief” was much bigger than anticipated and it eventually became a book.

How would you describe the signifi-cance to Cyprus of the discovery of natural gas regarding the economic future of the island? I would describe it as unprecedented. One cannot even fathom how much this development will affect the future of this country. The whole economy of the island will need to be re-oriented and, if we play our cards right, Cyprus will enter a different league: the elite.

Many experts say that it will probably take until 2020 for the real revenues to start flowing. Are we not celebrating too early? Frankly, if it was up to me no revenues would reach our generation. The rev-enues should be secured for the future generations. However, the mere need to put in place the necessary infrastruc-

ture – which will eventually allow us to exploit our hydrocarbons – will result in direct investments of around €20 billion within the next 8-10 years. This in itself is enough to kick-start our economy and lead to unprecedented growth rates for Cyprus. This is what our genera-tion should focus on and not the direct revenues from the hydrocarbons.

How significant is Cyprus’ new rela-tionship with Israel, not only regarding the commercial exploitation of natural gas but in regional political terms? Israel and Cyprus could establish a new strategic partnership with huge synergies, both economic and political, for both na-tions. However, I do not think that either country is ready for a “marriage”. Until they are both ready, though, I think that both sides need to coordinate so that any moves by either party will not eliminate or restrict the possibilities of a future full-scale cooperation.

You support the idea of an LNG terminal in Cyprus that will serve both Cyprus and Israel. How feasible is an agreement between the two countries on this? As I said above, at present it is not fea-sible. It’s too early. However, I think that Cyprus should proceed on its own, giving

Israel the time to reflect and eventually see that the Cyprus LNG terminal is its best option to export its hydrocarbons.

Do you think that Cypriot politicians (across all parties) are capable of han-dling such an enormous undertaking as making Cyprus a regional energy hub? The most precious asset of Cyprus has been – and will always be – its human capital. Unfortunately, for a number of reasons many talented and well edu-cated young people have stayed out of politics. I think the opening up of such a promising new field will encourage some of our brightest minds to recon-sider their approach towards partisan politics and our political parties to open up to those new bright minds. I am an optimist by nature.

How confident are you that the people of your generation will transform the prospects brought by natural gas into a “tangible bright future”, as you say in your book? I honestly think that our generation has got what it takes to make this work. Of course, part of being a good manager is to know your limitations and thus know when help should be sought from abroad. I guess we shall soon find out.

five minutes with...If we play our

cards right, Cyprus will

enter a different league: the elite

Dr. George PamboridisManaging Partner, Pamboridis LLCAuthor of Hydrocarbons of the Republic of Cyprus

ΟΙ ΥΔΡΟΓΟΝΆΝΘΡΆΚΕΣ ΤΗΣ ΚΥΠΡΙΆΚΗΣ ΔΗΜΟΚΡΆΤΙΆΣ

Δρ ΓΙΏΡΓΟΣ Π. ΠΆΜΠΟΡΙΔΗΣ

Hydrocarbons of the Republic of Cyprus by Dr George Pamboridis is published in Greek by IMH.

five_min_pamborides.indd 16 28/12/2012 07:55


cover_story.indd 18 28/12/2012 16:20

cover_story.indd 19 28/12/2012 12:38

COVER STORY

1. Professional Services: Current Impact on Jobs and Growth

In view of concerns about soaring unem-ployment, it starts by examining the con-tribution of legal, accounting and finan-cial services to jobs. It then calculates how much revenue these sectors bring into the country in terms of exports of services as measured in the balance of payments. Finally, the authors consider the contribu-tion of the professional and services sector to the economy both in terms of size and growth. Since financial services are closely linked to business services, their contri-bution is also analysed, in particular the contribution of financial services serving international clients. By combining these, the researchers come to an estimate of the contribution of what they term “interna-tional services” and compare it with the contribution of tourism.

The conclusion here is that, with 17,900 employees in 2011, tourism and related transport was still bigger than “inter-national services”, employing 13,800 people. However, “international services” employment grew at an estimated annual average growth rate in 2007-2011 of 3.9% per year, while employment in tourism and related transport shrank at an estimated pace of 1.7% per year. The gap is therefore narrowing rap-idly. Indeed, if this trend continued, one might see “international services” employing more people than tourism within just five years.

Then authors conclude that tourism is no longer the mainstay of the Cyprus private-sector economy, as is commonly perceived. Moreover, they estimate that “international services” grew on average by 8.3% per year in 2007-11, whereas tourism and related transport grew by only 0.2%. Thus, “international services” have grown more than 40 times faster than tourism in the past five years and they are the new driver of jobs and growth.

Both professional and financial services were the fastest growing sectors in the past five years. By contrast, the traditional sectors such as tourism, manufacturing and con-struction, have actually acted as a drag on

growth. However, the report suggests that the sector should not be viewed as a compet-itor to tourism but rather as complementary sector which, together with tourism, fosters growth. The quality of hotels in Limassol, its high occupancy rates and the 40%-50% an-nual growth rates of Russian tourist arrivals since 2010, are a clear testament to how the professional services sector is helping tour-ism to reach its long-term aim of raising the quality of the tourist product and attracting higher-spending visitors.

The analysis also considers the contri-bution of the companies which are served by professional and financial services. Specifically, it estimates inflows of For-eign Direct Investment (FDI) by entities resident in Cyprus without a physical presence in Cyprus (EWPPs). According to the IMF data for 2009-2010, total inward FDI stocks including EWPPs

Professional scientific & technical

Accommodation & food services

Job creation

since 2001

6,400

2,1001,900

Financial & Insurance

cover_story.indd 20 28/12/2012 08:20


in 2010 reached $56.7bn (€42.8bn), whereas according to Central Bank data FDI stocks excluding EWPPs amounted to only €13.1bn.

Notwithstanding the Central Bank’s reservations about the accuracy of the data including EWPPs, the authors cau-tiously estimate that, over the years, the internationally oriented companies that use Cyprus as a base have invested a cumula-tive €29.8bn in the country, of which €18.3bn was from Russia. However, the difficulty of estimating this figure accurate-ly is underlined by the fact that the Central Bank of Russia has different data for out-ward foreign investment into Cyprus from Russia. According to its estimates, the stock of outward investment into Cyprus at the end of 2010 was $18.0bn or €13.6bn. Whatever the true picture, it is clear that the companies served by the professional services sector bring a large amount of money to Cyprus.

On the other hand, EWPPs have also been responsible for a substantial

amount of direct investment outside the country, amounting to an estimated €29.1bn, which makes the net gain to Cyprus much smaller. Thus, it cannot re-ally be said that EWPPs bring a great deal of net FDI into the country. Perhaps the greater impact of such investment flows can be seen in the amount of business and jobs that it generates at home for the business and financial services companies serving these international clients.

2. Macro Benchmarking: Cyprus as a Place to do

BusinessIn Section 2, Cyprus is benchmarked as a place to do business against other competi-tor countries for international business services, namely Ireland, Luxembourg, Malta and Singapore.

The World Bank’s Doing Business Report 2012 compares regulation for domestic firms in 183 economies. The rankings are based on 10 regulatory areas: starting a business, dealing with construction per-mits, getting electricity, registering prop-erty, getting credit, protecting investors, paying taxes, trading across borders, en-forcing contracts and resolving insolvency (closing a business). It also presents data on regulations relating to employment. The rankings are based on both quantitative and survey data.

Cyprus is ranked 40th out of 183. This is better than its 2011 ranking of 49 and Cyprus is also ranked ahead of nine other EU countries – Spain (44), Luxembourg (50), Hungary (51), Bulgaria (59), Poland (62), Czech Republic (64), Romania (72), Italy (87) and Greece (100).

However, with the exception of Luxem-bourg, the ranking is well below the other two peers covered by the World Bank. Singapore is ranked number 1 and Ireland number 10 (Malta is not included in the rankings).

While Cyprus scores fairly well for issues such as starting a business, paying taxes and investor protection, it scores very badly for registering property, for which it is ranked 123. The backlog of 100,000 or so title deeds for property that has already been purchased is clearly damaging perceptions of doing business in Cyprus. In addition, a lengthy judicial process is probably be-hind the very low ranking for enforcing contracts. However, for a country that promotes itself as a international financial centre, perhaps the issue to pay attention

to is the ease of obtaining credit. Here, Cyprus is ranked 78th, whereas Ireland is ranked 7th and Singapore 8th, although Luxembourg, a bigger financial centre than Cyprus, is ranked lower at 150th. This may be a by-product of the small stock market, which reduces access to alternative forms of financing and thus makes the banks the price-makers for finance.

In May 2012, the Economist Intel-ligence Unit (EIU), which produces Business Environment Rankings for 82 countries based on some 90 indicators, covering a five-year forecast period and compared with the preceding five years, ranked Cyprus 33rd for the forecast period 2012-18. The EIU says this is owing to three main weaknesses: (a) “Small market size, distance to the main EU market and lack of access to Turkey”; (b) “A culture of cronyism” which it says affects the environ-ment for competition; and (c) the division of Cyprus which “constitutes a security risk and may put off significant investors, espe-cially in the context of Turkey’s objections to hydrocarbons exploration and Cyprus’ cooperation with Israel in exploiting natural gas finds.” The EIU’s assessment is probably the only ranking in which the Cyprus problem is specifically highlighted as an obstacle to doing business. The recent deterioration in the macroeconomic out-look means that Cyprus’ global ranking for the macroeconomic environment also slips from 36th place in the historical period (2007-2011) to 58th – the same as Ireland – in the forecast period (2012-2018).

On the other hand, the EIU describes Cyprus’ tax regime as “one of its strongest features” and it notes that the tax regime will be bolstered by the revised law on

international trusts.Another index which also reflects the

environment for international business companies is the Global Competitiveness rankings of the World Economic Forum (WEF). Cyprus has been sliding down the rankings and, in the 2012-13 report is in 58th place (down from 47th), behind Sin-gapore (2), Luxembourg (22), Ireland (27)

cover_story.indd 21 28/12/2012 11:15

and now also Malta (47), which overtook Cyprus in the latest survey. Within the sub-indices, Cyprus scores worse on the subcategory of “innovation and sophisti-cation factors” than on other factors.

The World Heritage Foundation (WHF) produces an annual index of eco-nomic freedom which is another indica-tion of how attractive Cyprus is compared with its peers. Cyprus is ranked 20th out of 179, ahead of Malta (50) but behind Luxembourg (13) and much further be-hind Singapore (2) and Ireland (9). The key area that brings Cyprus’ score down is government spending, which is prob-ably influenced by the large public sector. According to Eurostat data, government spending in Cyprus was 47.3% of GDP in 2011, higher than the 43% recorded for Malta and 42% record for Luxem-bourg but a little lower than Ireland, at 48.7% of GDP.

Cyprus also scores fairly badly on freedom from corruption. Sometimes this is blamed on the fact that Cyprus is a small country. However, with the excep-tion of Malta, Cyprus scores worse than the other countries in the small country peer group for corruption. Transparency International ranks Cyprus 30th among 182 other countries for perceived levels of corruption in the public sector.

The general conclusion one can draw is that, as a general place for doing business, Cyprus is ahead of Malta but way behind Singapore, a fair way behind Ireland and in most cases behind Luxembourg.

score indicates a strong performance.Across these 12 Institution indicators,

Cyprus has its best ranking of 1 in the cost of redundancy dismissal, which is eight weeks of paid salary. The lowest ranking in the Institu-tions category is 48 in political stability, which largely reflects the Cyprus problem. The Insti-tution indicators in which Cyprus ranks rela-tively well are regulatory environment, press freedom and the business environment.

The report considers in-depth the category in which Cyprus has the lowest rank, namely Creative Outputs where it comes 63rd, which is very far behind Malta (best in the peer group at number 2) and Luxembourg (6th). It is also considerably behind Singapore (37th) and Ireland(38th).

The Creative Outputs category consists of 13 indicators under three headings: creative intangibles, which includes measures such as domestic trademark registrations and the num-ber of ICT business models; creative goods and services, which includes measures such as the number of national feature films per head of population and recreation and culture con-sumption; and online creativity which includes features such as registrations of generic top-lev-el domains and monthly edits on Wikipedia.

The best score is a tie between the Madrid Resident Trademark Indicator and the Generic Top Level Domains Indicator, both of which rank Cyprus 23rd globally. These two indica-tors show that Cyprus has a relatively high number of trademark registrations through the Madrid System. As regards domains, Cyprus has registered on average 35.2 generic top-level domains (i.e. websites ending with biz, info,

3. Micro Benchmarking: Cyprus as an Innovator

The report’s analysis of Cyprus as an innova-tor shows that while Cyprus clearly has several strengths, as regards innovation, many of which stem from the expertise and scale of the professional services sector, it is far behind its competitors in areas such as business sophisti-cation, creative outputs and therefore the gen-eration and capitalisation of knowledge. Where Cyprus as an innovator does excel, this seems to be as a result of the professional business services sector facilitating international clients’ efforts to innovate.

For 2012 Cyprus ranks 28th out of 141 countries in the Global Innovation Index. Strikingly, it is a long way behind all four countries in the selected peer group (Singapore is ranked 3rd, Ireland 9th, Luxembourg 11th and Malta 16th).

Cyprus scores far worse as an innovator than it does as a general place to do business. In par-ticular, while Cyprus tends to score better than Malta as a general place to do business, it scores worse than Malta as an innovator. This might well explain why Malta has been seen to be stealing a march on Cyprus as an international business services centre in recent years.

The best category ranking for Cyprus is Institutions, where it comes 15th out of 141. The Institutions category consists of twelve indicators that examine the political environ-ment, the regulatory environment and the business environment. In the scores, a low

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org, net or com) per thousand people aged 15 to 69. How much this activity relates to R&D and other forms of innovation by Cypriots, as opposed to innovation by the clients of the professional services sector, is unclear.

The lowest rank for Cyprus within the Creative Output category is ICT & business model creation which refers to the extent to which information and communication technologies are being invented and new busi-ness models, services and products created in a particular country. Cyprus ranks 66th in this indicator, which suggests that most of the activity in creating top-level domains is not related to creating business models, services and ICT products.

The combination of a high output score for trademarks and domains but a low one for ICT and business model creation reinforces the authors’ assumption that most trademark and domain registration is being undertaken by companies that are primarily engaged in such business activity globally.

The report also examines the remaining five indicators: Human Capital & Research, Infrastructure, Market Sophistication, Business Sophistication, and Knowledge & Technology Outputs.

Human Capital and Research: Cyprus ranks 30th out of 141 economies in this cat-egory. It is behind three of the four countries in the peer group –Singapore (ranked 2nd), Ireland (7th) and Luxembourg (12th). Malta is ranked 47th. The best performance within this category is in tertiary education with a rank of 19. This demonstrates that Cyprus not only values education highly, it also invests in it.

The lowest performance is in gross expenditure of R&D as a percentage of GDP, where Cy-prus ranks 59th. Cyprus is clearly not investing enough in R&D, perhaps, some would say, because up to now there were no real signifi-cant research organisations that could utilise the investment.

Infrastructure: Cyprus’ overall ranking is 42nd, behind Ireland (35), Luxembourg (18) and Singapore (9) but ahead of Malta (46). The best relative performance for Cyprus within the category is the ICT use index indi-cator, where Cyprus ranks 28th. The ICT use

index is a composite index that includes Inter-net users, fixed broadband Internet subscribers and mobile broadband subscriptions per 100 inhabitants. This relatively high performance for Cyprus confirms the high level infrastruc-ture the country has in terms of use, access and connectivity of ICT. Technology is a funda-mental prerequisite to growth and Cyprus has ample use and access to it. While Cyprus has quite a high ranking for ICT use, it has a low performance as regards e-participation: the use of the Internet to facilitate the provision of information by governments to citizens (“e-information sharing”), interaction with stakeholders (“e-consultation”), and engage-ment in decision-making processes (“e-decision making”). It is clear that Cyprus is facing chal-lenges in this area.

Market Sophistication: Cyprus performs relatively strongly with a ranking of 20 out of

141 economies. Compared to its peer group, Cyprus is third, ahead of both Luxembourg (23) and Malta (57), but well behind Ireland (6) and Singapore, the best performer in the peer group, which is ranked 4th. The best indicator within the ranking is Venture Capital Deals, where Cyprus is ranked 10th. Clearly, this shows the strength and expertise of the professional services sector in Cyprus, with the expertise to facilitate Venture Capital deals amounting to over 126 trillion PPP$ GDP. However, these deals are clearly not taking place within Cyprus. This is underlined by the fact that the lowest performer in the category of Market Sophistication is market capitalisa-tion (also known as “market value”). The low score for Cyprus underscores the fact that the active stock market is tiny, and is generally not used as a vehicle for raising corporate finance. This indicator therefore shows that there is plenty of opportunity for improvement.

Business sophistication: Cyprus ranks 37 out of 141. Notably, it is the indicator in which Cyprus falls furthest behind its peers, with Singapore ranking 1st, Ireland 2nd, Malta 4th and Luxembourg 5th. The best relative performance for Cyprus in terms of business sophistication is the amount of Joint Venture Strategic deals conducted. Cyprus ranks 10th in the world, beaten only by Ireland (ranked 7th in its peer group. This indicator attests to the expertise and strength of the professional services sector in Cyprus, which has both the know-how and the experience to structure JV alliance deals worth trillions. Yet, like market sophistication, it is likely that many of these deals concern assets or projects which take

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place outside Cyprus. This is probably also why the lowest performance in the business sophistication category is the indicator refer-ring to the percentage of gross expenditure on R&D financed by business enterprises. As noted above, Cyprus does not invest nearly enough in R&D. In this subcategory Cyprus ranks 65th out of 141 economies for the per-centage of R&D financed by the private sector.

Knowledge and Technology Outputs: Here Cyprus ranks 25th, a fair way behind all of its peers, with Singapore ranked 3rd, Ireland 6th, Malta 14th and Luxembourg 18th. Yet it is a great opportunity also to transfer such expertise to facilitate knowledge and innova-tion growth in the local economy. Discussions to this effect have been under way since the establishment of the first research university in the 1990s and culminated in suggestions to establish the Nicosia Knowledge Region, for example. The best relative performance for Cy-prus is the number of new businesses registered

4. Strengths, Weaknesses, Opportunities, Threats

The professional services sector has been the highest contributor to GDP growth in the past decade and almost the sole en-gine of the economy in the more recent difficult period. It has therefore become imperative to make a fresh analysis of the sector’s Strengths, Weaknesses, Opportu-nities and Threats (SWOT).

During the past decade, the profes-sional services sector, in conjunction with the leading efforts from the tax and audit firms, anchored in over 45 double tax treaty agreements, a highly educated, specialised work force and a robust “com-mon law” based legal system, has been able to structure a significant fee-based revenue stream which has led to a grow-ing contribution of the sector to GDP and employment. Yet it is operating in an

COVER STORY

per 1,000 population aged 15-64 (in 2009), where Cyprus is ranked 1st in this category. This is another confirmation of the strength and capacity of the professional services sector. The lowest relative performance in this section for Cyprus measures growth of GDP per per-son engaged.

The reports notes that it is critical for the professional services sector to focus on innova-tion in the local economy. Clearly, to create a model for sustainable growth the private sector needs to invest more in R&D. Venture capital deals need not only to be transacted in Cyprus but also invested in Cyprus. There are plenty of opportunities here, such as mobile and new augmented technologies, oil, gas and renewables, which would support a genuine entrepreneurship ecosystem. Today, the coun-try also has several areas for research including neuroscience and genetics, energy, blue and green technologies, archaeology, etc. Cyprus can also be far more innovative than it is today

environment in which many of the econ-omies of the Eurozone, including that of Cyprus, are struggling to stay afloat. Af-ter the reverberations of the 2008 global economic crisis, the ability to innovate and evolve to survive becomes imperative for every sector, as the way business has been conducted for decades is changing rapidly and radically.

Strengths• Common Law System: International

counterparts easily understand a Com-mon Law based system; its emphasis on equity cannot easily be transposed into code-based systems, especially in the judicial process, and therefore it facili-tates business transactions globally.

• Tax Regime: In 2003 the Cyprus tax system was overhauled in full compli-ance with EU directives, prior to EU membership in 2004. In April 2009 the OECD accepted Cyprus onto the White List of jurisdictions that have

by focusing more on its younger and highly ed-ucated researchers. For the professional services sector in particular, there is an opportunity to strengthen innovation in these areas. Cyprus can first improve its innovation environment and its ranking by addressing the “low hanging fruit” – that is, by focusing in the next twelve to 24 months on strengthening the categories in which it does relatively well, such as Insti-tutions and Market sophistication. In addi-tion, in the next 12 months and beyond, an implementation plan needs to be put in place to strengthen performance in the other areas and close the gaps within key categories where Cyprus is not performing as well, such as Infra-structure, Business Sophistication and Creative Outputs. To achieve all of these improvements requires strategic planning, coordination and collaboration by the key stakeholders including the policy makers, the private sector, the voice of the industry across disciplines, as well as the universities and research centres.

substantially implemented the interna-tionally agreed standard on exchange of information.

• Human Capital: There are over 10,000 lawyers and 5,000 certified accountants and auditors in Cyprus, as well as a few thousand fiduciary services profession-als and ancillary services providers. The professional services sector has solid expertise in corporate and merger & ac-quisition services, banking and finance, and real estate, and significant expertise in tax advisory, company registration and fiduciary services.

• Geography and Culture: The location of Cyprus makes it convenient in terms of access to various markets and time zones. In an era in which quality of life and work-life balance are coveted, Cyprus provides professionals with an open European culture, over 340 days of sunshine, and widely available broad-band access.

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Weaknesses• Fragmentation of Business Develop-

ment Efforts: While initiatives are organised by professional associations from the industry, individual firms, Chambers of Commerce, Federations and the Cyprus Investment Promotion Agency (CIPA), such efforts are often fragmented and lack a country-level strategic approach, goal-setting and well executed follow-up. Tourism now con-tributes less to the economy than the professional services sector. Yet the Cy-prus Tourism Organisation received a budget of €62.5 million in government funding in 2012, while CIPA’s officials report that its budget is currently only €1 to €1.5 million per year, although it is due for an increase. However, even without additional expenditure, there is a lot of room for improvement in terms of active collaboration, coordination, transparency and governance.

