Cyprus 2016 - Hubs of the Mediterranean

CYPRUS 2016 Hubs of the Mediterranean

Fast and Glorious

A Breath of Fresh Air

Energy as Catalyst

A much needed success story for the Eurozone

A new generation of thought leaders steps forward

Nations come together in the Eastern Mediterranean

A report by Business Intelligence Unit

CYPRUS 2016

Table of Contents 3

4 Fast and Glorious A much needed success story for the Eurozone, Cyprus exited the bailout program early and having borrowed only 70 percent of the allocated financial package.

6 Architects of Revival Smart policies and a willingness to make hard decisions restored growth and credibility to Cyprus, once again perceived as a safe and stable economy in a troubled region.

8 Bankers’ Square Sustainability, ethical banking, and client engagement are the key words that define a completely overhauled banking system in Cyprus.

With a total population predicted to reach 529 million by 2025, the Mediterranean region provides access to one of the largest and most diverse markets in the world. Over half of the population lives on the southern shores of the Mediterranean, formed exclusively of emerging economies, and the proportion is expected to grow to three quarters by 2025. The challenge of the Eastern and Southern Mediterranean lies in identifying sound and safe locations which allow foreign companies to contribute to the region’s development by taking advantage of the local business opportunities.

Business Intelligence Unit has set out on a mission to identify and assess the potential Mediterranean Hubs, which not only present profitable investment prospects, but also offer a business-friendly environment and regional cooperation potential.

10 Where the Opportunities Lie In brief: data & research centers, insurance & financial services, shipping, medical tourism, tax incentives.

12 Why Cyprus An attractive legal and tax framework is complemented to perfection by the unique natural attributes of a geostrategic location.

14 A Breath of Fresh Air A new generation of thought leaders steps forward to put Cyprus on the map of innovation and shape a new cluster of R&D in the Eastern Mediterranean.

16 Energy as Catalyst The new gas discoveries bring important investment opportunities to the region and the potential for nations to come together in the Eastern Mediterranean.

Business Intelligence Unit thanks all its partners in Cyprus for their contribution to this report. Their input was invaluable to the process of compiling a comprehensive series of studies on business opportunities in the Mediterranean. The publication of this report was made possible by the support of the sponsors: Bank of Cyprus, Hellenic Bank, PWC Cyprus, Cyprus Investment Promotion Agency, Cooperative Central Bank.

Business Intelligence Unit is a global intelligence provider, specialized in identifying and promoting investment opportunities on behalf of governments around the world. Business Intelligence Unit also works with international companies in the process of approaching foreign markets.

We welcome your feedback at info@businessintelunit.com Front cover picture: The Executive Terminal at Larnaca Airport, Cyprus, courtesy of Skylink Table of contents picture: Cyprus, Night Earth - NASA, by Anton Balazh/Shutterstock Inside back cover picture: Elea Golf Course, courtesy of Elea Estate, Cyprus Part of the data featured in this report appears in publications by Eurostat, GRID-Arendal, Fitch Ratings, Atlantic Council, International Energy Agency and International Monetary Fund.

A production by Business Intelligence Unit. Š 2016 Business Intelligence Unit

4 Fast and Glorious

CYPRUS 2016

CYPRUS 2016

Fast and Glorious

first quarter of 2016, the second largest growth of the 28 European Union countries. It now represents a much needed success story for what has become known as the troika, the crisis intervention team for the Eurozone, consisting of the International Monetary Fund, the European Central Bank, and the European Commission. The troika has often been criticized for its harsh austerity measures imposed during the previous bailout packages for Eurozone countries in dire straits, such as Ireland, Spain, and Portugal, which exited the deal more or less successfully. Greece is currently the only country of the monetary union to remain part of the financial rescue program.

Cyprus did not only exit the European Union bailout component on time, with almost 30 percent of the entire funds not utilized, but also two months ahead of the IMF component deadline.

A much needed success story for the Eurozone, Cyprus exited the bailout program early and having borrowed only 70 percent of the allocated financial package.

On March 7th 2016 Cyprus successfully exited the three-year international financial assistance program, also known as the Economic Adjustment Program for Cyprus, agreed in the form of a Memorandum of Understanding (MOU) between the Government of Cyprus and the European Commission, the European Central Bank, and the International Monetary Fund (IMF).

Only three years prior, in March 2013, the country’s economy was in shambles because of the toxic mixture of bankrupt banks, record unemployment, a sky-rocketing deficit and the inability to access financial markets, having its bonds downgraded to junk status. Cyprus was heavily affected by the exposure to Greece, which represented almost 150 percent of its Gross Domestic Product (GDP), and saw its local real estate bubble burst.

Fast and Glorious 5

Euro Symbol at the European Central Bank (ECB) in Frankfurt, Germany. Patrick Poendl/Shutterstock

the first and only nation to have had such strict measures imposed on its depositors and naturally, as a consequence, the move led to record-low investor confidence. In

around” of the economy in such a short period of time. On the eve of the exit, Christine Lagarde, Managing Director of the IMF, issued a statement emphasizing her admi-

“I wish to congratulate the people and the Government of Cyprus on their accomplishments under the economic adjustment program, which has delivered an impressive turnaround of the economy during the past three years.”

