Economics & Trade Policy

The True Cypriot Honest Broker

In 1974, Cyprus was split into an internationally recognized Greek Cypriot south and the breakaway Turkish Cypriot north. Turkey invaded Cyprus after supporters of unification with Greece organized a coup. Turkish Cypriots declared independence in 1983, but are only recognized by Turkey, which maintains 35,000 troops there.

For the first time in a generation there is a fresh opportunity for Cypriot reunification. Past mediation by the United Nations, European Union and the United States has only perpetuated a stalemate on the island. There is hope, however, as a new party is taking a crack at the unsolvable. Who is this newcomer? Natural gas.

As opposed to the well-intentioned brokers of this conflict, natural gas speaks in terms of cold, hard economics. Cypriot energy officials estimate the island’s reserves to be 1.7 trillion cubic meters of natural gas, and it needs an export market. Europe is far away, and the cost to transport would be high. Greece’s economy is in the doldrums, and demand for new sources of gas is low. The Arab world is politically unstable, and there is little economic development going on. That leaves one clear possibility: Turkey.

Turkey’s economy grew at an impressive average of 6.8% over the last 10 years,[1] and it has never been thirstier for gas. Having no hydrocarbon resources of its own, Turkey is dependent on exports from the Caucasus and Central Asia. They are positioning themselves as an energy hub for the region, given their strategic position between the hydrocarbons of Central Asia, and the advanced economies of Europe.

Under better economic circumstances, the Cypriots would have much more flexibility in choosing an export market. However, as Michael Moller, former UN representative to Cyprus, points out, “with a EU bailout of 12.6 billion Euros and levies of 60% on savings accounts, they will have little choice in the matter of where their gas goes.”

The situation is even more precarious given Turkey’s naval dominance in the Eastern Mediterranean. Due to their occupation of the northern third of the island, they claim that ethnic Turks of Cyprus deserve a share in the gas revenues. It remains to be seen whether this “gunboat diplomacy” is just rhetoric, but Cyprus certainly isn’t in a position to find out.

While the Turkey-Israel rapprochement of recent weeks is a positive for most of the region, this only narrows Cyprus’s window of opportunity. Much of the recently discovered gas in the Eastern Med is in Israeli waters. Given its precarious relations with its Arab neighbors, Turkey is also the most logical export route for Israel. Cyprus and Israel will be direct competitors in the Turkish market, and whichever side flinches stands to lose billions.

With so much on the line, Cyprus would be foolish not to take action. The greatest obstacle, as it has been in the past, is the attitudes of Greek Cypriots. As Jan Wielgohs observes, “The Turkish Cypriots have already voted in favor of reunification, and it is the Greek side that struck down this proposal back in 2004.”

Five years ago, the Cyprus Center of the Peace Research Institute Oslo (PRIO) published surprising claims about the monetary benefits that would come within the first year of reunification. PRIO’s conservative estimate was that every Cypriot family would make an extra €2,500 per year from Turkish-Greek trade. The north has narrowed the development gap between the two sides, and the Cypriot Turks should no longer be viewed as a drag on the economy. Again, this is another opportunity for the market to succeed where loftier appeals have failed.

Turkey may be able to sweeten the deal with a few carrots of its own. They recently completed a fresh-water pipeline to Turkish Cyprus, and this could easily be extended to the Greek side. Given the EU’s wariness to invest in Cyprus after the recent bailout, Turkey may be the best bet for Foreign Direct Investment as well.

Lastly, the Turkish occupation of Northern Cyprus is the main impediment to Turkey’s own EU aspirations. Turkey, like Cyprus, has a thousand and one reasons to end the stalemate, and this sense of urgency on both sides must be utilized while it lasts. Turkey has grown weary of the EU accession process, and may turn elsewhere if it doesn’t start seeing progress.

Economics and markets are in the driver’s seat in the Eastern Mediterranean, and the time for action is now. Natural gas has created an opportunity for peace that more altruistic powers have failed to initiate, and this opportunity is Cyprus’s to lose.

[1] ^ "Growth and economic crises in Turkey: leaving behind a turbulent past?". Economic Papers 386. Directorate-General for Economic and Financial Affairs of the European Commission. October 2009. p. 10.




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