• Lack of Niche Capacities: While the oil and gas sector in Cyprus is in its nascent stages and there is a small window of about two to three years to strengthen capacity, expertise in renew-

able energy is also lacking, even though solar energy and blue technologies could have been sectors of expertise on an island country in the Mediterranean. Overall, the professional services sector has not capitalised on the use of tech-nology and social media to the extent that it could.

• Overdependence on One Market: One of the reasons for the decline of tourism in Cyprus was its overdepen-dence on UK tourists, which until 2008 still accounted for more than 50% of arrivals. There is a risk that the profes-sional services sector will fall into the same trap. Russian clients now account for a “significant proportion” of the clientele of the professional services sector. As long as oil prices remain at around $100 per barrel or above, the Russian economy can continue to grow. There is therefore a window of op-portunity for the professional services sector in Cyprus to diversify into new markets.

• Lack of Prioritisation by Policy Mak-ers: According to the Cyprus Busi-ness Leaders Survey (Gold magazine,

July 2012), when asked what would be the single improvement in the way business is conducted in Cyprus they would focus on if given the chance, an overwhelming 58% responded that they would oblige the government and government departments to modernise, reduce red-tape and government bu-reaucracy. A lack of clear policy focus also extends to the bureaucratic and politicised delays on key initiatives such as the concept of utilising the “triple helix” of university-city-government to promote R&D and growth. Since the professional and financial services sector is large and growing, these bureaucratic hurdles largely affect this sector. A true country-level strategy requires collabo-ration between the private sector, the voice of the industry and the regulators.

• Not Championed by Country Lead-ers: In countries like Malta and Ireland, policy makers and government officials, including the president of the country, champion their professional services sectors and the voice of the industry abroad in close cooperation with the industry. Moreover, they support re-

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quests and consultations to innovate, decrease bureaucracy, increase flexibil-ity in the labour market and speed up processes within their countries. Such a collaborative approach would facilitate the provision of services to clients and improve the reputation of Cyprus.

Threats• Lagging Behind Peers: Cyprus tends

to trail behind its peers as a general business centre even though it ranks higher in certain metrics across differ-ent ranking reports. International rank-ings are the first level of due diligence conducted by investors and clients when seeking new markets and coun-tries to place their investments. They reflect both what is going on in the country and they provide a comparison to peer countries.

• Loss of Favourable Tax Regime: In 2011 the government made a number of alterations to the tax system that affected companies. Graver threats to the tax system come in three forms: a possible increase in the corporate tax rate, the proposed introduction of an EU-wide common tax base (or even tax rate) and the proposed introduction of a financial transactions tax.

• Fiscal and Banking Crisis: Another key threat to mere survival of several firms is the economic crisis in Cyprus and the region. In Cyprus, we are undergoing both a fiscal and a banking crisis. The

destruction of a key power plant in July 2011 and its adverse economic effects and political fallout deepened the sense of economic uncertainty even before the escalation of the Greek crisis that affect-ed the banks. Moreover, with the dete-rioration of the financial crisis in Greece and the impact on Cypriot banks’ capital of their exposure to Greek sovereign debt, tighter financial conditions have come into play that have been detrimen-tal to the confidence and the general demand for services. In the worst-case scenario, if Cyprus is perceived to be un-able to reach a deal with the Troika or to meet its Troika obligations, companies could start pulling business and bank deposits out of Cyprus.

• Emigration of Young Talent: Accord-ing to the Labour Force Survey, the youth unemployment rate hit 26.7% in the first quarter of 2012, up from 20.7% in the first quarter of 2011. This rate is likely to rise as coveted jobs in the public sector become more scarce. Since young Cypriots can now work anywhere in the EU, and since many young professionals are UK-qualified, the professional services sector could see an exodus of young talent to the UK, as is happening in Ireland. Not only would this reduce the pool of available labour for the professional services sec-tor, it would also have a negative im-pact on the sector’s ability to innovate, and therefore continue growing in these challenging times.

• Loss of Clients: This is a key threat, which translates to loss of business, loss of revenue, loss of tax revenue and de-creasing chances of economic recovery for the country.

Opportunities• EU-wide Tax Changes: If the EU

introduces a harmonised corporate tax base, it could force the sector to think harder about how to encourage interna-tionally oriented companies registered in Cyprus to invest and engage more closely with the local economy and also to carry out business within Cyprus. Two key opportunities in this regard are energy, including renewable, and research and development (R&D).

• Energy: A key new opportunity is pre-sented by new economic sectors that will change the landscape of the Cyprus economy, such as the energy sector which includes not only natural gas but also renewable energy sources (RES) such as solar, wind and more broadly green and

blue technologies. Regarding natural gas, Cyprus could play a significant role in the energy needs of the European Union in the next two decades and beyond. The main and ancillary services resulting from this finding will require the provision of specialized professional and financial ser-vices. This is a great opportunity for the professional and financial services sector in Cyprus to build capacity in the next two to three years. In addition, as alterna-tive sources of energy are at the forefront of global focus, laws to account for and audit energy capacity and energy savings by every legal and even physical person will become imperative. This is another area on which professional services pro-viders can focus and build capacities. There is no reason why the Cyprus pro-fessional services sector could not service such needs for corporations, foundations and even countries worldwide.

• Entrepreneurship Ecosystem: One way to encourage R&D is by build-ing an entrepreneurship ecosystem. A number of countries, including smaller economies, have successfully fostered such ecosystems and Cyprus has all of the fundamental ingredients also to fos-ter similar organic growth.

• Empower Youth: The Cyprus profes-sional services sector employs some of the better-educated youth of the European Union, holding advanced degrees from top schools in the UK and United States, yet there is a tendency to give younger professionals, lower value-added work and little responsibility when they might be better employed working on new niche markets, or developing innovation inter-nally, within firms, to strengthen internal efficiencies and effectiveness, quality and client value-added services. The new gen-eration of talent, having grown up with Internet in their lives, has different needs and aspirations, therefore can detect the same in the new generation of clients worldwide. These talented young profes-sionals can easily deploy smart technol-ogy to tap into prospective clients and anticipate their needs in professional and financial services globally. Professional services firms have the opportunity to engage, nurture and empower their young talent even more. New graduates can syn-thesise and adapt new ideas learned from their international education and experi-ences. Local firms can empower them to develop and deploy innovative ideas for improving internal processes, increasing efficiency and effectiveness and adding value to customers.

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5. Additional Jobs Potential if Opportunities are Grasped

Using an econometric model that analy-ses the historical relationship between growth and jobs, the authors estimate how many more jobs the professional services could create if the opportunities identified in the SWOT analysis and the recommendations are grasped by the policy-makers, the sector itself and its “voice of the industry” representatives.

For the post-crisis five-year period 2014-2008 it presents two scenarios. The first scenario assumes that none of the recommended measures is taken by either the government or the profes-sional and financial services sectors. Under the no-reform scenario, employ-ment rises at an annual average rate of 1.7% per year in 2014-2018, reaching 406,359 by 2018. Under the with-reform scenario, employment rises at an annual average rate of 1.9% per year, reaching 411,793 by 2018. In other words, implementing the recommenda-tions could add, cumulatively, just over 9,700 new jobs in five years.

Assuming these new employees earn an average salary of €3,000 per month, or €36,000 per year, this would bring in around an extra €8 million per year

to the social insurance fund and another €5 million per year in income tax rev-enue, or just over €13 million in total additional annual budgetary revenue. To put this in context, this is more or less the same as the €14 million which the government expected to receive in late 2011 by raising public-sector contribu-tions to the widows and orphans funds, and more than twice the estimated €5m increase in revenue generated by the rise in the top income tax threshold.

In the no-reform scenario, unemploy-ment rises in 2013, owing to another decline in real GDP growth, to 11.7% and then declines gradually to 6.7% by 2018. This is still well above the rates of 3% to 4% enjoyed in the early part of the last decade. In the with-reform scenario, the decline from 2014 is more rapid, with the unemployment rate reaching 5.9% by 2018. This is still higher than historically, but has traditionally been considered an “optimal” unemployment rate since it is high enough to discourage inflation. Moreover, in the with reform scenario, unemployment should continue to fall after 2018, as the Cyprus economy would be more robust and able to withstand shocks more easily.

It is worth noting that the real GDP growth rate would have to average more than 3.4% per year in 2014- 2018 to bring the unemployment rate below 5%.

6. Adopt and Adapt: A Blueprint for Sustainable

GrowthThe report concludes with a series of strategic-level recommendations for crit-ical actions required by the government, the sector and the voice of the industry, as well as specific recommendations for the next 12 to 24 months.

For the regulators/policy makers there are three strategic-level recommenda-tions and ten specific ones, for the private sector ten strategic-level recom-mendations and seven specific ones, while four long-term and ten short-term recommendations are proposed for the voice of the industry, which refers to the professional bodies and associations representing firms providing legal, fi-nancial, accounting, auditing, fiduciary and other professional services. Not sur-prisingly, the third list is the longest as the authors believe that the sector needs to strengthen its voice in various ways and serve as the connector between the private sector and the regulator.

Real GDP growth (%)

2.7

Real GDP growth (%)

2.3Unemployment

rate (%)

6.7

Employment

406,359Employment

411,793Difference in

employment (reform dividend)

5,435

Cumulative increase in employment

9,705Unemployment

rate (%)

5.9

DECREASE BUREAUCRACY, ENFORCE TRANSPARENCY AND GOOD GOVERNANCE

•Cutcompanyregistrationto1daybyDec2013

•Cuttitledeedbacklogto25,000byDec2013

•CreateadedicatedtaxteamforDTAsbyDec2013

•Prioritisethevoiceoftheindustrycallsforreform

CONSULT REPRESENTATIVES ON A REGULAR, STRUCTURED BASIS

•IntroducetaxbreaksforSMEs,venturecapital,angelinvestors,ICISfunds,privateequity

•Introducelawtoattractinternationalfoundations

•Passpendinglawsonfundsandregulationoffiduciaryandcorporateserviceproviders

•ExpeditependingDTAagreements

IMPROVE CYPRUS RANKINGS IN GLOBAL INDICES

•Coordinationandcollaborationwiththe voice of the industry

•Strengtheninternationalmediaandsocialmedia presence

Recommendations for Regulators and

Policy Makers


cover_story.indd 27 28/12/2012 11:16


BUILD CAPACITY IN NEW SECTORS •Oil&gas •Renewables,greenandbluetechnologies

BE PRO-ACTIVE WITH RESPECT TO THREATS

•PrepareforpossibleEU-widetaxharmonisation

•Diversifytoreduceoverdependenceononeortwomarkets

FOSTER INNOVATION, TECHNOLOGY AND EMPOWER YOUTH

•BuildanentrepreneurshipecosystembychannellingventurecapitalandprivateequityintoCyprustech,energy,creativestart-ups

•Tapintoyoungtalenttoincreaseefficienciesandfindinnovativesolutions

•Leveragesocialmediaandinternetpowertotapintoglobalclientneeds

Recommendations for Private-Sector Actors

COORDINATE ACROSS INDUSTRY FOR STRONGER VOICE

•Createadhocexpertteams(liketaxadhocteam)

•Useinter-disciplinaryteams •Fosterdialoguewiththeunions

LEVERAGE TECHNOLOGY TO IMPROVE ADMINISTRATION AND PR

•RevampwebsitesinbothGreekandEnglish,consideraccessinotherlanguages

•Usetechnologytobetterrespondtoclientneedsandglobaltrends

•Usesocialmediatofosterbetterandfastercommunicationwithmembers

INVEST IN YOUNG TALENT •Considerfosteringpro-bonolegalservices

programmes •Ensureeducationprogrammesalignwith

newgraduateneeds •Fosterinternshipprogrammeswith

universitiesfornewgraduatepracticaltraining

FOCUS ON RAISING GLOBAL RANKINGS •Continueconductingauditsandreviewsof

memberstoensurehighindustrystandards •Strengthengoodgovernanceand

sustainabilityrequirementsforallmembers

Recommendations for the Voice of the Industry

CEO OF PWC CYPRUS commissioned the Professional Services: Driving jobs and growth in Cyprus report, in part because he felt that the contribution of the sector to the economy, both in terms of GDP and growth as well as job creation and potential was not really understood, particularly by the policy makers. He spoke to Gold about his ambitions for the report and its recommendations.

Evgenios Evgeniou

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By John Vickers, Photography by Jo Michaelides

cover_story.indd 29 28/12/2012 08:20

centre for Funds and they have focused very clearly on that. We need to have a similar focus here. We need sponsorship and leadership from the top – policy makers and the government – as well as better cooperation within the private sector.

Gold: The report notes the vast dis-crepancy between the budgets of the Cyprus Tourism Organisation and the Cyprus Investment Promotion Agency. You mentioned steps that can be taken without requiring a great deal of money but surely promotion requires precisely that?E.E.: Money is definitely needed for placing advertisements or having a pres-ence in the international media. As far as the CTO budget is concerned, no-one is suggesting that it should be reduced but there could be better cooperation and leverage of that budget to promote Cyprus not only as a tourist destination but also as a place to do business. In these difficult times, the answer is not to find another €60 million – though I believe that this would be money well spent – but to make better use of the €60 million already allocated to build the brand of Cyprus as a country, as a quality business and tourist destination. It’s not a matter of spending more mon-ey but spending money more wisely.

Gold: And promotion abroad is only one aspect of this.E.E.: Yes. What is more important is what we offer as a country. Things like improving the services at the Registrar of Companies, reducing bureaucracy in the civil service, setting up special-

Gold: Given the importance of the sector, isn’t it odd that such a report was necessary?E.E.: I think it’s partly to do with the fact that overall we haven’t really changed as a country in the same way that the economy has changed. For example, the way that statistics are re-ported addresses the traditional sectors of the economy and doesn’t immediately capture this sector. Another reason may be that the sector and its contribution to the economy is not really obvious to the person in the street. It has only become more apparent in the last few years be-cause of the way that the international business sector is changing and compa-nies create more substance in the coun-tries in which they operate – we have seen a growing trend of foreign com-panies using Cyprus as a business base, setting up offices and relocating people here. There are now so many foreigners working and living in Cyprus that they are visible. Until recently the sector was below the average person’s radar.

Gold: The sector has shown its resil-ience when others have declined. How great a role do you see for it in the immediate future?E.E.: The next few years will be dif-ficult for Cyprus and I expect the next few weeks and months to be particularly tough. We have agreed on the prelimi-nary Memorandum of Understanding with the Troika but we still have to go through the process of reaching a final

There is a potential

for creating up to additional jobs in the professional

services sector alone.

agreement and its ratification by the parliaments of the member states and I don’t expect that to be a smooth pro-cess. So we have to protect the sector during this process but once it’s over and we start rebuilding the reputation and the credibility of Cyprus, we have to start discussing how growth is going to be generated. We cannot rely on fis-cal or credit expansion to drive growth – on the contrary there will be fiscal contraction and deleveraging in the next few years. However, one way in which we can drive growth is through the pro-motion of Cyprus as a business centre which only requires legislation, a regula-tory framework and the taking of deci-sions that are not necessarily easy but have to do with reducing bureaucracy in the civil service, and persuading the private sector raising its game in terms of quality, innovation and better coor-dination. These things don’t cost money and that’s why I believe it is an area on which we should focus to drive growth.

Gold: The report includes interest-ing comparisons between Cyprus and Malta and Luxembourg, where the private and public sectors and the parliament appear to work together in a much more structured manner.E.E.: Both countries took a decision that professional services were an impor-tant sector of the economy. There has always been a great deal of focus on this by government, together with good co-ordination, Private-Public Partnerships, a marketing policy for the country as a whole, and emphasis on certain areas. The Maltese, for example, decided that they wanted to promote the country as a

cover_story.indd 30 28/12/2012 08:20


ized teams in the Ministry of Finance to work with the private sector to draft legislation that can help Cyprus develop further as a business centre, giving more resources to the Inland Revenue Depart-ment and entering into double tax trea-ties with emerging economies in Africa. The issue is not the size of the civil ser-vice but how we utilize the resources we have. People should be transferred, re-trained and used in a way that supports the economy. And as the report notes, it is not only the public sector that needs to change. In the private sector we need to realize that we have to adhere to strict regulations and rules – I’m glad that the Fiduciary Services legislation has finally come before the House of Representa-tives, for example – and where there are cases of people not doing their job prop-erly we must take appropriate action. This is the way to improve our reputa-tion as a quality place to do business. It won’t be comfortable or easy but it needs to be done. Adapting is not an option it’s a necessity.

Gold: It’s interesting that while most people could make plenty of recom-mendations for the public sector, those in the report are also aimed at the private sector and the so-called voice of the industry.E.E.: Yes, and they go from basic things such as upgrading websites and making greater use of social media to what we say and how we position Cyprus and promote it as an international business centre. There are recommendations re-garding the way we cooperate amongst ourselves in the private sector as they do in places like Luxembourg and Malta where they seem to have a mentality of “first we work for the country and then we share the pie”. In Cyprus we some-times give the impression that all our efforts are focused on sharing the pie that already exists rather than trying to make it bigger. The report sends out a very powerful message to all of us in the private sector too.

Gold: Is the professional services sec-tor capable of further growth in these difficult times?E.E.: The report estimates that if the suggested changes are implemented there is a potential for creating up to 9,700 additional jobs in the next five years. Even if that proves to be opti-

mistic, the creation of several thousand jobs will be key in a country where unemployment currently stands at 12% and 25% amongst the young. The pro-fessional services sector is perhaps the only one that is proving to be resilient in this recession. It may not be growing as it was in the past but, to a large ex-tent, jobs are available and there is still recruitment of young graduates. This resilience indicates that if we actively try to change things for the better and help the sector, there is the potential for job creation.

Gold: The role of young profession-als is particularly underlined in the reportE.E.: It is already the case that this is a sector that primarily attracts young peo-ple. If we take the accounting profession as an example, it recruits a number of young graduates every year to train and qualify. Some stay in the sector while others move to industry and other sec-tors of the economy. The same applies to the legal profession. The point that the authors of the report make is that we should give these young people a greater say. We should utilise some of the fresh ideas they bring in order to become more innovative. One recommendation is to make greater use of social media and this is the generation that really

knows how to use it. It is the genera-tion that can come up with ideas about the regulatory framework and how we move forward. When these talented young people finish their studies they are equipped with the latest knowledge and a new fresh outlook. We should give them a greater voice and more participa-tion in the way the sector develops.

Gold: What are your ambitions for this report?E.E.: First, for it to be discussed and debated and in terms of the recommen-dations to drill down and make them even more specific. The most significant outcome will be for the new government in February to acknowledge the im-portance of the sector and its potential for growth in the difficult years that lie ahead and to show leadership and spon-sorship to implement some of the rec-ommendations. The ultimate ambition is for Cyprus to be talked about in a few years’ time in the same way that we talk about Malta which transformed itself from a fishing country into a Funds cen-tre. Cyprus is already an acknowledged international business centre and I hope that in the future we shall be seen as a country which, by leveraging the pro-fessional services sector and exploiting the opportunities arising in the energy sector, managed to grow itself out of the current troubles and, in the process, carried out the structural changes that needed to happen in order to enter the next phase of its economic history.

Gold: Are you optimistic that the re-port can make a difference?E.E.: Yes, because when a country finds itself in great difficulty that is perhaps the moment when change can happen. When things are going well it’s difficult to argue for change so that things be-come even better. We stand on a burn-ing platform. We are in a difficult situ-ation with some tough times ahead but ultimately we need to create a future for the people of Cyprus in terms of jobs, prosperity and a good standard of liv-ing. Today’s difficulties are a potential catalyst for change. So in a strange way, this is the time to be optimistic about achieving change and I believe that this report can play a role in promoting the necessary change.

COVER STORY

cover_story.indd 31 28/12/2012 08:20

OPINION

We failed to seek guidance from similar laws in other reputable jurisdictions renowned for their trust and fiduciary services

At last! Cyprus has a Fiduciary LawSomething good happened in 2012

info: George Savvides is a Partner at Fiducenter (Cyprus). The views expressed in this article are those of the author and do not necessarily reflect the views or bind Fiducenter (Cyprus) Ltd or the Cyprus Fiduciary Association.

Few pieces of legislation have been pending for such a long time and even fewer have been through so many different drafts until the final version was drawn up. For many of those involved

in the planning, its passage through the House of Representatives was starting to resemble an unfulfilled dream. And yet…

Despite all the bitterness and trouble it has brought to Cyprus, 2012 turned out to be the year in which the fiduciary train would finally pull into the station. On 12 December “The Regulation of Undertakings Providing Admin-istrative Services to Private Companies and Related Matters Law of 2012”, also known more simply as the Fiduciary Law, was approved by the House of Representatives.

I still experience many different emotions every time I think of this law and the lengthy process that brought us in to it:

Joy because there is now a clear prospect for en-hancing the reputation of Cyprus as an international business centre, a reputation which was hammered for so many years by “cowboys” sweetened by the phenomenal growth of the sector in the last decade who rushed to provide services without having a decent grasp of even the very basics.

Embarrassment because we needed the Troika to push for its enactment (it was included in the package of legislations covered by the Memorandum of Understanding for the bailout of the Cyprus economy and banking system) since we couldn’t agree on a draft acceptable to all those involved and affected.

Disappointment because the law was merely considered as another legal weapon against money laundering, even by those parties actively involved in its enactment. It was this consideration that mainly led to the involvement of the Troika, together with the fact that it was much easier to amend a piece of legislation which was in draft form rather than laws already in force.

Resentment because basic details relating to the provision of such services, such as adequate insurance cover, correlation between the number of entities managed and the number of staff, etc. are missing from the requirements of the law, which is really no surprise given the perception of the law as another piece of anti-money laundering legislation.

Injustice because the law should apply to all persons providing administrative (as they are termed by the law) services irrespective of whether they belong to professional associations, which have earned the self-regulation privilege for their members under totally different circumstances and for unequivocally different services.

Sadness because, following from the point above about exempted persons, we failed to seek guidance from similar laws in other reputable jurisdictions renowned for their trust and fiduciary services and to learn from the mistakes they have made, with the benefit of hindsight.

Concern because the regulator (for those firms that will need to apply for a license at the end of the day) is already stretched in terms of capac-ity and the prospect of additional resources is something of a pipedream considering the state of the public purse. I only hope that it will not take as many years as it took for the law to be enacted before it is properly enforced.

Determination to continue working towards eliminating any deficiencies and introducing new provisions in order to improve the law, always with the ultimate aim of improving the quality of services offered by the sector.

Above all I feel proud that we have fi-nally taken a big step in the right direction and confident because the next time I find myself promoting Cyprus – whether at conferences, seminars or in one-to-one meetings – I will no longer feel a cold sweat when asked whether the fiduciary sector in Cyprus is regulated (because this question is always asked). At last I will be able to answer with a solid “YES!”

By George Savvides


opinion_savvides.indd 32 28/12/2012 07:57

16th Annual Global CEO survey

1.200 CEOs across 60 countries

www.pwc.com.cy

© 2013 PricewaterhouseCoopers Ltd. All rights reserved

31 Cypriot CEOs took part in the 16th Annual Global CEO survey which will be launched at the Annual Meeting of the World Economic Forum at Davos, Switzerland, on January 22, 2013.

The results of the Global and local survey will be presented in Cyprus soon.

I In most people’s eyes, investment means putting money into something with the expectation of gain. In the words of a professional investor, however, it is a much more complicated exercise requiring great expertise. But if investing is a complex process, what

can be said about hedging? Ernesto Prado, Chief Investment Officer & Partner of Ayaltis AG, in Cyprus last month to address the Cyprus Investors Show 2013, says that it requires experience and knowledge that is not widely available. Once an investor develops a good understanding of how the markets behave, though, “hedging will start to become clearer”. But, as he told Gold, “it will unfortunately, always remain an art and not a science because to invest and make profits, one has to take risks.”

Gold: What kind of investment opportuni-ties do you see for private investors in 2013?Ernesto Prado: Although we anticipate 2013 to remain erratically volatile given the numer-ous issues facing sovereigns and their debt problems in different geographies, we believe there are very strong opportunities for savvy private investors in any strategy that enables them to identify and capture healthy secure coupon cash flows in any form such as mutual funds, hedge funds or private equity.

Gold: Sovereign bonds are no longer con-sidered as a safe haven for investors. What’s the alternative?E.P.: The term “safe haven”, like the descrip-tion “risk free”, is ultimately just a surrogate for “cash-flow certainty”. A lender ultimately just needs to know that he is going to receive all his dues back. In the past everybody assumed countries were “risk free” because they could simply just press “print” to hand investors back

their cash with certainty. Today Greece has no longer a printer to do so... It gave it up as a trade-off to join the eurozone. A wise investor’s “alternative” is – and has always been – to identify the cash flows or portions of cash flows he will receive with certainty. Unfortunately no generic securitized asset held long only can deliver that. Savvy investors need to “engineer” their own safe havens by isolating certain cash flows with derivatives and structures.

Gold: Do you think that trust in sovereign bonds will return and under what condi-tions?E.P.: Not paying ones debts has many term-dependent faces. The most brutal and immediate one is default. A more spread-in-time version is called “restructuring”. The most spread-in-time, available only for governments to control, is “inflation”. All insolvent entities attempt to stretch the term of principal pay-back as far into the future as possible while at-


Ernesto Prado

main_story1_prado.indd 34 28/12/2012 07:59


INVESTMENT

tempting to pay coupon to pretend solvency... Sounds familiar? This will unfortunately last for many years before a complete resolution, while any of these versions of default ultimately runs its necessary course, interrupted only by fake, short-lived, central-bank-printing-price-manipulation-rallies. What is owed will never be paid back in full. Trust will return when our children again forget about these balance sheet mechanics.

Gold: A lot is being said about alternative investments, which are being described as among the most attractive opportunities available. What do you understand by the term “alternative investments”?E.P.: Alternative means: “It is not a simple strategy, it’s hard to understand by the aver-age investor and I don’t know how to classify it”… like “alternative” medicine. Jokes aside, alternatives include all investment strate-gies which are not the simplest and riskiest,

long-only buying implemented by the general market. When you are long-only on any asset, you are taking all of its underlying risks. It works great when everybody is carelessly buy-ing risk (Internet bubble, credit-debt bubble, real-estate bubble, tulip bubble…) but it reveals the totality of the risks taken when the bubbles burst. When you implement respon-sible relative-value alternative strategies, you actually decide which inherent long risk you want to assume, as in long-only but crucially you sell (or short/hedge) those you do not want to assume, thereby reducing the total risk taken. Unfortunately during sustained bubble rallies, many people believe that by pairing a long with a short, they are well hedged. It is not that simple. Only a small portion of traders know how to appropriately hedge basis risk away and perform through severe bubble bursting crises. They are the ones to whom the term “alternative invest-ments” should refer.

Gold: Do you share the view that alternative investments are the answer to traditional in-vestments in which investors have lost faith?E.P.: Yes, as long as the investor can identify authentic alternative hedgers. However, this requires experience and knowledge that is not widely available.

Gold: What are the best options for inves-tors in a zero interest rate environment?E.P.: As in any environment: cash-flows, cash-flows and cash-flows. Only buy what you are certain you are going to be paid back fast enough without being devalued (i.e. inflated) away by slow-default-government-driven-inflation.

Gold: Equity performance was strong dur-ing 2012. What do you foresee for 2013? What are the main risks and investment opportunities lying ahead?E.P.: The DAX lost 32.6% from top to bottom in 2011 and gained 51.2% in 2012 for a grand net +1.9% total. I do not call that strong performance… I prefer to look at it as a central-bank-printing-press-subsidized-yoyo-rally. As long as governments in the EU struggle to save-outright-default-face by trying to implement I-will-not-pay-back-my-debts-in-full-by-slowly-restructuring, I expect risk asset markets to continue to behave as in the last two years unless the world’s central bank-ers get in a room together and decide to put scotch tape on the bill printing press switch at the same time. The risks remain the same: if you don’t know how to really hedge, brace yourself. Proper relative value opportunities will continue to be plentiful, though.

Gold: How can an investor hedge for the extreme events?E.P.: One needs to sit down, think hard and understand how all the different asset classes behave when they dislocate. They can dislocate starting from different points depending on where the most egregious excesses have formed. Invariably, though, almost all major crises (i.e. outside of asteroids, earthquakes and the like) have always been generated by the absurd price-driven stretching of balance sheets of specific asset classes when everybody buys indiscriminately in the hope of a quick profit. 1,000 times multiples on Internet corporate balance sheets in 2000, 9% with zero risk on mezzanine tranches of CDOs in 2006… Once an investor develops an understanding of this behaviour, hedging will start to become clearer. It will, unfortunately, always remain an art and not a science because to invest and make profits, one has to take risks. There is no such thing as a free lunch!

Even though 2013 is anticipated to remain volatile, there are good opportunities for savvy private investors By Kyproula Papachristodoulou

The Fine Art of Investing

Trust in sovereign bonds will return when

our children again forget about balance

sheet mechanics

main_story1_prado.indd 35 28/12/2012 07:59

Russia’s strong diplomatic

INTERVIEW

Vyacheslav

The longstanding good relations between Russia and Cyprus have strong historical, cultural and politi-cal foundations. In recent years these relations have

enjoyed an unprecedented boom. The role of Vyacheslav Shumskiy, Ambassador of the Rus-sian Federation in Nicosia, has been pivotal in the development of closer business ties, the growing influx of Russian tourists to the island and a more intimate political dialogue. Ambassador Shumskiy spoke to Gold about these developments, as well as about recent allegations of money laundering, the Cyprus Presidency of the Council of the EU, ‘people’s diplomacy’ and more.


main_story2_ambassador.indd 36 28/12/2012 08:02

By John Vickers

presence in Cyprus

Shumskiy

VYACHESLAV SHUMSKIY Vyacheslav Shumskiy graduated from the Moscow State Institute of International Relations. He joined the diplomatic service in 1972 and served at the Embassies of the USSR in Somalia, Zambia and at the Embassy of the Russian Federation in the USA. He returned to Africa in 1998 as ambassador to Namibia. Before arriving in Nicosia he was Director of the First Department of CIS countries of the Ministry of Foreign Affairs of the Russia.


the EU’s international partners. From our perspective, we have been pleased to note the Cyprus Presidency’s sincere approach aimed at further deepening the strategic partnership between Russia and the European Union, at making it more results-oriented and mutually beneficial.

Gold: The Eastern Mediterranean region is important for Russia, the EU and of course the USA. How concerned are you about the instability we are witnessing?V.S.: Russia is deeply concerned about the latest developments in the region. I would like to remind you that, all along, my country has supported the Arab nations in their endeavours to determine their own fate independently and move towards more effective models of economic development and governance. We believe that internal political conflicts should be resolved only by means of inclusive national dialogue with the compulsory participation of all national and religious groups. Attempts to impose external sets of values on other countries can lead to increased xenophobia, intolerance, a proneness to conflict and, as a result, to the accumulation of elements of chaos in international affairs. Russia condemns all cases of religious intolerance, persecution and discrimination. There are no easy solutions for overcoming the problems in this region but Russia believes in the prospect of creating the necessary conditions for peaceful, stable and democratic development in the Middle East and North Africa.

Gold: Finally, you have been quite active in recent months with a number of charitable causes in Cyprus, engaging Russian busi-nesses to donate to local charities. Is this a new, different kind of diplomacy?V.S.: Philanthropy has never been alien to di-plomacy. The charity fundraising, organised by the Russian business community in Cyprus un-der the Embassy’s auspices, is not only a matter of providing help to those Cypriots who are in need; I would say that it is a good example of the effectiveness of ‘people’s diplomacy’, which constitutes an important means of improving mutual understanding between our nations which have long been historically connected by close ties of friendship. I would like to express my sincere gratitude to all those who took part in the fundraising, in particular to the manage-ment of Wargaming.net and its Director and General Manager, Vangelis Georgiou.

INTERVIEW


There has been no outflow of Russian capital from Cyprus; quite the contrary in fact.

2010, Cyprus created an effective system to combat money laundering, which meets all international standards. Moreover, the legality of the financial operations of Cypriot banks is guaranteed by national legislation. This has been repeatedly stated in the reports of the MONEYVAL Committee of Experts of the Council of Europe. From time to time the question of the alleged laundering of Russian capital in Cyprus is raised by those who op-pose the further development of cooperation between Russia and Cyprus, including the financial sphere.

Gold: A number of Russian companies have been very active in the licensing process of the island’s offshore blocks for natural gas exploration. Is there an interest at state level and is your embassy monitoring the process?V.S.: The Embassy keeps a watchful eye on the complex of issues related to hydrocarbons in the Exclusive Economic Zone of Cyprus, including the tenders for the licensing of the relevant blocks. Moscow’s interest in Cypriot natural gas is confirmed by the participation of the Russian companies Novatec and GPB Global Resources together with the French company Total in the tender for the license to explore and extract natural gas in Block 9 of Cyprus’ EEZ.

Gold: For Cyprus there is clearly a politi-cal dimension to the handling of energy resources issues. What is the view from Moscow?V.S.: Russia is guided by economic criteria in its approach to energy resources while, at the same time, naturally giving consideration to national and international security factors. It therefore seems logical to us that when determining its approach to energy issues, the Republic of Cyprus should proceed in ac-cordance with current conditions – the Cyprus problem being unsolved and tensions in the Eastern Mediterranean increasing – and take into account not only economic motives but political reasons as well.

Gold: What is your assessment of the Cyprus Presidency of the Council of the European Union, given the significance of Russia’s relations with the European Union? V.S.: Τhe country holding the Presidency of the Council of the European Union plays an important role, including one in relations with

Gold: Relations between Russia and Cy-prus have always been excellent but to-day they are enjoying an unprecedented boom, particularly in the business and tourism sectors. It must be very satisfy-ing for you to see such links strengthen-ing further between the two countries. Vyacheslav Shumskiy: The Russian Embassy in Cyprus actively promotes the strengthening of business relations between our countries and it is satisfied with the current level of their development, even though I believe that the opportunities for economic interaction are still not being fully utilized. Cyprus is a stable economic partner of Russia. Russian-Cypriot turnover reached almost €40 million for the first ten months of 2012. In 2011 total Cypri-ot investments exceeded €60 billion, making Cyprus the leader among countries investing in Russian economy. Meanwhile the cumulative volume of Russian investments in the Cypriot economy makes up more than €20 billion, representing about 80% of all foreign invest-ments in Cyprus. Regarding tourism, Cyprus is an attractive vacation destination for Russian citizens and according to the Cyprus Tourism Organisation, during the first ten months of 2012 over 460,000 Russian tourists visited the island, a 41% increase on last year. The final figure for 2012 is expected to exceed 500,000.

Gold: Will the latest economic develop-ments in Cyprus, such as the signing of the memorandum in the wake of a €2.5 billion loan from Russia, influence the way Russian businesses view Cyprus?V. S.: Russia assisted Cyprus financially at the end of the last year by providing a €2.5 billion state credit but to overcome its financial and economic difficulties, the country had to look for additional vast financial assistance. As we speak, the Memorandum with the Troika of international lenders has not yet been signed. However, the Cyprus banking sector is still seen by Russian business as a reliable financial platform. According to our information, there has been no outflow of Russian capital from Cyprus; quite the contrary in fact.

Gold: In the context of the eurozone crisis and the bailout negotiations for Cyprus, the question of the laundering of Russian funds has again surfaced. What is your perception of this? V.S.: This question is obviously far-fetched. It is well-known to all that, between 1998 and


Richard Cooper

BANKING UNION

“The banking union is a good idea but it will not solve all of Europe’s problems. What it will do is permit at least a greater degree of separation between public debt and the banking system. The important missing

piece – I would say the crucial missing piece – is a resolution authority. I think that would improve supervision if both the supervisors and the supervised knew that at the end of the day the supervisor could fire management well before bankruptcy or formal insolvency. The truth is that we do not know just how good many of the loans on the bank’s books are. We do not know because it depends on conditions that will prevail six, twelve, eighteen months from now. This is the kind of things supervisors need to watch closely on a day to day basis and prevent dangerous surprises. I would also go for deposit insurance. Deposit insurance has two advantages. First, the Europeans can expect no gain by withdrawing their money form a Spanish bank and moving it to a Dutch bank. And we’ve seen money withdrawn from Greece, for example and fly abroad. Secondly, at least in the US, deposit insurance is financed by fees on the banks of which they built up a reserve and when a need for insolvent banks arises no taxpayers’ money is involved. What makes things a little less urgent for Europe is the ESM. If necessary, the supervisor could withdraw the money from the ESM.”

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EUROZONE


BREAKING UP IS HARD TO DO

THE EURO IS HERE TO STAY AND THE EUROZONE CAN GET ITSELF OUT OF THE RECESSION. By Kyproula Papachristodoulou

There are many American economists who view the euro as a failure and many of them have been predicting its demise since its launch in 1999. Richard Cooper, Maurits C. Boas Professor of International Economics at Harvard University is not one of the US eurosceptics. Indeed, as he told the audience at a public lecture organised by the Cyprus Institute in December, he has “always been pro-euro”. But, as he told Gold, the eurozone is currently on a non-sustainable path because of austerity measures and the only way to turn things around is to pursue an expansionary budget for the eurozone as a whole.

Gold: Under the present circumstances, what could bring about a failure of the euro?Richard Cooper: The greatest pressure on the euro would come from the financial markets if they came to the conclusion that European politicians were incapable of mak-ing decisions in the financial and economic area. Up to now there have been distress and delays but, quarter to quarter, Brussels has been moving on. But if the financial markets were to become essentially disaffected by

the decision-making process in Europe, the potential for a collapse would be profound. In such a case, there would be a massive movement out of Greek, Spanish, Italian, Belgian and even French sovereign debt and a shift towards Danish or Finnish. And then you would see pressure on Finland to leave the eurozone. This would not be easy. There is an exit from the EU clause in the Treaty of Nice but there is still no possibility of exiting the euro and staying in the Union so it is legally complicated. Fiscally, Finland is a very conservative country. I haven’t seen any serious discussions about leaving the eurozone in Germany but in Finland there is some internal pressure. If they think of leaving, the whole effort will be very difficult and economically it will not be very benefi-cial. So I actually think it’s hard to break up the eurozone. I think the political will to maintain the euro is very strong.

Gold: So where does the problem lie?R.C.: The problem is how to translate this political will into action. I am not aware of any serious political action against the euro, even though there are some political parties


– some minorities – that say they want to leave the euro but they do not know what they are talking about. This is just empty political rhetoric. In the core of the Europe-an political leadership there is a very strong will for the euro to survive and I’m assuming that they will stay ahead of markets enough to keep it going. Nevertheless, my best guess is that the euro will survive and it will still be here ten years from now.

Gold: Should solidarity in the European Union mean that countries can be bailed out by their European partners in case of troubles such as those affecting Greece? R.C.: At this moment there is a no bailout clause in the Treaty. According to the Treaty, eurozone governments will not be obliged to assume the obligations of another member state. And as far as I can tell there has been no violation of the “no bailout” clause up to now. But it may come soon if Europe has to decide on another serious Greek rescheduling. Most of the Greek debt is now in the hands of officials, especially European officials. What they chose to do in November – which I think was perfectly sensible – was to extend the maturity and reduce the interest rates. I think I can hon-estly say that this is not a bailout in the sense meant in the Treaty but they are getting close.

Gold: Do think that Greece should have exited the eurozone?R.C.: Greece faces a very hard decade no matter how you look at it. I don’t think that an exit from the eurozone would diminish that; it would only change the profile. It would probably make the latter part of the decade somewhat easier because they would have their own currency which would depre-ciate against the euro, thereby stimulating exports and other sources of demand. But I think that it would make the earlier years worse. The Greeks have a lot of debt to other Europeans and with their own currency depreciated against the euro, the drachma value of the debt would rise. Many Greek firms would find themselves technically insolvent. A country can stand one or two or three insolvencies at a time but if lots of firms go bankrupt at the same time, it is extremely disruptive. Consider also the consequences on the debt. I’m not talking about the govern-ment now; I’m talking about the private sector. It would be very painful. Also, in such a case credit dries up completely, even trade credit, so exports go on a cash-and-carry basis and that’s an impediment to trade. So I think that leaving the eurozone would worsen

What was undisciplined in Ireland was the building boom, which was a private boom financed partly with foreign money.

Gold: Obviously the markets were not the only ones to blame.R.C.: Greece and its refusal to leave within its own means was one of the parts that went wrong. I think the other one was the public’s understanding of the obligations that their governments had undertaken by entering into the single currency.

Gold: Both of these now belong to the past. Why is Europe still failing to get out of the crisis, despite having taken certain measures, and bold ones in some cases?R.C.: One of the things that is wrong now is that there is too much austerity. I’m not say-ing that the Greeks should have an expan-sionary budget. I am saying that Germany should have an expansionary budget. That would partly directly – and especially indi-rectly – help Greece. Europe as a whole is now in a slump. Sadly Greece has to be in a slump but Europe does not. That’s a failure of European policy as a whole.

Gold: So you are suggesting expansionary policies in some parts of the eurozone.R.C.: The austerity path that Europe is now on will fail. We have austerity now through out most of Europe, including the Nether-lands and the UK for very different reasons. The authorities as a whole should stabilize the eurozone as a whole. What we are seeing is austerity in a number of member states without a corresponding boom in others. That’s what is missing. Austerity would be a lot easier to bear in one country if the rest of the area was booming. In this respect I think that Germany, for example, and the Baltic countries that can handle it should take as much as fiscal expansion as necessary.

Gold: How do you view the European Central Bank’s stance?R.C.: In general I would give the ECB quite high marks for having navigated this very difficult period so successfully. But I would give it a B+ rather than a straight A because I believe there needs to be greater monetary ease. And that is needed not to help Greece, Italy, Spain, etc. directly but to help them indirectly through more buoyant expen-diture in northern Europe. In this sense I think that Europe is on a non-sustainable path and the question is how quick will this be recognized and addressed. The eurozone as a whole should have an expansionary budget.

EUROZONE


Greece’s position in the short run though it might make it better in the long run.

Gold: The “no bailout” clause ensures a healthy relationship among EU states.R.C.: Indeed. Look at the United States. The arrangement among the 50 states is, in this respect, exactly analogous to Europe. We have a federal entity which, in its domain, is a sovereign entity and we have 50 states which, in their domains, are sovereign entities. One of these domains concerns their budgets. There is a lot of federal money that goes to the states but

THE AUSTERITY PATH THAT EUROPE IS NOW ON

WILL FAIL

this is for specific reasons, such as develop-ment etc. I think that’s a healthy relation-ship. We are watching a situation play out now in California and there is certainly no expectation from the Californians that the other states will come and save them. The Europeans tried but they did not succeed in establishing that principle right from the beginning. Even though there was a no bailout clause, the markets did not act as though they believed it.

Gold: And what went wrong with the markets?R.C.: The markets did not behave as we were expecting them to but they did not only misbehave in Europe. It happened in the US too. But Greece was totally undis-ciplined from a budgetary point of view. I would not make the same claim for Ireland or for Spain, I think they are all differ-ent, the details are importantly different.


ads.indd 45 28/12/2012 12:48

OPINION

Within France there is a perception that the economy is more robust than it is

Turning JapaneseThe eurozone can learn much from Japan’s descent into crisis over two decades ago

info: Dr. Savvas Savouri is a Partner and Chief Economist of Toscafund.

It is my opinion that the economic future of the eurozone will see it more closely following Japan’s experience during its lost decades than any other template available. The reason I hold this view is because I see the euro-

zone’s experiences bearing an uncanny resem-blance to those of Japan before it descended into crisis over two decades ago and I see an equally poor policy response. Here is what I wrote about Japan in March 2010:

“When Japan’s property bubble burst it had a disastrous impact on its banks, triggering a crisis not dissimilar to what has been suffered more recently across Europe and the United States. In fact Japan could have written the play-book on introducing deposit protection, nationalising banks and pumping liquidity into an economy at unprecedented levels. In total it is estimated the cost has been half a trillion dollars to bail-out Japan’s banks. With bank balance sheets horribly damaged by asset write-downs, their ability to lend was sharply reduced, deepening the crisis. Not only have repeated Government efforts to reflate the economy produced only passing success, they have left the state with a considerable stock of debt. Tokyo’s efforts to revive the Japanese economy were always forlorn”.

In identifying the path that Japan needed to follow if it were to have any hope of emerging once more, I penned this more in hope than expectation:

“If its economy is to have a chance of a viable future, Japan has to make significant changes. By their very nature these changes would, in the near term at least, make a bad situation worse. If nothing is done then Japan’s name will be added to the list of nations whose economies could once claim superiority but have since faded into mediocrity. Unfortunately, though, it seems there is neither the political or corporate will to face up to these realities”.

One could easily substitute “the eurozone” for “Japan” in this despairing paragraph. From Japan’s experience, I can confidently

claim that the eurozone can expect more bank bailouts. And as the yen has proven, a weak internal economy and zero rates do not ensure currency weakness, or certainly not the weak-ness needed to reflate.

Returning to my study of March 2010, I would suggest that you can also accept it is as being just as relevant for France as Japan:

“For Japan the reality is that its trade facing sectors need to become more efficient if they are to avoid losing market share. To achieve this will require implementing restructuring that has been largely avoided for years. Here then is Japan’s dilemma. If it restructures its industrial base to become more trade competitive it will worsen its domestic economy. If it stubbornly persists with manufacturing over-capacity, it will fail to miti-gate for lost competitiveness”.

Just as Japan has stubbornly avoided taking its distasteful but healing medicine, so too – thus far – has France. And since nothing indicates any thawing in this stubbornness, it deserves all the French Stick it gets.

The strengths of any sovereign economy have to be weighed against its weaknesses. It is no less important to distinguish its secular trend from its cyclical movements. Even in light of the recent downgrade by Moody’s I am con-vinced of complacency within France towards the strength of the French economy; a percep-tion their economy is more robust than it is, and so less in need of the widespread restruc-turing it demands.

As much as the French industrial base has de-layed restructuring itself, events unfolding mean it cannot put this off much longer without trigger-ing a backlash. And nowhere will this backlash be felt more than in the sovereign debt market.

Whilst I am not claiming French national debt will suffer a crisis along Greek or Span-ish lines, I am convinced it faces a repricing if Hollande stubbornly denies French needs to industrially restructure similar to the way Mit-terand did in the 1980s.

By Savvas Savouri


opinion_savouri.indd 44 28/12/2012 07:44

©2013 Deloitte Limited

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main_story7_banking.indd 46 28/12/2012 07:54

SYSTEMIC CASES (TABLE 1)

CountryStart of the crisis

Date when

systemic

Extensive liquidity support

Significant guarantees on liabilities

Significant restructuring

costs

Significantasset

purchases

Significant nationalizations

Austria 2008 2008 ✔ ✔ ✔ ✔

Belgium 2008 2008 ✔ ✔ ✔ ✔

Denmark 2008 2009 ✔ ✔ ✔

Germany 2008 2009 ✔ ✔ ✔

Greece 2008 2009 ✔ ✔ ✔

Iceland 2008 2008 ✔ ✔ ✔ ✔

Ireland 2008 2009 ✔ ✔ ✔ ✔ ✔

Kazakhstan 2008 2010 ✔ ✔ ✔

Latvia 2008 2008 ✔ ✔ ✔

Luxembourg 2008 2008 ✔ ✔ ✔ ✔

Mongolia 2008 2009 ✔ ✔ ✔ ✔

Netherlands 2008 2008 ✔ ✔ ✔ ✔

Nigeria 2009 2011 ✔ ✔ ✔ ✔ ✔

Spain 2008 2011 ✔ ✔ ✔

Ukraine 2008 2009 ✔ ✔ ✔

United Kingdom 2007 2008 ✔ ✔ ✔ ✔ ✔

United States

2007 2008 ✔ ✔ ✔ ✔ ✔

BORDERLINE CASES

France 2008 ✔ ✔

Hungary 2008 ✔ ✔

Italy 2008 ✔ ✔

Portugal 2008 ✔ ✔

Russia 2008 ✔ ✔

Slovenia 2008 ✔ ✔

Sweden 2008 ✔ ✔

Switzerland 2008 ✔ ✔


2011Belgium

2008Luxenburg

2009Germany

2009Austria

2008BelgiumLuxenburgNederlands

2008UK

2008Denmark

2008Nederlands



CRISES OUTCOMES AND RESOLUTION IN THE EUROZONE AND THE UNITED STATES (TABLE 2)

Country Output Loss

Increase in debt

Monetary expansion

Fiscal costs Fiscal costs Peak

liquidityLiquidity support Peak NPLs

AS A PERCENTAGE OF GDP

AS A PERCENTAGE OF FINANCIAL

SYSTEM ASSETS

AS A PERCENTAGEOF DEPOSITS AND

FOREIGN LIABILITIES

AS A PERCENTAGEOF

TOTAL LOANS

Eurozone 23 19.9 8.3 3.9 1.7 19,3 13,3 3,8

United States 31 23.6 7.9 4.5 2.1 4,7 4,7 3,9


Guinea-Bissau 1995


DIRECT FISCAL OUTLAYS, RECOVERIES TO DATE AND ASSET GUARANTEES, 2007-2011 (IN PERCENT OF GDP) (TABLE 3)

COUNTRY TYPE OF OUTLAY SPECIFIC FISCAL OUTLAY GROSS OUTLAYS RECOVERIES NET

OUTLAYS

Austria Recapitalization Capital Injection Program 2,9 Asset purchase Impaired assets and liquidity 2,0 TOTAL FISCAL OUTLAYS 4,9

Asset quarantee program Asset guarantee program 0,6

Belgium Recapitalization Ethias, Fortis, KBC and Dexia 5,8 Other Capital for Fortis SPV 0,2 TOTAL FISCAL OUTLAYS 6,0 Asset guarantee Asset relief facility 6,0 Fortis SPV 1,3 Fortis portofolio 0,4 TOTAL ASSET GUARANTEES 7,7 Denmark Recapitalization Capital Assistance Program 2,7 Capital injection in Fionia Bank 0,1 Other Loan to Fionia Bank 0,3 TOTAL FISCAL OUTLAYS 3,1 France Recapitalization SPPE acquisition of subordinated bonds 0,5 Second stage recapitalization (BNP, SG, Dexia) 0,5 TOTAL FISCAL OUTLAYS 1,0 Asset guarantee Financial Security Assurance Inc. 0,3

Germany Recapitalization Federal and state recapitalizations and quarantees for capital support 1,7

Norddeutsche Landesbank Girozentrale 0,1 TOTAL FISCAL OUTLAYS 1,8 Asset purchase Asset purchase program 11,1 Asset guarantee Bad Bank Act 6,1 Greece Recapitalization Capital injection package I 1,7 Agricultural Bank of Greece 0,2 Capital injection package II 0,5 2012 Capital Injection package III (IMF estimate) 23 Other Liquidity 1,9 TOTAL FISCAL OUTLAYS 27,3 Iceland Recapitalization Securities lending 6,2 Commercial banks recapitalizations 14,7 Recapitalization of the House Financing Fund 2,1 “Savings banks” 1,3 Other Central bank recapitalization 18,1 Called guarantees on the State Guarantee Fund 1,8 TOTAL FISCAL OUTLAYS 44,2 23,7 20,5Italy Recapitalization Recapitalization scheme 0,3 Luxembourg Recapitalization Fortis and Dexia 7,7 Netherlands Recapitalization Fortis, ING, SNS, and AEGON 6,6 Other Loans to Icesave and Icelandic deposit Insurance 0,2 Loan to Fortis 5,9 Total fiscal outlays 12,7 7,1 5,6 Asset guarantee ABN AMRO/ Fortis Mortgage portofolio 6 ING Alt-A RMBS portfolio 4,8 Total asset guarantees 10,8 Sweden Recapitalization Recapitalization package 0,2 Other Initial contribution to stabilization fund 0,5 TOTAL FISCAL OUTLAYS 0,7 Switzerland Recapitalization Mandatory convertible notes UBS 1,1 1,5 -0,4United Kingdom Recapitalization RBS, Loyds, LBG, and Northern Rock 5

Other Dunfermiline Building Society takeover 0,1 Deposit compensation 1,8 Loans to Northern Rock and Bradford & Bingley 1,9 TOTAL FISCAL OUTLAYS 8,8 2,2 6,6 Asset guarantee Pool of RBS assets and CoCos 14,5 United States Recapitalization Capital Purchase Program (CPP) 1,5 1,5 0 AIG 0,5 0,1 0,4

Targeted Investment Program 0,3 0,3 0

Support to GMAC 0,1 0 0,1

Support to Fannie Mae and Freddie Mac 1,2 0,2 1

Other Automotive Industry Financial program 0,5 0,3 0,2

Asset purchase MBS purchase 0,3 0 0,3

Public-Private Investment Program 0,1 0 0,1

TOTAL FISCAL OUTLAYS 4,5 2,4 2,1

Asset guarantee Citigroup asset guarantee small


OPINION

A healthy banking sector is essential for the economy

The Troika’s Banking Reforms for CyprusA number of the reforms being put in place are steps in the right direction

info: George Theocharides is an Associate Professor of Finance at the Cyprus International Institute of Management (CIIM). He is also the Director of the MSc in Finance & Banking programme.

The first of the Troika’s banking reforms concerns the improve-ment of liquidity in the banking sector. Banks will need to have a 25% concentration limit on regulatory capital and 50% for

domestic sovereign. They should also hold 50% of the required liquidity in instruments that are safe and liquid (i.e. short-term money market in-struments) while deposits by non-residents (either in euros or foreign currency) will also require a minimum liquidity ratio of 60%. I believe that these requirements are steps in the right direc-tion which will avoid liquidity “dry-ups”, provide diversification to the banks’ portfolio and help avoid recent situations such as the excessive con-centration on one type of security.

The second reform deals with adequate capital buffers. Specifically, all banking institutions will have to increase their Core Tier 1 capital ratio from 8% to 9% by the end of 2013. It will be difficult for our banking institutions to achieve the desired ratios in such a short period of time, especially during a recession, which implies even more state funding and, consequently, a further rise in our national debt level. The third reform deals with the regulation and supervision of banks and cooperative credit institutions and the Troika has demanded a number of changes.

(1) The bank should be able to seize and sell the loan collateral within a maximum time-span of 18 months (or up to 2 years for primary residences) from the start of legal or administrative proceedings. This could imply seizures on a massive scale and forced sales could have a serious, negative impact on the property market, in addition to the social unrest that it would cause. A time frame of 3-5 years for seizure of the collateral would have been more prudent.

(2) All loans, repayment of which is due by more than 90 days, will be considered as non-per-forming. This aligns Cyprus’ methodology with that used elsewhere in Europe and brings more transparency and, consequently, confidence to investors. However, it will inevitably substantially increase the amount needed for recapitalization, again placing a greater burden on the taxpayer.

(3) A central credit register listing all borrowers and beneficial owners for both commercial banks and cooperative credit institutions will be set up by the Central Bank and (4) corporate governance should be strengthened. These should have been implemented prior to the arrival of the Troika.

(5) The regulation and supervision of coopera-tive credit institutions will now be aligned to that of commercial banks so that, by the end of June 2013, it will be undertaken by the Central Bank. This will improve the overall efficiency of the financial system.

The fourth reform aims to segregate non-perform-ing and non-core assets from the rest of the banks’ assets. If this is done properly and with good plan-ning, state-funded institutions will be left with the “good” loans on their balance sheet and will again be able to attract new foreign investors and depositors.

The last set of reforms deals with monitor-ing corporate and household indebtedness and measures to help increase financial transparency. My view is that such measures will have a posi-tive impact in the medium- to long-run through better monitoring of corporate and household indebtedness and increase confidence by foreign investors and depositors in our banking system.

Could we have achieved better terms in the mem-orandum during the negotiations with the Troika, as far as the banking reforms are concerned? Probably, but let’s not forget that they are the lenders and they have the upper hand in deciding what needs to be done to correct the inefficiencies and problems of Cypriot banking sector. In any case, and despite the extremely negative situation that we are experiencing right now, in the long run I am optimistic about the prospects of our banking sector. As the Governor of the Central Bank of Cyprus recently pointed out, a crisis is a unique opportunity to fix longstanding problems. I agree with this view, and I see a number of the reforms being put in place as steps in the right direction. The banking sector needs to regain the confidence of investors, creditors, and depositors. Transparency, stricter supervision, and good corpo-rate governance and risk management practices will help in this way. A healthy banking sector is essential for the economy so we should make every effort to achieve this as soon as possible.

By George Theocharides


opinion_ theoharides.indd 52 28/12/2012 08:04

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BrouGht to you By

Barry Topf is a member of the Monetary Policy Committee of the Bank of Israel and Senior Advisor to the Governor. Since 2002 he has been a member of the board of the Central Bank. He has extensive experience as a lecturer and consultant, and has advised numerous central banks and international organisations in the areas of reserve manage-ment, foreign exchange policy, monetary policy and financial stability. In November

Prevention is Better than Cure

How the Israeli economy has proved to be so resilient during the global financial crisis By Kyproula Papachristodoulou

2012 he addressed the Doing Business with Israel summit that took place in Nicosia. Gold spoke to Topf on how Israel has managed to weather the current crisis well enough to be considered a successful case study that is being discussed in forums and summits around the world.

Gold: It is commonly accepted that ‘prevention better than cure’ and where the economy is the patient, what does Israel’s experience have to teach the rest of us?Barry Topf: It is always better to prevent a crisis and it is of the utmost importance to make an economy resilient to outside shocks


main_story5_barry.indd 54 28/12/2012 08:21

ISRAEL


indicator of economic stability. Once you have a path laid out, even if you have a deviation in a specific year or over a period of time, people realize that you must eventually return to the set path. This is very useful. Of course, you always have the possibility to amend the law and temporarily change the ceiling for the deficit if there is a crisis. Flexibility is needed if you are asked to deal with a sudden problem. A country, like an individual, should not be too rigid. On the other hand, if there’s too much flexibility then the legislation becomes meaningless. Unless there are very strong reasons to change the rules, you do not change them. In our case, whenever the rules have been changed the reasons have been cred-ible. It wasn’t because the politicians decided that they wanted to spend more money, for example. The relevant legislation remains credible and automatic stabilizers have remained in place for a long time because people have come to realize that fiscal discipline is necessary to combat an economic crisis.

Gold: Israel’s economy primarily targets inflation. Has the current crisis shown that perhaps other targets should pre-vail?B.T.: The Bank of Israel operates a flex-ible inflation targeting policy that allows temporary deviations from the target, but is designed to ensure that inflation returns to within the target range within two years at most. New legislation govern-ing the Bank of Israel came into force in 2010 and it clarifies that the Bank’s policy objectives include the pursuit of second-ary goals in support of government policy (in particular, economic growth and the

reduction of social inequalities) as long as this does not impair the primary goal of price stability or the efficiency and stability of the financial system. The new regime gives us the flexibility to time the steps we take and to make sure that we do not do anything too drastic. During the current crisis we have seen that the availability of liquidity is very important in order to respond quickly and to prevent an immediate freeze of the system. We have been very careful to make sure that the economy is liquid both in terms of the domestic banking system and internationally. We have made a major effort to increase our foreign exchange reserves and I believe that this move has contributed a great deal to the stability that Israel has experienced during the current crisis. We have increased our foreign exchange reserves from US$25 billion in 2008 to about US$75 billion.

Gold: How do you view the ECB’s response to the financial crisis in Europe?B.T.: They are obviously facing a very difficult set of circumstances. Over the last few months we have seen a lot of very serious steps being taken and, as a result, the markets have been pleased. That is encourag-ing but, of course, you need others to step in, you need the govern-ments, you need the private sector. There is a danger of expecting too much from central banks and monetary policy.

Gold: Do you think that governments around the developed world have learned enough from the past to be able to deal with the cur-rent crisis?B.T.: I think they have taken a lot of correct steps and the crisis would have been a lot worse if they hadn’t done the things they did. I’m reasonably confident that they will get back on the correct path. They have to.

Banks should invest in what they know best and not rely on what everybody is saying is good and profitable

Prevention is Betterso as to weather any kind of crisis relatively easy. An economy that is flexible in terms of its labour force and has good and strong reg-ulation should be the pursued mix. What we’ve seen recently was a financial crisis and financial crises usually focus on the banking system. Hence, it should be a priority to make the banking system as strong as possible. Many countries have learnt this lesson. This may sound very wise but I’m only saying it now because we had our own crisis in Israel in the mid 1980s and the people who are making decisions now are those who remember it and learnt their lessons. We may have managed to avoid the effects of the recent crisis because we remember the lessons from the previous one. We should also bear in mind that crises in the banking system are often related to the real estate sector. The real estate market must be watched very carefully. Good regulation is a necessity. A few years ago, nine out of ten people were criticizing our bank supervi-sor over regulation but when they realized that what he did saved the banking system, they blessed him! In short, I would say that strong regulation in the banking system is essential in or-der to ensure that the banks themselves manage their risks.

Gold: So how did Israel’s banking sector manage to avoid the worst of the finan-cial crisis? B.T.: The Israeli banking system was more focused on traditional banking products as opposed to fancy and more fashionable derivatives as happened in some other countries. Additionally, our banks had less international exposure. Banks should invest in what they know best and not rely on what everybody is saying is good and profitable. Israeli banks have a very strong risk management culture, good and conservative professionals and very high capital adequacy. The bank supervisor had asked them to raise their capital adequacy very soon after the crisis started and that was important. Moreover, he did not hesitate to intervene in decisions when he thought that specific investments were too risky for the banks. This happened very rarely but, even if you only do it once or twice, that is enough to give a signal to the banks about how they should behave in the future.

Gold: What about problems deriving from fiscal imbalances? What should the Israeli experience tell us?B.T.: During the years 2001-2003, Israel experienced its worst recession in decades, which included four consecutive quarters of negative GDP growth. The dramatic change in the state of the economy came after an exceptional 9% GDP growth rate in 2000. The budget deficit peaked at almost 6% of GDP in 2003, and the public debt, which was high to begin with, reached almost 100% of GDP that year. Thus Israel was forced to pursue a procyclical fiscal policy and to cut public spending drastically. The measures taken affected public sector spending with cuts in transfer payments and child allowances, etc. The measures were very painful and heavily criticized but we now see their fruits.

Gold: Israel’s fiscal policy is anchored in the country’s legislation. How effective is it in dealing with an unforeseen economic and financial crisis?B.T.: Israel’s legislation sets limitations on both the deficit level and the rate of growth of government expenditure. It contributed to the reduction of the deficit in the last few years and, conse-quently, to a decline of the debt/GDP ratio, which serves as a key

main_story5_barry.indd 55 28/12/2012 08:21

For Anthony Livanios, CEO of Energy Stream CMG GmbH, the Frank-furt-based international advisory firm working in the oil and gas industry, the question of how Cyprus should best exploit

its natural gas reserves is straightforward: it should partner with Israel to trade gas from a Cyprus-based LNG terminal. And once the revenues begin to flow, the main challenge for both countries will be to avoid “the Dutch Disease”.

For all the politicians’ constant talk of unity, it has always been a very rare com-modity in Cyprus but, for once, the country is united – in its belief that the discovery of natural gas reserves in its offshore Exclusive Economic Zone means guaranteed future prosperity. This is the experts’ view too, but opinions diverge on the issue of when the gas – and the revenues – will begin to flow.

One person who is in a position to express a sound view on the matter is Anthony Livanios, CEO of Energy Stream CMG GmbH, who has been working on gas pipelines for a decade. He told Gold that 7-10 years from now is the best case scenario. “I would be surprised if Cyprus or Israel are producing natural gas in 7 years’ time,” he said, suggesting that sometime between 2020 and 2023 is a reasonable date by which to expect that Cyprus will be in a position to go ahead with the commercial exploitation of its newly-found natural resource. Livanios has every reason to propose such a timeline. “To illustrate this point with some-thing from my own experience,” he recalled, “the Production Sharing Agreement (PSA) of the Shah Deniz gas field in Azerbaijan, which is the largest in the Caspian region, was signed in 1996 with BP and Statoil leading the consor-tium. The first gas was produced at the end of 2007 and still the gas was going only to the

Turkish market because there was no further infrastructure in place. By December 2012 the second phase was still not there and we are now thinking about a best case scenario of another five years which means 2017-2018, in other words 20 years after the signing of the PSA.”

Cyprus is not renowned for its ability to act quickly but this is an area in which, Livanios says, “You cannot waste a single second thinking that because it’s long-term you have time. While these are very long-term invest-ments, time does not exist because there are so many challenges that must be dealt with, from shale gas to the eurozone crisis. All these factors play a role and Cyprus and Israel should act quickly”.

Anthony Livanios believes that the best scenario for Cyprus is for it to join forces with Israel and trade its gas with Europe. “This will be a win-win situation – for Israel and Cyprus because of the revenues and for the European Union because it can diversify its resources of natural gas and thereby strengthen Europe’s energy security”.

There are great advantages for both coun-tries if they manage to sign an intergovernmen-tal agreement for the production and trading of natural gas. “First, Israel will have a binding agreement with an EU Member State,”

NATURAL GAS

Livanios said. “Second, Israel and Cyprus both have many geopolitical challenges to deal with. With a binding intergovernmental agreement, they can secure the trading of their gas much better. The reserves are significant but they are not as large as those in Central Asia or the Per-sian Gulf, for example, so a joint venture will create economies of scale and lead to a much better environment for the two countries, not only geopolitically but economically too”.

The other big question concerns the way in which Cyprus and Israel should trade their gas: By pipeline or as Liquefied Natural Gas (LNG)? Livanios has no doubts whatsoever: “LNG is the way to go. I have been involved in gas pipelines for more than 10 years and they are necessary for landlocked countries such as Kazakhstan, Turkmenistan and Azerbaijan but if you are in the Mediterranean and you have access to the largest and most lucrative gas market in the world, you should take advantage of LNG. This is the first consideration. The second one is that pipeline gas needs long-term supply contracts of 10, 15 or 20 years whereas LNG does not. It can even be traded on the spot market. And thirdly, the combined reserves of Israel and Cyprus are not enough to make it commercially viable to build a pipeline.”

Livanios gives the examples of the Nabucco

A Cyprus-Israel LNG partnership is a win-win situation By John Vickers

THERE COULD BE SO MUCH MONEY THAT IT BECOMES A CURSE


Anthony Livanios

main_story6_livanios.indd 56 28/12/2012 08:23


and/or the Trans-Anatolian Pipeline, noting that, “The cost of Nabucco is €10 billion and that of the TAP about half that amount and there is still competition between which of the two pipelines will be constructed. Talks have been going on for the last 10 years and we still do not have a final investment decision. If we are talking about an offshore pipeline from Cyprus to Greece, the cost is huge – some estimates say €20 billion – and who is going to pay for it? It doesn’t make economic sense”.

Despite the ‘geopolitical challenges’ facing Cyprus because of Turkey, some commenta-tors have suggested that it would be commer-cially viable to construct a pipeline to Turkey. Livanios dismisses the idea outright:

“Geopolitics is the name of the game. A very experienced oil man once told me, ‘You can have the best commercial agreement in the world but if you do not have the right intergovernmental agreement, forget it’. This is the rationale of the big oil majors – they know that you need to have the right geopolitical framework and it’s simply not feasible because of the situation here. If there was a settlement in Cyprus tomorrow, it might be worth con-sidering but as things stand at the moment, we can forget the idea. For me, LNG is the best option for Cyprus right now”.

So LNG is the way forward, which means the construction of a terminal. In Cyprus or Israel? Anthony Livanios believes that Cyprus has more advantages: “It’s an EU member state which means that you are operating under EU law and you get all the benefits of the fact that the EU is trying to create a flexible, unified natural gas market. Secondly, I believe that, geopolitically, Cyprus will be a more secure place than Israel. Of course, persuading Israel to agree to let Cyprus to trade its natural gas from Cypriot territory will not be an easy task. And I cannot overstress the fact that Israel will want an intergovernmental agreement that will provide security guarantees from Cyprus for the next 30 years at least. As I said before, these are long-term investments”.

If the right decisions are taken by the gov-ernments of both countries, the resulting agree-ments will be “extremely beneficial” according to Livanios. “The countries will change and their economic development will be very dif-ferent from what it has experienced in the past. However, it won’t happen automatically. Even if the right intergovernmental agreement is signed with Israel, Cyprus needs to have a clear plan about everything: its natural gas infra-structure, facilities, the LNG terminal and its size are all issues that need to be cleared up”.

There is another danger which could appear after 2020 when the gas is being extracted and traded: the so-called ‘Dutch Disease’ which refers to what happened in the Netherlands where gas was discovered and so much revenue was earned that it led to a decline in the country’s competitive-ness. “There could be so much money that it becomes a curse,” said Livanios, “and you can be sure that there will be a lot of money. The first challenge will be to use it properly. The good news is that Cyprus has survived all these decades and developed economi-cally without relying on natural resources, so the chances are that it will make good use of its gas revenues but it will need a lot of work, planning, decision-making and the best possible production sharing and project development agreements”.

Finally, what about the price issue? Gas prices are currently linked to oil prices but there is a considerable difference between the two and, with growing competition from shale gas, is there not a danger that the revenues that we are dreaming of may not materialize in the way we believe today?

Livanios doesn’t think so: “A country like Cyprus that has proven gas reserves and is thinking of trading them will definitely ben-efit, however much the market price fluctu-ates. The more serious danger is to avoid the ‘Dutch Disease’ rather than not earning the anticipated revenues. The numbers will, of course, be determined by the market but the bottom line for Cyprus and Israel is that they will benefit a great deal from the trad-ing of their natural gas”.

Anthony Livanios

A nthony Livanios is the CEO of Energy Stream CMG GmbH, an international advisory firm in the oil and gas industry based in

Frankfurt, Germany. The company develops and implements oil and gas growth strategies and provides strategic market intelligence for oil and gas commercial projects. He has over 20 years of experience on energy issues, business to government relations specializing in oil and gas upstream and midstream investments, geopolitics of oil and gas pipelines, and market research. He has implemented a number of projects on business development and the promotion of investments for governments and public sector organisations as well as for private businesses. His experience spans over 50 countries in the Arab world, the Caspian region, Europe, and North America. He has developed a strong global network in the areas of energy and international relations. In December 2012 he addressed the 2nd Cyprus Energy Forum in Nicosia.

main_story6_livanios.indd 57 28/12/2012 08:23

IRELAND

NEGOTIATE. AGREE. IMPLEMENT

The IMF and the EU will be lending Cyprus the money but the country should take ownership of the adjustment programme and implement it the best possible way, says Rafique Mottiar.By Kyproula Papachristodoulou

As Cyprus enters an era of aus-terity, Ireland is considered to be by far the most suc-cessful of the countries to have required

a bailout. Economist Rafique Mottiar, who has many years of experience as a central banker and a consultant to the Central Bank of Ireland on the Report of the Commission of Investigation into the Banking Sector in Ireland, spoke to Gold about the lessons learnt over the past few turbulent years.

Gold: What were the main character-istics of the Irish crisis?Rafique Mottiar: First and foremost you should bear in mind that the Irish crisis is an entirely home-made crisis. The inappropriate policies that we fol-lowed during the boom created prob-

lems for us after it. Secondly, the Irish crisis was a banking crisis that became a fiscal crisis and thirdly, the banking crisis which became a fiscal crisis was caused by the failure of the banks to be careful about how they gave loans during the boom period. The boom itself provided the basis for an extensive increase in property prices. So, in a way, our crisis was a threefold crisis: a bank-ing crisis, a fiscal policy crisis and then a competitiveness problem.

Gold: How did Ireland try to solve its problems?R.M.: When the crisis erupted in 2008 we tried to tackle all three problems at the same time. We had very little choice but to look for assistance through the IMF, the ECB and the European Com-mission. The urgency and the combina-tion of the problems effectively meant that we had to look for assistance in a way that would increase the time we had for adjustment. Otherwise the adjust-


main_story7_rafique.indd 58 28/12/2012 09:24


NEGOTIATE. AGREE. IMPLEMENT

ment would have to be done in a much sharper way and as a consequence we would have had much more austerity measures and tax increases than those implemented as a result of the Troika Memorandum. Essentially, the Troika agreement gave us financial assistance to spread the adjustment over a 3-5 year period. Note that in the case of Ireland the financial support comes from the IMF, the European Stability Fund and bilateral loans from Sweden and the UK.

Gold: What ensured the success of the Memo-randum in the case of Ireland?R.M.: The main reason for the success in the implementation of the adjustment programme is that the government ad-opted the programme as its own. People say that it’s an IMF-imposed programme but the truth is that we took ownership of the programme; the Govern-ment has the last word on how to imple-ment measures as long as it ensures meeting the set targets. Yes, the targets have been set by the Troika but the way we reach the fiscal adjustment is ours. The programme was designed to restructure the banks, to put fiscal policy on a sustainable path and to increase competitiveness. In order to do this, it provided us with enough finance to recapitalize and deleverage the banking sec-tor. It also gave us time to gradually increase taxes and cut expenditure to balance the fis-cal position and to introduce structural poli-cies to make the labour market much more flexible and then create the conditions to increase competitiveness. There has already been tremendous progress in all three areas. We have achieved a large number of objec-tives of the financial programme, the banks have sold their non-core activities and we have created the conditions for meeting the fiscal targets. We have covered 75% of all targets so we are nearly there. We expect to exit the programme at the end of 2013 and the most important thing is that we have started funding the government through the markets.

Gold: Do you think that a period of 3 years is long enough for the adjust-ment? Should it be longer?R.M.: You can spread an adjustment

programme over a longer period of time but the longer it is, the deeper the austerity becomes. The quicker you can do it – provided that you can protect the vulnerable parts of society to some extent – the quicker you get back trust and stability. Longer adjustment creates uncertainty, both among the citizens and internationally. Uncertainty leads

to increased savings and increased savings leads to an outflow of deposits. In Ireland deposits have stabilized as people feel safe and

more confident. The issue now is for people to become more confi-

dent and save less. The 2013 budget does not only specify the policies to be followed over one year but also broadly what is going to happen in 2014 and 2015. People know what is going

to happen and are prepared for the future. Predictability

– to the extent that it’s possible – helps people organise their lives

and provides stability.

Gold: Could Ireland have avoided an IMF/EU programme and, instead, secure money for its banks in the way Spain did?R.M.: I think Ireland’s case is differ-ent from that of Spain. Irish banks had got into trouble at the end of 2008 and in order to tie them up we were forced to ask for a bailout. Deposits had been flowing out of the country. The banks had to borrow money from the Irish Central Bank and the ECB. The pres-sure to resolve the crisis was intense and it was exerted by the markets and by the ECB which was essentially bailing out the banks. If a bank was insolvent the ECB would stop lending. Some people argue that we had enough cash to last another six months. But the week before we sought assistance from the IMF we had deposit outflows of €1 billion in three days. If the authorities hadn’t tak-en the initiative, that uncertainty would have continued. At the time when the decisions are made the pressure is enor-mous. Foreign exchange crises and de-posit crises are like a herd of elephants coming down the road. If you do not get out of the road you get smashed. So, what do you do? Do you get out of the way as fast as you can or freeze and let the elephants extinguish you? That is

exactly the problem. Hindsight is good but it is very difficult to handle a crisis at the time it is unfolding.

Gold: Do you believe that the size of the Irish banking sector was a factor in all of this?R.M.: Yes, at the end of the day the banking sector was too huge and was not supporting the domestic economy. Irish banks were partly international through subsidiaries and branches abroad. The question is whether you have enough capital to absorb shocks in the domestic economy.

Gold: Do you believe that the EU should have let one of the problematic countries go bust and exit the euro-zone?R.M.: No I do not think so. I believe that its time to stop talking about a country exiting the eurozone. Euroscep-tics who are leading the discussion on the possibility of a country exiting the euro do not understand how the euro works. The European partners have a very strong and committed approach to-wards the euro. It is their project, their own child. The idea that we are going to break up the eurozone because we have problems is ridiculous.

Gold: Having witnessed the Irish ex-perience, what would you recommend Cyprus to do in order to exit the crisis the soonest possible?R.M.: I would recommend Cyprus to do what we did in Ireland: take ownership of the programme. The IMF and the EU are lending the money but a country should take ownership of the adjustment programme and implement it the best possible way. Cyprus should not argue with its lenders. The way is very simple: Negotiate, agree and implement.

PREDICTABILITY HELPS PEOPLE ORGANISE THEIR LIVES AND PROVIDES STABILITYRafique

Mottiar

main_story7_rafique.indd 59 28/12/2012 09:24

OPINION

MLM companies end up creating problems and dissolving relationships

Pyramid Schemes are Not MarketingBeware the MLM opportunists!

info: Andros Christodoulou is a Member of the Cyprus Marketing Association

Recently I have been invited to at-tend “business meetings” without knowing the subject beforehand, only to find out later that they were recruitment meetings by MLM (multi-level marketing)

companies. During their presentations, I heard references to ‘Internet Marketing’, ‘Networking Marketing’, ‘Affiliate Marketing’ and ‘Referral Marketing’ numerous times and I felt extremely annoyed to hear these terms being used in an un-orthodox way by opportunists exploiting people’s ignorance to make fast money.

Wikipedia defines MLM as “Multi-level market-ing, a marketing strategy in which the sales force is com-pensated not only for sales they personally generate but also for the sales of the other salespeople that they recruit. This recruited sales force is referred to as the partici-pant’s ‘downline’, and can provide multiple levels of compensation. Other terms for MLM include pyramid selling, network marketing, and referral marketing.”

In other words, MLM is a system of salespeople, one below the other (a pyramid), which works based on the concept that each salesperson will keep recruiting new salespeople and these new salespeople will continue to do the same thing and so on. Most commonly, you are expected to sell products directly to consumers by means of relationship referrals and word of mouth. In the beginning, these companies ask you to buy some products, a membership card or even invest money in order to take advantage of the so-called “investment opportunities” – for which you will need to bring in subsequent investors to increase your profit or recoup your initial outlay.

They promise you fat bonuses and even a steady high income if you become a “business associate” or reach your targets. They even “give” you the chance to move to the next level by buying more products or points. Celebrities or wealthy individuals are often used in the presentations but the companies don’t tell you that these celebrities didn’t make their money through MLM.

An MLM company can be viewed as a three-dimensional triangle. Let’s say that it starts with one person at the top with just 10 people below (the downlines), 100 people below the 10, then 1,000 be-

low the 100 and so on. This pyramid would employ all the people in the world in just 10 levels. Do you know of any such company? No, and the reason is simple. The majority of the people involved in these companies realise the scam and drop out very quickly. They are the lucky ones. Those who keep trying to make the easy money end up with big losses, fewer friends, lawsuits and a great deal of stress.

Is this Marketing? Wikipedia defines Marketing as “the process of communicating the value of a prod-uct or service to customers. Marketing might some-times be interpreted as the art of selling products, but selling is only a small fraction of marketing. As the term ‘Marketing’ may replace ‘Advertising’, it is the overall strategy and function of promoting a product or service to the customer… From a societal point of view, marketing is the link between a society’s material requirements and its economic patterns of response. Marketing satisfies these needs and wants through exchange processes and building long term relationships.” In other words, a good Marketer must first study the market to find out the needs and wants of his/her clients, then create a suitable product or service in order to satisfy those needs and sell it to the target group. The outcome of this process is that the company increases its busi-ness by building strong brands and subsequent profits while the clients will buy their favourite products and be happy. A healthy long-term relationship will exist between the company and its clients and the continuation of this practice benefits the companies, the clients and, conse-quently, society as a whole.

Is MLM a new Marketing method or a genuine part of the Marketing philosophy? The answer is definitely “No”. Marketing practices create healthy long-term relationships and evolution within a social framework whereas MLM companies end up creating problems and dissolving relationships. Whether one can make money from MLM com-panies or not is another story. My message to those involved in such companies is that they should not confuse what they are doing with Marketing. Just as a doctor treats his patients under the Hippo-cratic Oath, a true Marketer treats his clients with the utmost respect.

By Andros Christodoulou


opinion_ christodoulou.indd 60 28/12/2012 08:24

FINANCIAL


ANTI-MONEY LAUNDERING REGULATION By Elena Frixou

Cyprus has implemented a comprehensive framework to combat money laundering and terrorist financing. As a regional and interna-tional business centre, it places the fight against

money-laundering among its top domestic and foreign policy priorities, thereby retaining and elevating its credibility, integrity and quality as a business centre.

The appropriate mechanisms for the preven-tion and suppression of money laundering and terrorist financing activities have been imple-mented in Cyprus through effective regulatory frameworks based on European Directives and relevant international standards.

The Law defines and criminalises the laundering of the proceeds generated from all serious criminal offences and provides for the confiscation of such proceeds, aiming at depriving criminals of their profits. It also places special responsibilities upon banks, financial institutions and professionals to take preventive measures against money launder-

info: Elena Frixou is a Senior Officer at the Association of Cyprus Banks. The opinions expressed above are the personal views of the author.

ing and terrorist financing by adhering to prescribed procedures for customer identifica-tion, record keeping, education and training of their employees and reporting of suspicious transactions.

Evaluation by International and European bodies Cyprus’ anti-money laundering (AML) system has repeatedly been evaluated by the Council of Europe Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL). The evaluation is based on a detailed methodology developed jointly by the International Monetary Fund and the FATF and on the FATF 40+9 Recommendations.

In the latest (2011) evaluation, Cyprus was highly commended for the comprehensive and sound manner in which it took measures for combating money laundering and the financing of terrorism in accordance with prevailing international standards and was congratulated on the very comprehensive legal framework put in place. These comments alone should provide a comprehensive response

COMBATING

CRIME IN

to the unfounded adverse criticisms which are voiced from time to time against Cyprus. It is important to note that the ratings assigned to Cyprus compare favourably with those of other member countries of the Financial Action Task Force on Money Laundering (FATF) and the European Union.

Some of the main MONEYVAL comments are the following:• Cyprus has effectively addressed most of the

issues raised in the previous evaluation.• The financial sector shows a higher degree

of awareness of its responsibilities and AML/CFT obligations.

• Cyprus’s regime to combat money laun-dering and the financing of terrorism is compliant with Financial Action Task Force standards. The number of convictions for money laundering has increased and helpful case law on freezing and confiscation has been established.

• The Cyprus supervisory authorities of the financial sector have sufficient powers to su-pervise compliance and carry our inspections. Overall, the financial sector appears to be adequately monitored. The authorities need

MONEY LAUNDERING

CYPRUS

main_story9_compating.indd 62 28/12/2012 13:37


additional resources to monitor designated non-financial businesses and professions and there is no effective supervision as regards company service providers, real estate agents and dealers in precious metals and stones.

• The legal framework for mutual legal assistance is sound and Cyprus generally responds to requests for assistance efficiently and effectively. Furthermore, reports by the FATF have

verified that Cyprus is a cooperative country against money laundering as well as having a comprehensive anti-money laundering system. In the past the IMF has also assessed Cyprus’ banking supervisory and regulatory systems ap-plied to the international banking and financial services sector, including its anti-money laun-dering system and concluded that the latter are in line with internationally accepted principles.

Updates to the Cyprus Legal FrameworkThe sectors which are regulated for AML purposes are banks, electronic banking institu-tions, money transfer businesses, Cooperative Credit Societies, investment companies, insur-ance companies, law firms, accounting and auditing firms ,real estate agents and dealers in services and goods such as precious metals and precious stones.

A new inclusion in this list of regulated sectors is that of Corporate/Fiduciary Services, triggered by the recent expansion of the EU Anti-Money Laundering Regulatory Frame-work to cover trust and company services providers and the passing of the new law by the House of Representatives last month.

The recent enactment of the Cyprus Gam-bling Law means that proceeds generated from illegal gambling (i.e. online casino gambling, a crime punishable with over one year’s im-

the latest (2012) updated FATF Recom-mendations have already been implemented here. They include applying a risk-based approach, enhanced measures for politically exposed persons to deter and detect corruption proceeds, and measures to fight the financ-ing of proliferation. Furthermore, due to the increased importance of ‘transparency of ben-eficial ownership’ the numerical threshold for determining controlling ownership of a legal person in Cyprus has been set at the lower 10% plus one share (instead of higher 20-25% threshold used in other member states) i.e. the beneficial owner will at least include, in the case of corporate entities, the natural person or natural persons who ultimately own or control a legal entity through direct or indirect owner-ship or control a 10% plus share.

As the FATF calls upon all countries to implement these measures effectively in their national systems, the European Commission is taking immediate action to meet the new standards through their incorporation into the existing EU Directive and is in the process of drafting a 4th AML Directive.

Foreign Account Tax Compli-ance Act (FATCA) and AMLThe Foreign Account Tax Compliance Act (FATCA) is a US Tax reform aimed at combating tax evasion. Its goal is to track US taxpayers who are evading their tax obligations either by holding offshore bank accounts with foreign financial intermediaries (FFIs) or by setting up foreign shell corporations and invest-ing overseas through these corporations. The main features of FATCA are:• FATCA introduces a 30% withholding tax

on withholdable payments (US source inter-est, dividends and gross sales proceeds) made to all FFIs.

• The withholding tax can be avoided if the FFI enters into an agreement with the IRS (participating FFI) under which it commits itself to comply with a number of obliga-tions, inter alia to disclose the identity of US individual account holders and provide the IRS with a detailed annual report including all income (US and non-US) paid to them.

In order to comply with these rules, FFIs would be expected to put into place specific AML due diligence as follows:• Identification of US accounts• Establishing Monitoring and Due Diligence

processes• Defining an Exit-Strategy for individual

clients• Designing and implementing FATCA and

other reporting• Establishing an organisational set-up that is

US compliant

prisonment) may be considered the object of a money laundering offence.

In addition, the amended Cyprus Interna-tional Trusts Law imposes on the Trustee of a Cyprus International Trust obligations which mirror those of entities regulated under the AML Law, thus enhancing the integrity of Trustees and furthering the credibility of Cy-prus International Trusts as corporate vehicles.

FATF Recommendations RevampedIn February 2012, the Financial Action Task Force (FATF) revised its Anti-Money Laundering Recommendations with the aim of strengthening global safeguards and further protecting the integrity of the financial system against the fight against money laundering and terrorist financing. The Recommendations are better targeted and have been fortified, specifically in areas which are high-risk or where implementation could be enhanced, including dealing with new threats such as the proliferation of weapons of mass destruction, improving transparency and better addressing the laundering of the proceeds of corruption and tax crimes. They also strengthen the re-quirements for higher-risk situations and allow financial institutions and other designated sectors to apply their resources more efficiently by focusing on higher-risk areas while there is more flexibility for simplified measures to be applied in low-risk areas. Moreover the recom-mendations deal with the realities of techno-logical development and the need for financial inclusion.

The revision of the Recommendations will facilitate national authorities in taking more effective action against money laundering and terrorist financing at all levels – from the identification of bank customers opening an account through to the investigation, prosecu-tion and forfeiture of assets.

As an international financial centre, Cyprus is extremely cautious about illicit funds that could threaten its veracity. Hence several of

THE LAW DEFINES AND CRIMINALISES THE LAUNDERING OF THE PROCEEDS GENERATED FROM ALL SERIOUS

CRIMINAL OFFENCES

IN 2011, CYPRUS WAS HIGHLY COMMENDED FOR THE COMPREHENSIVE AND SOUND MANNER IN WHICH IT TOOK MEASURES FOR COMBATING MONEY LAUNDERING

main_story9_compating.indd 63 28/12/2012 13:37

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Χορηγοί Επικοινωνίας Οργανωτές

ΣΕ ΠΟΙΟΥΣ ΑΠΕΥΘYΝΕΤΑΙ Το Συνέδριο απευθύνεται σε ιδιοκτήτες και διευθυντικά στελέχη των κυπριακών οικογενειακών επιχειρήσεων όλων των μεγεθών και όλων των κλάδων της οικονομίας

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{January 2013}

70 Productivity Up, Wages DownThere is a long-term trend towards a falling share of wages and a rising share of profits in many countries.

72 Pharma Industry on the Cusp of a Golden EraIf it is to prosper, it must address challenging issues head on.

73 Rich Man, Poor ManThere is a huge disparity in GDP per capita across the EU

74 The Largest Sovereign Bailout in History?If the Troika lends Cyprus €17 billion, it will represent 100% of GDP.

76 “Very Serious Imbalances”The European Commission identifies prob-lems in Cyprus’ financial sector.

77 Wanted: A High-Calibre Energy PolicyThe Cyprus Energy Round Table Consensus

ISSUE

2278

66 Losing MomentumFDI growth expected to have slowed in 2012.

68 US Drives Global PE-Backed IPO Activity in 2012Companies raised US$20.5 billion in the first 11 months of last year.

69 Distressed Asset Investing Key considerations of distressed asset transac-tions.

78 {lifestyle}86 Papa’s Got A Brand New BagThe vintage handbag has never been so coveted.

MONEY: Portfolio Management: How to Innovate and Invest in Successful ProjectsBy Dr. Shan Rajegopal 68

ECONOMY: Greekonomics: The Euro Crisis and Why Politicians Don’t Get It By Vicky Pryce 76

LIFESTYLE: Information is Beautiful By David McCandless 81

+ BOOK REVIEWS

70 {business}

73 {economy}66 {money}

THE LARGEST

SOVEREIGN BAILOUT IN HISTORY?

THE INTERNATIONAL INVESTMENT, BUSINESS & FINANCE MAGAZINE OF CYPRUS 65

gold_plus.indd 65 28/12/2012 13:44


foreign direct investment

{MONEY}

By Kyproula Papachristodoulou

In 2011, despite the global financial and economic crisis that started in 2008 and ongoing sovereign debt crises, global Foreign Direct Investment (FDI) inflows rose by 16%. According to the World Investment Report

2012 of the UNCTAD (United Nations Conference on Trade and Development), this increase occurred against a back-ground of higher profits for transnational corporations (TNCs) and relatively high economic growth in developing countries during the year.

The projections for 2012, though, are not positive. The resurgence in eco-nomic uncertainty and the possibility of lower growth rates in major emerg-ing markets risks undercutting this favorable trend in 2012. Specifically, UNCTAD predicts that the growth rate of FDI will slow in 2012, with flows leveling off at about $1.6 trillion. Leading indicators are suggestive of this trend, with the value of both cross-bor-der mergers and acquisitions (M&A) and greenfield investments retreating in the first five months of 2012. Weak levels of M&A announcements also suggest sluggish FDI flows in the later part of the year.

2011 BY REGIONFDI flows to developed countries grew robustly in 2011, reaching $748 billion, up 21% from 2010. Nevertheless, the level of their inflows was still a quarter below the level of the pre-crisis three-year

DRIVING FACTORSData shows that FDI from developed countries rose sharply in 2011 (by 25%) to reach $1.24 trillion. While all three major developed-economy investor blocs – the European Union (EU), North America and Japan – contributed to this increase, the driving factors differed for each. FDI from the United States was driven by a record level of reinvested earnings (82% of total FDI outflows), in part driven by TNCs building on their foreign cash holdings. The rise of FDI outflows from the EU was driven by cross-border M&A. An appreciating yen improved the purchasing power of Japanese TNCs, resulting in a doubling of their FDI outflows, with net M&A purchases in North America and Europe rising by 132%.

Outward FDI from developing econo-mies declined by 4% to $384 billion in 2011, although their share in global out-

FDI GROWTH EXPECTED TO HAVE SLOWED IN 2012LosingMomentum

average. Despite this increase, developing and transition economies together con-tinued to account for more than half of global FDI (45% and 6%, respectively) for the year as their combined inflows reached a new record high, rising 12% to $777 billion. Reaching a high level of global FDI flows during the economic and financial crisis, it says a lot about the economic dynamism and strong role of these countries in future FDI flows that they maintained this share as developed economies rebounded in 2011.

Rising FDI to developing countries was driven by a 10% increase in Asia and a 16% increase in Latin America and the Caribbean. FDI to the transition econo-mies increased by 25% to $92 billion.

Flows to Africa, by contrast, continued their downward trend for a third consecutive year but the decline was marginal. The poor-est countries remained in FDI recession, with flows to the least developed countries (LDCs) retreating 11% to $15 billion.

The poorest countries remained

in FDI recession, with flows to the least developed

countries retreating

11% to $15 billion

money_fdi_2.indd 66 28/12/2012 13:44


flows remained high at 23%. Flows from Latin America and the Caribbean fell 17%, largely owing to the repatriation of capital to the region (counted as negative outflows) motivated in part by financial considerations (exchange rates, interest rate differentials). Flows from East and South- East Asia were largely stagnant (with a 9% decline in those from East Asia), while outward FDI from West Asia increased significantly to $25 billion. A

gainst a backdrop of continued economic uncertainty, turmoil in the financial markets and slow growth, countries worldwide continued to liberalize and promote foreign investment as a means to support economic growth and development. At the same time, regulatory activities with regard to FDI continued.

According to the World Investment Report 2012, investment policy

measures undertaken in 2011 were generally favourable to foreign investors. Compared with 2010, the percentage of more restrictive policy measures showed a significant decrease, from approximately 32% to 22%.

The report comments that it is premature to interpret the aforementioned decrease as an indication of a reversal of the trend towards a more stringent policy environment for investment that has been observed in previous years – also because the 2011 restrictive measures add to the stock accumulated in

previous years. The share of measures introducing new restrictions or regulations was roughly equal between the developing and transition economies and the developed countries.

The overall policy trend towards investment liberalisation and promotion appears more and more to be targeted at specific industries, in particular some services industries (e.g. electricity, gas and water supply; transport and communication). Several countries pursued privatisation policies. Other important measures related to the

facilitation of admission procedures for foreign investment.

In 2011-2012, several countries took a more critical approach towards outward FDI. In the light of high domestic unemployment, concerns are rising that outward FDI may contribute to job exports and a weakening of the domestic industrial base. Other policy objectives include foreign exchange stability and an improved balance of payments. Policy measures undertaken included outward FDI restrictions and incentives to repatriate foreign investment.

Investment Policy Trends

CYPRUS: FDI IN DECLINE

Cyprus reported foreign direct investments inflows of $276 million against $1,828 million in outflows in 2011. Inflows were significantly

lower in 2011 compared to 2010 when they reached $766 million. Over the past two years inflows plummeted: In 2006 they had reached $1,834 million, in 2007 $2,226 million and in 2008 $1,415 million.

There was a bolt upright movement in 2009 when inflows rose to $3.472 million, only to decline again in 2010 to $766 million. Regarding outflows, from 2006 to 2008 there was an upward movement rising from $887 million to $2,717 million. Outflows decreased to $383 million in 2009, to $679 million in 2010 and increased to $1,828 million in 2011. Cyprus is ranked among the developed countries which are the member countries of the OECD (other than Chile, Mexico, the Republic of Korea and Turkey), plus the new European Union member countries which are not OECD members (Bulgaria, Latvia, Lithuania, Malta and Romania), plus Andorra, Bermuda, Liechtenstein, Monaco and San Marino.

two thirds of the total value of greenfield investments in 2011.

Although the growth in global FDI flows in 2011 was driven in large part by cross-border M&A, the total project value of greenfield investments remains significantly higher than that of cross-border M&A, as has been the case since the financial crisis.

Report, reflects both the growing value of assets on stock markets and the increased financial capacity of buyers to carry out such operations.

Greenfield investment projects, which had declined in value terms for two straight years, held steady in 2011 at $904 billion. Developing and transition economies continued to host more than

CYPRUSFDI Flows 2006 – 2011

INFLOWS OUTFLOWS

Millions of dollars

Millions of dollars

2006 1,834 8772007 2,226 1,2402008 1,415 2,7172009 3,472 3832010 766 679

2011 276 1,828UNCTAD cross-border M&A database

CYPRUSNumber of cross-border M&A

Net sales

Net purchases

2005 - 32006 5 232007 17 212008 32 462009 22 1602010 23 280

2011 27 149UNCTAD cross-border M&A database

M&A PICKING UPCross-border Mergers & Acquisitions rose by 53% in 2011 to $526 billion, spurred by a rise in the number of mega-deals (those with a value over $3 billion), to 62% in 2011, up from 44% in 2010. This, according to the World Investment

money_fdi_2.indd 67 28/12/2012 13:44


lobal private equity-backed IPOs faced stiff headwinds in 2012, with companies raising US$20.5 billion through 103 IPOs in the first 11 months of the year – almost a 50% drop compared to 2011, when US$38.6 billion capital was raised in 116 deals. While

global trends saw Asia-Pacific as a key driver of global IPO activity this year, PE-backed IPO activity occurred mostly in the US, according to Ernst & Young.

Sixty-seven deals went public on US exchanges in 2012, accounting for 77% of the total capital raised (compared to US$29.6b and 62 deals in the US in 2011). Asia-Pacific recorded 31 deals raising US$3.3 billion, ac-counting for 16% of total proceeds (compared to US$6.0 billion and 43 deals in 2011). Nearly two-thirds of Asia-Pacific’s proceeds came from one large deal, the July listing of Malaysian hospital operator IHH Healthcare, which raised US$2.1 billion in a dual listing on the Kuala Lumpur and Singapore exchanges. In Europe, there were only five deals in 2012 that raised US$1.4 billion (compared to US$2.9 billion and 11 deals in 2011).

Jeffrey Bunder, Global Private Equity Leader at Ernst & Young says:

“Lowered investor confidence on continued concerns around macroeconomic growth equated to lower volumes of IPOs in 2012.

However, those deals that priced during the year generally performed well on the first day of trading – and more importantly, the major-ity of those companies successfully held on to those initial gains.”

On a market-weighted average basis, PE-backed IPOs saw an average increase of 11.4% in their first day as a public company. And most have held on to those initial gains, with PE-backed deals returning an average of 14.1% from their offer price as of early December. This compares with 9.5% for the overall market. Performance also compares favourably with most equity indices. In early December, the S&P 500 had returned 13.5%, and the MSCI World index of developed market stock exchanges returned 11.8%.

Pipeline could see 57 PE-backed companies raise around US$12b

In the second half of the year to the end of November, 30 companies had filed for IPOs, down from approximately twice that number in the first half of the year, and a fraction of the 132 companies which filed in the first half of 2011.

However, there are currently 57 PE-backed companies in registration, expecting to raise more than US$12 billion in total proceeds. Some of the largest companies currently in the pipeline include Intelsat, (which was acquired by BC Partners and Silver Lake from a consor-tium including Apollo Global Management, Apax Partners, Madison Dearborn Partners, and Permira Advisors) in July 2007 for

PORTFOLIO MANAGEMENT: HOW TO INNOVATE AND INVEST IN SUCCESSFUL PROJECTSBY DR. SHAN RAJEGOPAL (PALGRAVE

MACMILLAN, 2012), RRP: £26.00 (£18.18

FROM AMAZON.CO.UK)

Technology is accelerating the speed of change, increasing competition in the marketplace and forcing business leaders

to be agile and innovative in order to stay ahead of their competitors. Where some companies are falling by the wayside, others are excelling in decision-making and execution. What makes the difference? Businesses that are good at managing change think about how to establish a culture of innovation, how to align innovation and investment decision-making, how to prioritise resources to the right areas and how to streamline decision-making so as to manage implementation and measure results to drive continuous improvement. Shan Rajegopal is a respected business advisor and one of the leading authorities on innovation and project portfolio management. Here he sets out in a clear, simple style the key factors you need to address to ensure that innovative ideas bubble to the top, that you make better investment decisions and can manage implementation with less wasted resources and time.

BOOK REVIEW

ipo deals

{MONEY}

US DRIVES GLOBAL PE-BACKED IPO

ACTIVITY IN 2012

US$16.4 billion; and Avaya Holdings, which was taken private by TPG and Silver Lake Partners in June 2007 for US$7.9 billion.

PE-backed IPOs activity saw an increase in the emerging markets There were 4 PE-backed deals that exceeded US$1b in proceeds in 2012, compared with 7 last year and 10 in 2007. The largest of these was the Malaysian Healthcare operator IHH Healthcare, which was the fourth-largest IPO to price globally in 2012, and the fourth largest ever on the Bourse Malaysia. The IPO raised US$2.1 billion and achieved a market capitalization of US$7.1 billion, making it one of the largest listed healthcare providers in the world.

money_distressed_ipo.indd 68 28/12/2012 13:45


investment

{MONEY}

info: Antonis Vidakis CFA, CBA, Director and Alexandros Pericleous MBA, Ernst & Young Transaction Advisory Services.

By Antonis Vidakis & Alexandros Pericleous

Once distressed assets have been identified, prospective buyers must understand the compli-cated acquisition process and each stakeholder’s agenda.

Successful acquirers will also need clearly-de-fined investment objectives, confidence in their own valuation and operational, commercial and financial due-diligence processes, as well as insight into potential acquisition strategies. Additionally there is a need to move fast and maintain sufficient management resources to make it all work.

Due-diligence in a distressed asset context requires careful risk assessment and, spe-cifically, an intensive focus on identifying hidden (often off-balance sheet) liabilities. For example, assets are often transferred with no warranties or indemnities. Potentially damag-ing legacy issues include underfunded pension liabilities, employment contracts, termination agreements, warranties, regulatory issues and breach-of-contract claims. Would-be buyers must also assess their ability to re-configure and re-deploy the target’s assets, including an often demotivated workforce, to generate target returns.

Valuing distressed assets can be especially challenging. Often, there are few comparables. Historical performance data based on the current owner’s use of the assets can be helpful. However, in performing valuation and due-

diligence, companies should focus on plotting future returns for any distressed asset based on a new set of forward-looking circumstances with the right management and business plan that derive greater value.

Consideration needs to be given on how to structure the acquisition. The most com-mon approaches include buying the asset outright or acquiring the asset or discrete assets within a bankruptcy process. The insolvency process may allow the acquirer to structure the deal in order to separate the asset from certain liabilities and leave the latter with the bankrupt estate. Other structuring tech-niques involve purchasing operating compa-nies and leaving behind entities that hold the financing arrangements. When contemplating a purchase of just discrete assets or an entire corporate entity, other factors such as the tax implications of an asset purchase versus share deal may differ significantly and, therefore, impact the total purchase price.

An environment with less credit availability will tend to mean fewer competing bidders. Buyers offering cash, paper and/or equity, or a workable combination will likely occupy a strong negotiating position. This is not to say that the use of credit is completely out of reach. Distressed assets are often controlled by creditors such as banks willing to negotiate re-financing or credit “rollover” on owner-ship change at leverage ratios in excess of 50%

despite tight credit markets. Over the past few years specialist funds have

raised more than €65bn to invest in, or provide leverage to, stressed/distressed Euro-

pean assets transactions.Perhaps the greatest challenge in the compli-

cated, high-pressure effort to secure distressed assets is the need for speed. Businesses tend to fail very quickly, even after protracted suffering because management, often in denial, fail to take critical distress-softening steps. When failure becomes evident, key stakeholders such as lenders and bondholders move with great haste to protect their capital.

Today, there are increased opportuni-ties for distressed asset acquisition. Entities, adequately prepared, will likely find enormous opportunity. Owing to greater complexity and heightened risk, distressed asset investing requires companies to commit greater manage-ment capital. But with preparation, informa-tion and nerve, such investments can yield rich rewards. Employing the services of professional advisers such as Ernst & Young to support the transaction, investors can tap into the global experience, resources and skillset on offer as well as an independent expert’s opinion.

PERHAPS THE GREATEST CHALLENGE IS THE NEED

FOR SPEED

DISTRESSED ASSET INVESTINGLAST MONTH WE DEFINED DISTRESSED ASSETS AND ADDRESSED THE ADVANTAGES AND RISKS RELATED TO INVESTING IN SUCH ASSETS. IN THIS SECOND PART OF THE ARTICLE WE PRESENT KEY CONSIDERATIONS OF DISTRESSED ASSET TRANSACTIONS.

money_distressed_ipo.indd 69 28/12/2012 13:46

The current economic and financial crisis has dampened wages but the trend of declining employee compensation relative to productivity is an old one. According to data compiled by the International Labour

Organization (ILO) between 1999 and 2011, average labour productivity in developed economies increased more than twice as much as average wages. The global trend

has resulted in a change in the distribution of national income, with the workers’ share decreasing and capital income’s share increasing in a majority of countries.

Even in China, a country where wages have roughly tripled over the last decade, GDP increased at a faster rate than the total wage bill – and hence the labour share went down. The ILO, in its Global Wage Report 2012/13, says that the drop in the labour share is due to technological progress, trade globalisation,

{BUSINESS}

global earnings

the expansion of financial markets, and decreasing union density, which have eroded the bargaining power of labour. Financial globalisation, in particular, may have played a bigger role than previously thought.

The impact of the global financial and economic crisis on labour markets has often been analysed through the prism of the unemployment rate, particularly in the developed economies, where unemployment has risen from less than 6% to more than

Productivity Up,

By Kyproula Papachristodoulou

THE ILO REPORTS THAT THERE IS A LONG-TERM TREND

TOWARDS A FALLING SHARE OF WAGES AND A RISING

SHARE OF PROFITS IN MANY COUNTRIES

HOW MUCH DO THEY EARN?While wages grew significantly

in emerging economies, differ-ences in wage levels remain

considerable. In the Philippines, a worker in the manufacturing sector took home around US$1.40 for each hour worked. In Brazil, the hourly direct pay in the sector was US$5.40, in Greece it was US$13.00, in the United States US$23.30 and in Denmark US$34.80 (2010 exchange rates, rounded up).


business_productivity.indd 70 28/12/2012 13:46


8% of the labour force, with double-digit figures in Greece, Ireland, Portugal and Spain, for example.

In developing countries, unemployment rates fluctuated less. Even so, worldwide unemployment has increased by 27 million since the start of the crisis, bringing the overall number of unemployed to about 200 million or 6% of the global labour force.

The most serious concern relates to youth unemployment, which has reached alarming proportions. The ILO estimates that, in 2011, unemployment affected 75 million young people aged 15-24 worldwide, representing more than 12% of all young people. Many more do not appear in the unemployment statistics because they have become so discouraged as to have stopped looking for work.

During 2011, real average wage growth remained far below pre-crisis levels globally, going into the red in developed economies, although it has remained significant in emerging economies. Monthly average wages adjusted for inflation – known as real average wages – grew globally by 1.2% in 2011, down from 2.1% in 2010 and 3% in 2007. Because of its size and strong economic performance, China weighs heavily in this global calculation. Omitting China, global real average wages grew at only 0.2% in 2011, down from 1.3% in 2010 and 2.3% in 2007.

Wages suffered a double dip in developed economies but remained positive throughout the crisis in Latin America and the Caribbean, and even more so in Asia. Fluctuations were widest in Eastern Europe and Central Asia, partly as a result of the strong post-transition recovery in wages before the global financial crisis, and the severe contraction in real wages in 2009.

The Global Wage Report contributes to a wider literature on the changes in the distribution and levels of wages within and across countries, as well as on the economic and social implications of these trends. One of the key findings of this literature is the growing inequality in income, in terms of functional and personal income distribution. In terms of functional income distribution, which concerns how national income has been distributed between labour

and capital, the ILO reports that there is a long-term trend towards a falling share of wages and a rising share of profits in many countries. The personal distribution of wages, according to the report, has also become more unequal, with a growing gap between the top 10% and the bottom 10% of wage earners. These internal “imbalances” have tended to create or exacerbate external imbalances, even before the Great Recession, with countries trying to compensate for the adverse effects of lower wage shares on consumption demands through easy credit or export surpluses.

What should be done? The ILO analysis suggests that policy action towards “rebalancing” should be taken at both national and global levels: “In attempting to redress external imbalances, policy-makers should refrain from a simplistic view that countries can “cut” their way out of the recession. Policy-makers should pursue policies that promote a close connection between the growth of labour productivity and the growth of workers compensation.”

The ILO believes that the existence of large current-account surplus in some countries suggests that there is room to better link productivity increases and wages as a means to stimulate domestic demand. “Policy-makers should be careful not to promote a race to the bottom in labour shares in deficit countries or throughout the eurozone. Austerity measures that are imposed from the outside and bypass social partners harm effective labour relations.”

Given the difficulty of organising workers, particularly in the context of increasing labour market segmentation and rapid technological

changes, a solution to the aforementioned problem according to the ILO would be the support of environments which enable collective bargaining. The ILO view is that minimum wages, if properly designed, are an effective policy tool which can provide a decent wage floor and thus secure a minimum living standard for low-paid workers and their families.

In the current economic conditions, minimum wages remain a topic of debate on the policy agenda and in the public domain in both developed and developing countries. As part of its Decent Work Agenda, the ILO encourages Member States to adopt a minimum wage to reduce working poverty and provide social protection for vulnerable employees. It further recommends that minimum wages should be set by authorities after consultation with the social partners and that a balanced approach should be adopted which takes into account the needs of workers and their families as well as economic factors, including levels of productivity, the requirements of economic development and the need to maintain a high level of employment.

Along the same lines, the European Commission recently expressed the view that member states should establish “decent and sustainable wages” and that “setting minimum wages at appropriate levels can help prevent growing in-work poverty and is an important factor in ensuring decent job quality”. Debates continue regarding the level at which minimum wages should be set.

If the labour market’s problem is redistribution of income, the solution should not be sought only within the labour market. “Redistribution will also require a number of changes that lie outside of the scope of labour markets, including reform and repair of financial markets to restore their role in channelling resources into productive and sustainable investments,” the ILO report says.

Wages Down

CUTTING WAGES IS NOT ALWAYS WISEA decrease in the labour share, according to

the Global Wage Report, not only affects perceptions of what is fair – particularly

given growing concerns about excessive pay among CEOs and in the financial sector – it also hurts household consumption and can thus create shortfalls in aggregate demand. Based on data, the shortfalls in some countries have been com-pensated by increasing their net exports, but not all countries can run a current account surplus at the same time. Hence, the ILO concludes, a strategy of cutting unit labour costs, a frequent policy recom-mendation for crisis countries with current account deficits, may run the risk of depressing domestic consumption more than it increases exports. “If competitive wage cuts are pursued simultaneously in a large number of countries, this may lead to a “race to the bottom” in labour shares, shrinking aggregate demand.”

business_productivity.indd 71 28/12/2012 13:46

Major scientific and technological advances, alongside socio-demographic changes and increasing demand for

medicines, will revive pharma’s fortunes post 2020, according to a new report from PwC, Pharma 2020: From vision to decision.

However, in order to survive to 2020 and then to potentially thrive on the opportunities the next decade holds, important decisions need to be made – and the challenges of rising customers expectations, poor scientific productivity and cultural barriers need to be addressed.

One of the major hurdles facing the pharma industry is the rising healthcare bill. Its expenditure as a percentage of GDP is climbing in countries in every income bracket and is increasing most steeply in the mature markets where the industry has historically made most of its money. At a time when all economies are feeling the tougher times, the industry is having to play its part. The bill payers are demanding better outcomes and introducing new mechanisms to measure these as a precondition for paying for new medicines.

As a result, PwC research suggests that the pharma industry must either offer more

value without charging more or prove that it can remove costs from another part of the healthcare system to make room for the higher prices it’s charging. For example, the scope for helping healthcare payers save money in the mature markets is huge. Currently, roughly more than 85% of the health budget goes on healthcare services and less than 15% on medicines – so if the industry can reduce spend on costly medical services and procedures, PwC estimates that its share of healthcare expenditure in these countries could rise to 20% by 2020.

The growth markets – which will account for 33% of the world’s GDP and where demand for medicines will more than double by 2020 – offer the pharma industry countless opportunities but the report highlights that for it to be profitable, it’s about being sensitive, strategic and targeting the right population with the right medicine and delivering value.

The report believes that the industry needs to rebalance its expenditure and invest more in the early part of the R&D process to deal with rising costs. More needs to be done to improve productivity and the returns on R&D investment. Most of the products that will be launched in the coming years are already in the pipeline, but they are not aligned with demand and rising expectations from healthcare payers,

PHARMA INDUSTRY ON THE CUSP OF A GOLDEN ERA

{BUSINESS}

pharmaceuticals

providers and patients. Marrying the pipeline with the market in the next decade is going to be the key.

Despite the big changes in the industry over the past few decades, the report also finds that the organisational culture at many pharma companies has changed very little, or if anything has become more stultifying. The industry has struggled to deal with change in the past, but the report says change must now be embraced in a rapidly changing world. A demanding commercial environment is set to continue and in order to succeed, the report suggests this must change and industry’s top figures need to foster a creative corporate

culture that allows organisations to develop with the courage to explore and flexibility

to thrive in different conditions.

Mike Swanick, global pharmaceutical and life sciences leader, PwC, said: “The industry is at a crossroads. In established markets, budgets are constrained and all stakeholders want real solutions and cures. Pharma companies must now deliver ‘real’ value to payers and patients to prove their worth and to rebuild trust in the sector. In growth markets, companies must respond responsibly to a growing population’s needs, recognising demographic and cultural diversity. The industry has historically found change difficult to deal with but time is running short and decisions must now be taken. Those that do, face an optimistic future, while failure to respond now could lead to many regrets.”

THE PHARMA INDUSTRY IS AT A CRITICAL JUNCTURE. THE NEXT FEW

YEARS MAY LOOK BLEAK BUT THE FOLLOWING DECADE WILL BRING AN

ERA OF RENEWED PRODUCTIVITY AND PROSPERITY. HOWEVER, IF IT IS

TO PROSPER, THE PHARMA INDUSTRY MUST FIRST MAKE SURE IT HAS

A FUTURE AND ADDRESS CHALLENGING ISSUES HEAD ON.

PHARMA COMPANIES MUST NOW DELIVER

‘REAL’ VALUE TO PAYERS AND PATIENTS TO PROVE

THEIR WORTH


buspharma_econrich.indd 72 28/12/2012 13:47


{ECONOMY}

gross domestic product

The disparity in GDP per capita across the EU is quite remarkable, as shown by Eurostat’s most recent analy-sis, in which Luxembourg has by far the highest GDP per capita among the 37 countries surveyed – more than two and a half times the EU27 average, and 6 times higher than Bulgaria, which is the poorest EU

Member State as measured by this indicator. One particular feature of Luxembourg’s economy which, to some

extent, explains the country’s very high GDP per capita is the fact that a large number of foreign residents are employed in the country and thus contribute to its GDP while, at the same time, they are not included in the resident population.

The Netherlands comes second among the EU Member States, at 31% above the EU27 average, but EFTA Member States Norway and Switzerland have a higher level of GDP per capita. Ireland shows a stable volume index among the top EU Member States. In 2011, Austria had the same position as Ireland, experiencing a continuous increase in its GDP per capita. Other EU Member States with a GDP per capita of more than 20% above the EU27 average are Sweden and Denmark. Germany and Belgium are at the same level of about 20% above the average, followed by Finland and EFTA Member State Iceland. The United Kingdom and France show a GDP per capita level of nearly 10% above the EU27 average.

Italy and Spain are at a GDP per capita level around the EU27 average, being about 5% higher than Cyprus. Malta, Slovenia and the Czech Republic are all clustered between 15% and 20% below the EU27 average, followed by Greece, whose GDP per capita has decreased significantly due to the economic crisis. Portugal and Slovakia have GDP per capita levels around 25% of the EU27 average while Estonia, Lithuania, Hungary and Poland are all very close to around 35% below the EU27 average.

Croatia – the acceding state – has a slightly higher volume index than Latvia, both around 40% below the EU27 average. Candidate country Turkey has a higher level of GDP per capita than EU Member States Romania and Bulgaria, at around half the EU27 average. The other candidate countries – Montenegro, Serbia and the Former Yugoslav Republic of Macedonia – are about 60% or more below the EU27 average. Finally, two potential candidate countries – Albania and Bosnia & Herzegovina – both have GDP per capita of 70% below the EU27 average. While GDP per capita is mainly an indicator of the level of economic activity, Actual Individual Consumption (AIC) per capita is an alternative indicator better adapted to describe the material welfare situation of households. Generally, levels of AIC per capita are more homogeneous than GDP but there are still substantial differences across the EU Member States.

Luxembourg is the country with the highest level of AIC per capita in the EU, 40% above the average of the EU27. However, while Luxem-bourg can be said to be in a league of its own in terms of GDP, this is less so for AIC. One reason for this is that cross-border workers contrib-ute to GDP in Luxembourg while their consumption expenditure is recorded in the national accounts of the country of their residence. The EU Member State with the second highest AIC per capita is Germany at 20% above the average, around the same as its GDP per capita.

Rich Man, Poor ManTHERE IS A HUGE DISPARITY IN GDP PER CAPITA ACROSS THE EU

Gross Domestic Product Actual Individual

Consumption

2010 2011 2010 2011

Luxembourg 267 271 141 140

Netherlands 131 131 114 113

Ireland 129 129 103 101

Austria 127 129 118 119

Sweden 124 127 114 116

Denmark 128 125 116 113

Germany 119 121 117 120

Belgium 119 119 111 111

Finland 113 114 111 112

United Kingdom 111 109 120 118

France 108 108 113 113

Euro Area 17 108 108 107 107

Italy 101 100 102 101

Spain 99 98 95 94

Cyprus 97 94 99 98

Malta 85 85 83 84

Slovenia 84 84 80 81

Czech Republic 80 80 71 71

Egreece 87 79 97 91

Portugal 80 77 84 81

Slovakia 73 73 71 70

Estonia 63 67 56 58

Lithuania 57 66 61 70

Hungary 65 66 60 61

Poland 63 64 67 69

Latvia 54 58 53 57

Romania 47 49 46 47

Bulgaria 44 46 43 45

Norway 181 186 136 135

Switzerland 154 157 129 130

Iceland 112 111 106 107

Croatia 59 61 57 59

Turkey 50 52 54 57

Montenegro 42 42 52 53

FYROM 36 35 40 40

Serbia 35 35 44 43

Albania 27 30 30 34

Bosnia and Herzegovina 30 30 36 36

Source: Eurostat/ EU27=100

buspharma_econrich.indd 73 28/12/2012 13:47

{ECONOMY}


In the Winter 2012 issue of its Eurozone publication, Ernst & Young gives its Outlook for Cyprus which makes for unpleas-ant reading but ends with some medium-term optimism.

“The Cypriot Government is in negotiations with the troika (the EC, ECB and IMF) over a bailout package totaling some €11–€16 billion, of which €5–€10 billion is likely to be allocated to the domestic banking sector. With Cypriot GDP currently standing at around €17 billion, the bailout could amount to almost 100% of GDP, which would make it the largest sovereign bailout in history.

The exposure of the Cypriot Government to the liabilities of the banking system has led to

the main rating agencies downgrading govern-ment debt. Standard & Poor’s downgraded Cyprus to B from BB in October, while Moody’s downgraded it to B3 from Ba3, citing deteriorating economic conditions in Cyprus and Greece, as well as the Government’s slow response to the crisis.

The crisis in Cyprus is in some ways similar to the crisis in Ireland, although contagion from Greece is the main cause. Government debt in Cyprus was estimated at around 83% of GDP in the second quarter of 2012 and the government deficit averaged around 5.5% of GDP in 2012, both of which would be manageable if taken in isolation. However, Cy-priot banks’ exposure to the Greek economy, estimated at €25 billion, and the Greek

write-down of debt as part of the private sector involvement (PSI) that led to an overnight loss of €4 billion, meant that two of the largest banks were struggling to meet capital-adequacy ratios and seeking government support. This prompted the Government to apply for a bailout from the EU in June.

The financial crisis is having profound economic impacts. Preliminary estimates of growth for the third quarter show GDP falling 0.5% after a 0.9% drop in the second quarter, leaving economic activity 2.2% lower than a year earlier. All sectors of the economy contracted, except tourism and the legal and accounting professions, which reflects the weakness of domestic demand. We estimate that GDP fell by 2.3% in 2012 as a whole and

IF THE BAILOUT AMOUNTS TO €17

BILLION, IT WILL BE ALMOST 100% OF

CYPRUS’ GDP

THE L

ARGEST SOVEREIGN BAILOUT IN HISTORY

?

economy_bailout.indd 74 28/12/2012 13:48

bailout


prospects of an imminent turnaround for the economy are remote. Against this backdrop, the unemployment rate has risen sharply, climbing to 12.2% in September, compared with 8.5% a year earlier. This is weighing on household demand; for example, new car registrations were down 26.6% year-on-year in September. This illustrates how the financial crisis is affecting the real economy.

Critical to Cyprus’ short-term outlook is a bailout package with the Troika. Even then the road to recovery will be long and the recession is likely to last several years. But, as Ireland has shown, a successful arrangement can lay the foundations for emerging from the crisis. However, the Cypriot Government and the Troika have yet to reach an agreement on a deal. If an agreement is not reached soon, the Government could have difficulties in meeting financial commitments.

The main sticking points between the Government and the Troika are conditions for the banking sector and the scale of austerity. The Troika wants to increase core tier 1 capital to 10% from 8%. It also wants to impose a tougher definition of non-performing loans (NPLs) that would see debts classified as “bad” earlier and also allow banks to seize and auction off property earlier. The Government wants to protect homeowners, but, critically, if capital requirement and NPLs were to rise, then bank bailout needs would also soar – a key factor in explaining the range of estimates of the bailout needs of the Cypriot banking sec-tor. However, it is clear that confidence in the banking system needs to be restored. Foreign deposits in Cypriot banks account for around 150% of GDP and so far they have held up remarkably well. But any run on the banks by foreign depositors would be catastrophic and result in a full-blown credit crunch.

Bank loans to households and non-financial corporates are currently falling and the supply of credit will remain a drag on the economy. The Government has passed legislation allow-ing the state to guarantee bank bonds and new loans in the hope of reversing the decline in credit. The legislation allows the Government to provide guarantees up to €3 billion, but the impact is likely to be limited. Tight credit sup-ply, as well as oversupply and weak demand, is one of the factors contributing to the collapse in construction activity: in the year to August 2012, total square meters constructed had col-lapsed by 31%.

With bank credit likely to remain weak and an oversupply of properties unlikely to be absorbed given the economic backdrop, a similar rate of decline is expected for 2013. But if financial and economic stability can

to decline by 3.5% this year. Fiscal austerity is expected to take its toll in the coming years as well, especially with the Troika (if not the Government) aiming to narrow the public-private wage gap significantly by lowering public sector wages. There will be some relief from falling inflation as the impact of the VAT hike drops out and commodity price inflation remains subdued, but real wages are likely to fall over the next few years. The continued rise in unemployment above 14% and likely tax measures mean that household disposable income will continue to shrink. Therefore we expect private consumption to decline by 3% in 2013 and by 2% in 2014.

The miserable prospects for domestic demand will result in Cyprus enduring a long and painful recession. Greece, Ireland and Portugal have all experienced multiyear reces-sions and Cyprus is unlikely to escape a similar fate. We expect GDP to fall by around 2.3% in 2013, with a further 1.2% drop in 2014 and only to return to modest growth in 2015.

The performance of the tourism sector has been one area of promise. The number of tourists rose by 4.1% year-on-year in October 2012. Key to the growth in tourist numbers is a strong rise in the number of tourists from Russia. This is in part due to the Cyprus Tourism Organisation (CTO) promoting the country in Russia. The CTO has also identified China as another growth market and is promoting itself heavily there. We expect tourism to continue to offer some relief to the ongoing financial crisis. Demand from tradi-tional markets such as the UK, Germany and Scandinavia should also pick up as the financial position of consumers in these countries strengthens. Moreover, if the euro weakens as forecast, this will also provide a boost to tourist numbers from outside the eurozone.

While the Government deals with the financial crisis, the next few years are bound to be tough. But there are reasons to be optimis-tic about medium-term prospects. Although there was some controversy and suspicion of motives regarding the allocation of the latest batch of gas licenses, the gas reserves do provide an important opportunity for Cyprus. The Government hopes to have a pipeline and liquefaction terminal in place by 2018, with exports of natural gas beginning the following year. It is estimated that this will require an investment of around €7-€8 billion (or 40%-45% of current GDP). When construction on these facilities begins, it will be an important economic stimulus. It is hoped that this growth from the gas industry will also contribute to repaying the loans that are expected as part of the EU bailout”.

be restored, the rate of decline should subse-quently ease in 2014.

The Government and the Troika also disagree on the amount of fiscal austerity required. The Government has made propos-als that would see cuts amounting to around €975 million, or over 5% of GDP, over the next five years. The Troika meanwhile is seek-ing cuts totaling €1.2 billion.

There are some areas of agreement between the two parties, such as plans to reduce the public payroll, reform pensions and improve tax collection. There are, however, further

significant differences regarding the 13-month salary, the cost of living al-

lowance and the scale of privatization. The Government is refusing to privatize profitable semi-government organisations (SGOs), even though they could raise a significant share of their financing requirement through such sales.

Although at the time of writing negotiations are still underway, it is clear that Cyprus is about to go through a period of fiscal austerity, despite the Government’s announcement of a stimulus package worth €300 million over three years designed to boost jobs and encour-age construction. The overall outlook for investment is bleak: government investment will be hit by austerity measures, construction activity is sliding and, despite some new proj-ects, such as a new oil storage facility, private investment will also shrink sharply this year and next. Tight financial conditions and an ongoing recession mean firms will be reluctant to undertake anything but essential investment. After falling by 25% this year, investment is likely to decline by a further 17% in 2013 with another double-digit drop likely in 2014.

Conditions are just as tough for households. Public sector wages are being frozen and unem-ployment is surging, while purchasing power is squeezed by the VAT hike implemented in March. Against such a backdrop – espe-cially when access to credit is so constrained – consumption will be dragged down by falling income. Household consumption is forecast

IN 2012 ALL SECTORS

OF THE ECONOMY CONTRACTED, EXCEPT

TOURISM AND THE LEGAL AND ACCOUNTING

PROFESSIONS

economy_bailout.indd 75 28/12/2012 13:48


{ECONOMY}

cyprus

The European Commission be-gan the second annual cycle of the Macroeconomic Imbalance Procedure (MIP) 2013 with the publication of the Alert

Mechanism Report (AMR) at the end of No-vember. The report calls for in-depth reviews of developments related to the accumulation and unwinding of macroeconomic imbalances in 14 EU Member States: Belgium, Bulgaria, Denmark, Spain, France, Italy, Cyprus, Hungary, Malta, the Netherlands, Slovenia, Finland, Sweden and the United Kingdom.

On Cyprus, the Commission concluded that the country “was experiencing very serious imbalances, in particular as regards developments related to the external position, public finances and the financial sector. In the updated scoreboard, several indicators are above their indicative thresholds, namely the current account deficit, net international investment position, export market shares, pri-vate sector credit flow, private sector debt and general government debt. On the external side, the current account balance indicator remains above the negative threshold despite a recent strong decline in imports due to a compression of domestic demand.

Looking forward, the losses in export market shares are in particular explained by the goods balance which has maintained its downward trend, while Cyprus continues to record surpluses in services trade. Overall, the current account deficit is forecasted to decrease in the years to come.

Losses in price and cost competitiveness have eased recently, the public sector wage

freezes contributed to wage moderation in the private sector and export-oriented sectors. However, structural reforms to underpin sustained improvements in competitiveness have not materialised. In parallel, the nega-tive net international investment position is fast-deteriorating which raises concerns about the sustainability of external position of the country. The net international investment position has deteriorated on the back of cur-rent account deficits, but also due to valuation losses on banks’ assets abroad.

On the internal side, the highly leveraged private sector has continued to unwind its large outstanding debt. This is also indicated by the significant decrease of the private sector creditor flow indicator compared to the year

before. The fact that the credit in-dicator remains above the threshold is

primarily associated with the loan resched-uling process taking place, as the rescheduled

loans are treated as new flows, rather than provision of new credit. For households, debt levels are matched by substantial assets, but these have been hit by a continuous decline in real and nominal house prices. The public debt is also above the Treaty-based threshold and is expected to increase sharply.

At the same time, unemployment in Cyprus has risen sharply recently, and is expected to increase further looking forward, indicating structural challenges in addition to cyclical factors. Any further fallout from the exposure of the Cyprus banking sector to Greece and further deterioration of economic activity will aggravate the risks and make structural adjustment more difficult. The situation is further exacerbated by negative feedback loops

GREEKONOMICS: THE EURO CRISIS AND WHY POLITICIANS DON’T GET IT BY VICKY PRYCE (BITEBACK PUBLISHING, 2012)

RRP: £12.99 (£8.96 FROM AMAZON.CO.UK)

Economist Vicky Pryce reflects on the eurozone crisis, its causes and how Europe has responded, and offers her

thoughts on what might and what needs to happen if the euro is to survive in its current form. She pays particular attention to Greece – the country of her birth – which continues to be seen as Europe’s problem child. But she explains that the roots of the crisis are much deeper than profligate governments in Greece, Ireland, Portugal, Italy or Spain. If it is to survive in the long term, even greater political and fiscal integration and cooperation will be required. Unfortunately the enormous pain that is now being inflicted on many countries has led to greater nationalism and made reaching the consensus necessary to pull Europe out of its crisis more, rather than less, difficult. Pryce, formerly joint head of Britain’s Government Economic Service, recognizes that Greece should never have been allowed to join the eurozone. On the other hand, her professional expertise is humanised by her personal knowledge and love of her country.

BOOK REVIEW

‘Very Serious Imbalances’THE EUROPEAN COMMISSION

IDENTIFIES PROBLEMS IN

CYPRUS’S FINANCIAL SECTOR

STRUCTURAL REFORMS TO UNDERPIN SUSTAINED

IMPROVEMENTS IN COMPETITIVENESS HAVE

NOT MATERIALISED

between developments in the housing and financial sectors and government finances. Also the Cyprus’s financial sector is among the most leveraged in the whole EU. After requesting official financing on 25 June 2012, Cyprus is currently negotiating a programme of economic policies to address its financial, fiscal and structural challenges. Overall, the Com-mission finds it useful, also taking into account the identification of a very serious imbalance in May, to examine further the risks involved and progress in the unwinding of imbalances in an in-depth analysis.”

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{ECONOMY}

The government needs to appoint a high-calibre, indepen-dent Energy Advisory Team with a short shelf-life of no more than six months to help shape its vision and strategy for the recently established national oil and gas company (KRETYK). These were the conclusions of a small group of locally based energy experts, academics, economists and

senior professionals who met in December for a round table energy discussion hosted by Castor & Partners, a Leadership Development and Executive Search firm, and consultancy companies Curveball Ltd and Sapienta Economics Ltd. Held under Chatham House rules, which allow for the free exchange of opinions without attribution, the group came to the consensus conclusions outlined below. “We organised this round table in order to get a debate going about how Cyprus can make the most of this new natural resource,” said Adam Lomas, of Castor and Partners, who recently retired to Cyprus after 35 years with Shell. “It was a really good discussion and we’d like to keep the dialogue going so we can flesh out these ideas a little more,” he said.

CYPRUS ENERGY ROUND TABLE CONSENSUS The discovery of hydrocarbons within the island’s Exclusive Economic Zone is an opportunity to transform the business climate and culture of Cyprus on a larger scale than that currently being considered and cur-rent plans for realisation appear to be optimistic

Pending a full Government debate and under strict rules of corporate governance, a framework should be quickly established to include the appointment of an Energy Minister and an Energy Advisory Team. This should be a quickly appointed and short-lived body to advise and recommend the framework and policy for the National Oil and Gas Company (KRETYK). The team should serve for no longer than 6 months.

This organisation should be staffed with proven experts with a record of success in the international hydrocarbon industry. The Energy Ad-visory Team should be transparent and independent and report to the President, focusing on national energy security, commercial exploitation strategy and, where possible, exempt from party politics. To ensure that the agency has no conflict of interest, members of the team should not seek subsequent positions with KRETYK.

As regards the national oil and gas company (KRETYK), its structure and purpose needs to be more clearly defined than at present. It should be a semi-government organisation with a

IT IS CRITICAL TO MAKE THE CYPRUS HUB CONCEPT ATTRACTIVE TO ISRAEL RATHER THAN TO RELY ON ISRAEL FOR A SOLUTION

transparent legal framework that is supported by an overall vision and business plan for the economy of Cyprus. This would act as encour-agement for investment from abroad and for Cypriot entrepreneurs. KRETYK should make clear to potential investors the regulatory/policy/infrastructure framework. Ideally the Government, via KRETYK, will become an active partner in most related joint ventures, but in the shorter term, due to financial and personnel constraints, the government may choose to take a minority interest or simply regulate.

KRETYK should become an example for other similar organisations and be staffed by qualified personnel who wish to deliver a future for all Cypriots over and above personal gain and have a long term view on energy issues for the region. Whilst the position of Israel is important, it is critical to make the Cyprus hub concept attractive to Israel rather than to rely on Israel for a solution. Considering that there is much gas in Iraq, which is now being distributed through the Gulf, the value proposition of Cyprus could be significantly enhanced if, in its long term vision, its objective were to become a ‘gas hub’ for the whole of the Eastern Levant to include all hydrocarbons in the region. Despite the current decision to build an LNG plant, it was felt that no detailed eco-nomic analysis had been done and made publicly available that would support this option.

The Sovereign Wealth topic must not be forgotten but can await the generation of funds from hydrocarbons.

The Energy Advisory Team and/or KRETYK should retain the flexibility of future customer options, whilst recognising the

unique opportunity of becoming a future secure supply to Europe.

WANTED: A HIGH-CALIBRE ENERGY POLICY

energy

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WELL, ALMOST… AS FASHIONISTAS WADE FRESH-EYED INTO THE NEW YEAR, THEIR FOCUS IS RETROGRADING: THE VINTAGE HANDBAG HAS NEVER BEEN SO COVETED, AND WHAT A FASHIONISTA WANTS, A FASHIONISTA GETS –NO MATTER THE PRICE TAG. By Chloe Panayides

BRAND NEW BAG

{LIFESTYLE}

PAPA’S GOT A

lifestyle.indd 78 28/12/2012 13:49


The tough crocodile skin, endlessly embossed and as black as night, bends smoothly and stands strong: the creation of stalwart contours. The seams are perfect and fierce; the gold hardware glistening, beckoning. White diamonds deliciously accent the clasp and lock of this Hermes Birkin handbag. As for the key? Only €48,800, as sold by Doyle in New York back in 2005.

To most people – including possibly all men – a handbag is, quite simply, a handbag: a means to safely and seam-lessly transfer objects from A to B.

To a select and passionate few, however, a handbag is an expression of exclusivity, originality, status, and – above all – a work of art, and they will invest a great deal into acquiring what their hearts desire.

Consider, furthermore, the thrall of luxury vintage pieces that have endured fashions diachronically and, due to their limited number, embody a uniqueness that presents an opportunity for the fashion-conscious to make a statement against the artificiality of modern consumerism.

Heeding the power of this passion, it is perhaps at this point that the investment-conscious take note, and look upon the otherwise simple handbag once more. Suddenly, a means to safely and seamlessly invest money, with the possibility of gaining profits from year to year, emerges.

Fortunately for prospective inves-tors, certain changes to the societal and economic landscape have intensified the fashion world’s fixation with vintage handbags of late. Indeed the possibil-ity of profits is being spearheaded from three separate angles.

Firstly – and a factor not to be un-derestimated – celebrity endorsements of vintage pieces have brought the idea and acceptability of wearing vintage to the fore. Ardent fans wishing to emulate their favourite celebrities, and associate themselves to some small degree with the famous faces they look upon daily in a saturated media scene, have eagerly welcomed ‘vintage’ into their fashion vo-cabularies. So much so, in fact, that select upscale department stores and popular shopping websites have introduced dedicated shops-within-shops offering customers a refined collection of vintage handbags (and clothing) in amongst the usual modern, seasonal assortments.

Another perfect example in practice for you: fashion label, Lana Marks, produces one trademark ‘Cleopatra’ bag each year. It is of no surprise that the 2007 edition, which accompanied actress Helen Mirren to the Academy Awards that year and beheld her win her Best Actress honour, sold for a stagger-ing €188,290.

The second factor that has seen the vintage handbag mar-

ket explode with vigour sprouted, interestingly, from the economic

downturn. Matt Rubinger, director of luxury accessories at Heritage Auctions, explains: “The popularity of vintage luxury has been developing in a major way since 2007. It was the recession’s answer to the ‘It Bag’. It wasn’t that people weren’t buying, it’s that they were shifting from current and cutting-edge to tried-and-true.”

The instability induced by the eco-nomic crisis did not seem to inhibit the fashion lover’s spending; it merely re-directed efforts, with faith being placed in brands and styles that have proven worth, enduring the test of time.

The third and final reason that vintage handbags have received greater

Tattention of late lies with the eagerness emanating from emerging markets. Con-sumers in countries spanning China, India, Russia, Indonesia, Columbia, and Vietnam, are increasingly fixating their attention upon – and choosing to spend their newly-earned purchasing power on – luxury heritage brands. In the handbag world, this equates to funds being injected into the likes of Chanel, Hermes, and Louis Vuitton.

Indeed, in stark contrast to alterna-tive investor markets – whereby success is balanced upon the crux of condition – the vintage handbag market’s founda-tion is fortified by the brand. Target-ing brand is primary and elementary; the essence of wise vintage handbag investing. More specifically, focusing on discerning the so-called ‘It Bags’ of each respective brand would certainly lend a competitive and commercial advantage.

Akin to the heritage brands to which they belong, most of these iconic ‘It Bags’ also have a story to tell, with people desiring to be a part of their col-lective narratives.

And, indeed, whilst the term ‘vintage’ is pointedly synchronic, having undergone numerous metamorphoses over the years, it seems to have finally settled upon being an expression of this shared historical import between purse and purchaser.

Cameron Silver, owner of Decades, a landmark Los Angeles vintage store, ex-plains of the current tide: “Over the last decade, the term ‘vintage’ has come to describe anything at least 10 years old. But given the tumultuous fashion land-scape of recent seasons, with the loss of great talents like Yves Saint Laurent and Alexander McQueen and the musical chairs of designers moving from house to house, some believe that age is no longer the only criteria for what defines vintage fashion. Overall, vintage implies that there is archival value.”

No handbags embody this more than the illustrious Kelly and Birkin pieces, produced by Parisian fashion house, Hermes, and named after celebrity royalty, Grace Kelly and Jane Birkin, respectively.

When Grace Kelly innocently used her beloved Hermes handbag to shield her baby bump from the persistent paparazzi back in 1935, little did she know that

OVER THE LAST DECADE, THE TERM ‘VINTAGE’

HAS COME TO DESCRIBE ANYTHING AT LEAST 10

YEARS OLD

vintage

lifestyle.indd 79 28/12/2012 13:49


vintage

It is prob-ably not too bold an assertion to assume that the ten most expensive handbags ever sold

– encrusted with diamonds and made of rare animal skins – are seldom taken out of the house for use.

1. The Mouawad 1001 Nights Diamond

Purse – $3.8 millionShaped like a heart and utterly covered with gold and dia-monds weigh-ing 381.92 carats, this bag took 8,800 man hours to create with 10 people as-signed to the task.

2. Hermes Birkin Bag by Ginza Tanaka

– $1.9 millionJapanese designer, Ginza Tana-ka, lent his expertise to the making of this bag. It is made of platinum and over 2,000 diamonds. The strap, made entirely of dia-monds, may be removed and used instead as a necklace or bracelet. A pear-shaped diamond weighing 8 carats that decorates the front of the bag may also be removed and utilised as another accessory.

3. Chanel Classic Diamond Forever

Handbag – $261,000This classic bag features 334 diamonds, with 18-carat white gold heavily used in its construction; its selling price

reflects the fact that it is favoured by celebri-ties the world over.

4. Lana Marks Cleopatra Bag

–$250,000Made of al-ligator skin in a metal-lic silver shade and 18-carat white gold, this bag was also frosted with 1,500 black and white diamonds; a one-of-a-kind piece that sold for $250,000.

5. Hermes Matte Crocodile Bir-

kin Bag – $120,000The classic Bir-kin further decorated with white diamonds weighing 10 carats sold for an accented price to its ‘infe-rior’ sibling for $120,000.

6. Leiber Precious

Rose Bag –$92,000Perfectly shaped like a flower, only one such bag was cre-ated, encrusted with 1,016 diamonds weighting, in to-tal, 42,56 carats. To further embellish the diamonds, 1,169 sapphires and 800 tourmalines were added for good measure.

7. Hermes Black Crocodile Birkin

Bag –$64,800Sold in New York in 2005 for $64,800, this Hermes Birkin

made of black crocodile skin exem-plifies the allure that it holds over the fashion-conscious population.

8. Louis Vuitton

Tribute Patch-work Bag – $45,000One of the key brands in the world of handbags, this particular piece was created by recycling 15 other Louis Vuitton bags. Only 24 were custom-made and delivered, and the company has announced that they will not produce any future Tribute Patchwork bags. A Frankenstein of handbags it may be, but it still managed to originally sell for $45,000.

9. Marc Jacobs Caro-lyn Crocodile

Bag – $38,000With a quilt design and purple crocodile skin, this bag has become a hugely popular mainstay of the Marc Jacobs brand.

10. Fendi Selleria Bag – $38,000

Would you like sable or chinchilla skin? The former is only found in the Russian forests and mountains, the latter a rodent indigenous to South America: exotic and expensive, and customised to your preference. It’s no wonder that this handbag costs more than a car.

Handbags Are Foreverthe bag would forever thereafter become known as the Hermes Kelly. With its clean, square lines, clean-cut flap and single strap drop, the Hermes Kelly has defied all laws of fickle fashion, becoming as legendary as its namesake.

Just shy of fifty years later in 1984, another iconic actress would lend her name to a Hermes bag. As she sat next to Hermes’ chief executive, Jean-Louis Dumas, on a flight from Paris to London, the contents of Birkin’s straw bag emptied from the overhead compartment on to the deck below; she duly complained of the difficulty of finding a leather weekend bag to her liking. Soon after, the Hermes Birkin was born; similar in shape to the Kelly, save for its sculpted leather flap and double strap drop. The Birkin actually has the distinction of carrying the longest waiting list in accessory history: an aston-ishing six years.

For those uninspired by the prospect of this wait, the Kelly and the Birkin have become ubiquitous on the vintage auction scene. Indeed, since December 2010, Christie’s has held bi-annual ‘Elegance’ sales, which always include a large selection of Hermes handbags. Infused with the archival legend of Kelly and Birkin (the actresses), successful sales of the Kelly and the Birkin (the bags) are not overly dependent upon age; up to 80% of Hermes bags sold through Christie’s are described as hav-ing been made within the last five years, proving that the fashion-passionate are just happy to be able to own one.

Insiders of the fashion world stress the importance of auctions in both putting seller and seeker in touch, as well as deter-mining pricing. Most vintage boutiques are said to price their items according to the activity in the auction world, where estimates and final bids are well-docu-mented and luxury goods circulate freely. Furthermore, auctions clearly delineate the supply and demand chain as it grows or recedes, dictating respective pricing.

Not to be fooled into imagining that the pricing of these accessories, so well-loved and desired by fashionistas, is a matter of mere mechanics, Rebecca Tay, a fashion writer and editor, succinctly summarises the process of pricing vintage handbags as being both a science and an art.

Elaborating further on the artistic values to be taken into consideration, Pat Frost,

lifestyle.indd 80 28/12/2012 13:49


INFORMATION IS BEAUTIFUL BY DAVID MCCANDLESS

(COLLINS, NEW EDITION 2012)

RRP: £20.00 (£12.80 FROM AMAZON. CO.UK)

In these days of e-books, Kindles, etc., it is still possible to find printed books that cannot be reproduced in electronic form and this is one of them:

a truly beautiful, lovingly crafted piece of work that is a pleasure to look at. Author David McCandless deserves full marks for its concept, design, and content and for presenting all types of information from the profound to the trivial in such an entertaining and accessible way. You can dip into it at random and know you are bound to come away with some new bit of knowledge. The way some of the figures are presented is brilliantly original, and really fires the imagination to think about how information could be better presented. Elsewhere. Alongside conventional graphs, pie charts and flow charts there are also bubble clusters, ‘coxcombs’ and the delightfully-named ‘semantic polar grids’. There is even a page displaying visual ways of displaying information. With subjects ranging from Creation Myths to Salad Dressings, via The Middle East, it’s quite brilliant.

BOOK REVIEW

director of fashion at Christie’s explains: “We know that certain colours are more popular. People always love red. There is also a current trend for citrus shades, blues and pastels. These colours are always ap-pealing to an Asian palette: lime green in London looks very, very bright, whereas it doesn’t in the Hong Kong sunshine.”

Likewise, condition and rarity lend themselves to the creation of the final price. Collectors often covet one-of-a-kind pieces that, though showing signs of life and of having been well-travelled, are also well cared for. Frost details: “We base our estimates roughly on the retail price of the bag, then add a plus for condition, a plus for unusual colour, and so on.” Overall, fashion experts agree that good returns are

Rumour has it that

Coco Chanel modelled the 2.55

quilting on the stained glass windows found

in her French hometown

Coco Chanel: a young, strong and independent

woman, who pursued her dreams of success and romance. The Chanel 2.55: refined, quilted, and innovative, with its gold chain strap changing the landscape of handbag history. Introduced in February of 1955 (hence the name), the romance surrounding

the story of its creation is as famous as the landmark chain. Rumour has it that Ms. Chanel modelled the quilting on the stained glass windows found in her French hometown, chose burgundy for the lining based upon the colour of the uniforms worn at the orphanage at which she grew up, and designated one of the handbag’s

seven pockets for love notes.Tiffany, a boutique chain based in Nicosia and Limassol has, since the 1980s, been accessorising Cyprus’ fashion savvy with the otherwise unobtainable: Coco Chanel. Tiffany remains the only authorised seller of Chanel on the

island. It’s ‘Corner of Chanel’ stocks the most famous and sought after handbags of the Parisian fashion house, including the iconic 2.55. The epitome of style, transcending fashion, prices for a small 2.55 bag start at €2,450.

dependent upon brand, model, condition, material, and colour – in that order.

Indeed, at Christie’s recent Elegance sale, which took place on May 30, 2012, all three top lots were crocodile Birkin bags, going for nearly double their estimated prices. A 2011 braise Birkin, for example, far surpassed its estimate of €31,000-€33,000, selling for €58,800. In total, 58 Hermes bags were sold at that session, amassing a sum close to €858,662.

Whether a worshipper of fashion – driven by a passion for all things fine and enamoured by the artistry of luxury brand pieces – or not, the soaring sales and pop-ularity of certain iconic bags will surely encourage one to look again and wonder: is a handbag simply a handbag?

Chanel in Cyprus

lifestyle.indd 81 28/12/2012 13:49


I walked into the restaurant.It was my favourite spot on the pic-

turesque former fishing harbour of Tourkolimano (Turkish Harbour) which became Mikrolimano (small harbour) in 1974. The same year that Turkish Cof-fee was renamed Greek Coffee.

I went up to Jimmy, the usually bois-terous owner who, this time. was miser-ably huddled up in a corner. “Are you on strike too?” he asked me. Maybe my red nose was a giveaway. I was soon to realize that Jimmy had noticed that I had a cold.

“What do you mean on strike?” I asked. Then he explained. Jimmy had taken a personal stand against the recent steep price hike in heating oil by not filling up. As he explained to me, he’d rather catch cold than pay the exorbitant prices being charged by Greek heating oil suppliers this winter.

Jimmy’s stand was a moral one. Believe me, his restaurant does well enough – even in these times of crisis – for heating oil not to break his bank.

And then I thought of all those Greeks who are doing without heating oil this winter. Not because of a moral issue but for a simple economic reason. They can’t afford it.

Times are tough. Really tough. Un-employment is nudging up close to 30%. That’s almost one in three Greeks. One in three! That means that there is hardly a family who does not have someone out of work. And amongst the

youth it’s 50%.Standard & Poor’s recently an-

nounced an upward revision in the rat-ing of Greek debt. To many, this signals

that, perhaps, we’ve finally reached rock bottom. That the only way from here is up. I certainly hope so. Because I wonder just how much more this society can take. And it’s not a Greek problem. Similar scenarios are being played out in Italy, Spain, Portugal and Ireland – together with Greece, the unfortunate group of nations with the equally unfor-tunate nickname – PIIGS.

Back to Jimmy. Europe has become a weird place. A place where recovery is based on austerity. A place where the Northern European view of the world prevails. A view that prizes efficiency, productivity and good housekeeping above all else. A place dominated by the Protestant ethic. Whatever happened to the European mosaic?

I fear for Europe. Because austerity is not the way out. How many price increases can a population bear? Because the pressure on society is giving rise to political extremism on the left and the right. Because pensioners who have worked hard all their lives have had their livelihood reduced. But most of all, I fear for Europe because young people have lost the right to dream. I fear that we may lose our best. Those with the brains, the vision and the courage never to give up. Because they are the ones who will move elsewhere. And leave Eu-rope forever poorer.

As for me? I’m still nursing my cold. It’s a bad one. And once it has gone I might join Jimmy on strike.

The Only Way Is Up

info: Peter Economides is a Brand Strategist and founder of Felix BNI. He is a former Executive Vice President and Worldwide Director of Client Services at global adver-tising agencies McCann-Erickson Worldwide and TBWA\Worldwide. He has worked on some of the world’s most iconic brands including Coca-Cola, Apple, Absolut, illy, Audi and Nike. In Cyprus, he has been involved in branding projects for Bank of Cyprus, Sigma Television and easy-forex. Peter is based in Athens. Follow Peter on facebook at http://www.facebook.com/economidespeter or on Twitter @petereconomides

Whatever happened to the European mosaic?

THE LASTWORD

How much more can Greek society take?By Peter Economides

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TFI Markets - Gold Magazine - January 2013 Ad - Happy New Year - III.pdf 1 21/12/2012 11:30:32

More than just a holiday destination with pristine white beaches and 300 days of sun-shine, Cyprus can also cater to your business needs ranging from registering and setting up your company’s operations to managing your EU, North African and Middle Eastern clients at a considerably lower cost.

As well as being an EU country and a mem-ber of the European Monetary Union since 2008, Cyprus enjoys the lowest corporate tax rate in the EU of 10%. Cyprus belongs to those jurisdictions on the OECD White List which have substantially implemented the internationally agreed tax standard.

In addition to this, Cyprus provides efficient business services, has a transparent legal and regulatory system and is committed to sustainable growth.

Cyprus welcomes both visitors and investors to work here, so, if you are searching for a new business base, consider Cyprus. It’s more than just beaches and sun.

“Columbia’s growth and expansion over the years is attributed to the uniqueness of Cyprus; being the is-land’s strategic position at the cross-roads of three continents, its compre-hensive legal framework, double tax treaties regime, communication sys-tem, banking system, infrastructure in general and last but not least its highly educated labor force.”

Captain Dirk Fry, Managing Director Columbia Ship Management Ltd

“The favorable business climate, the excellent telecommunications infra-structure, the well educated and skilled human resources, the favorable tax rates and the proximity to the Middle East and Africa markets, were some of the key factors that enabled NCR to de-cide to move its regional offices to Cy-prus in the 80’s. Gradually, NCR man-aged to expand the office in Cyprus to cover also all the African Countries.”

Managing Director of NCR Cyprus,Mr. George Flouros

Ministry of Commerce, Industry & TourismTrade ServiceTel: + 357 22 867100Fax:+ 357 22 375120www.mcit.gov.cy/[email protected]

Cyprus InvestmentPromotion AgencyTel + 357 22 441133Fax + 357 22 [email protected]


*Available between the hours of 0830 and 1700 Monday to Friday. Calls may be recorded for security reasons and so that we may monitor the quality of our service. Call costs may vary. Please check with your telecoms provider. Barclays offers banking, wealth and investment management products and services to its clients through Barclays Bank PLC and its subsidiaries. Barclays Bank PLC is registered in England and is authorised and regulated by the Financial Services Authority. Registered No. 1026167. Registered Offi ce: 1 Churchill Place, London E14 5HP. Barclays Bank PLC is authorised by the Central Bank of Cyprus to conduct banking and investment business.

Barclays.A bank with a tradition of strength.It’s a tradition that has lasted in Cyprus for over 70 years, delivering the highest levels of local knowledge combined with unrivalled international reach. As one of our clients you will have access to our team of highly experienced professionals who provide seamless banking and corporate solutions. They are your gateway to the vast range of support and expertise available from Barclays globally. Whether you operate locally or internationally, our tradition of strength will help you create a culture of success.

To find out more about how Barclays can help, go to barclays.com/wealth or call us on +357 22 654477* for our Nicosia office or +357 25 208000* for our Limassol office.

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