Christine Lagarde, Managing Director, International Monetary Fund

the words of John Hourican, CEO The MOU imposed tight capital of Bank of Cyprus, “the system controls and a haircut on all depos- had had a cardiac arrest; it was a its higher than EUR 100,000 in the moment of chaos for the country”. country’s two biggest banks (Bank of Cyprus, later recapitalized, and Fast forward to present day, the Laiki Bank, which was allowed leaders of global financial instito go bust and then merged with tutions have nothing but words Bank of Cyprus). Cyprus became of praise for the “impressive turn-

ration for the country’s evolution: “I wish to congratulate the people and the Government of Cyprus on their accomplishments under the economic adjustment program, which has delivered an impressive turnaround of the economy during the past three years.” She assessed that “the economy re-

turned to positive growth last year, expanding by about 1.5 percent. The banking system is on a much more solid footing and workouts of nonperforming loans are accelerating, opening space for new productive lending. The fiscal position has been restored to a sustainable path, and public debt is now firmly on a downward trajectory. In addition, Cyprus regained access to international capital markets and successfully issued three Eurobonds during the past 21 months.”

According to Eurostat, Cyprus had a 1.6 percent GDP growth in 2015 and currently the country’s economy is faring well, with a 0.9 percent GDP increase in the

million in the bank. The European Bank for Reconstruction and Development was brought in for governance, followed by investors such as Renova (the Swiss-based Russian investment vehicle) and a number of asset managers from London and New York. John Hourican explains: “I set an ambition for a billion euros of new equity, which is 6 percent of the country’s GDP, a big number, and we delivered that during the summer of 2014. It was the major fix moment for the banking system in Cyprus, because more than 30 international investors, including Wilbur Ross, validated our story.”

Challenges like the high level of non-performing loans (45.8 percent of total loans) and the high unemployment (12 percent, a significant drop from the 16 percent of last year) still remain. Cyprus has also failed to comply with a final bailout requirement, the privatization of the state-owned The systemic banks have been re- telecommunications company, capitalized and have successfully Cyta, because of the major politpassed the imposed stress tests. ical price that would have had to Hellenic Bank, the first bank to be paid ahead of the parliamentareceive the investors’ interest in ry elections that took place at the the post-crisis period, was capital- end of May 2016, which caused the ized with the help of the Ameri- loss of the final EUR 275 million “I set an ambition for a billion euros of new equity, which is 6 percent of the country’s GDP, a big number, and we delivered that during the summer of 2014. It was the major fix moment for the banking system in Cyprus, because more than 30 international investors, including Wilbur Ross, validated our story.”

John Hourican, CEO, Bank of Cyprus can-based hedge fund Third Point of agreed European loans. Since and Wargaming, a Belarusian Cyprus only accessed EUR 7.25 gaming company. billion of the EUR 10 billion allocated under the MOU, the overall Bank of Cyprus was also success- performance of the economy was ful in attracting big names to the not affected by this turn of events. table, most prominently Amer- The privatization is now seen as ican investor Wilbur Ross who a growth factor rather than a way invested a whopping EUR 400 out of the crisis.

6 Architects of Revival

CYPRUS 2016

CYPRUS 2016

Architects of Revival Smart policies and a willingness to make hard decisions restored growth and credibility to Cyprus, once again perceived as a safe and stable economy in a troubled region.

How did it happen? How did Cyprus go from being an economy on the brink of collapse to becoming a Eurozone success story in only three years?

Harris Georgiades Minister of Finance, Republic of Cyprus

John Hourican CEO, Bank of Cyprus

Averof Neophytou President, Democratic Rally

service, the successful privatization of the ports and the upcoming privatization of the state-owned telecommunications company are only the first steps in insuring economic sustainability. Harris Georgiades emphasizes that the overall strategy of the government is to meet the requirements of the private sector by reducing bureaucracy and providing an attractive infrastructure for business: “if you ask me what the biggest problem is, regrettably, it is bureaucracy. We know it, we acknowledge

Banking is the sector that suffered the biggest reputational damage, but also the one that received the largest foreign investment in the history of Cyprus. John Hourican, recipient of the Euromoney Banker of the Year Award for Excellence 2015, who revived and maintained on steady course what was three years ago a broken institution, explains that upon taking the reins of Bank of Cyprus in October 2013 he realized that a clear strategy had to be put into place and deliberate action

ing credibility to the bank and helping it attract 30 other investors. “You have to focus on the outcome you’re delivering”, John Hourican says.

Minister of Finance, Harris Georgiades, explains that the government made sure to implement the right policy mix and avoid following a typical austerity policy, which would have sent the country on a recession spiral: “we made it very clear to the local and international investor community that there would be no “We made it very clear to the local and international investor comnew taxes, that we would maintain munity that there would be no new taxes, that we would maintain a competitive tax regime, and any a competitive tax regime and any fiscal consolidation would target fiscal consolidation would target the spending side.” the spending side. We did cut pubHarris Georgiades lic spending, but we first identified Minister of Finance, Republic of Cyprus those areas where this could be done without negatively affecting the real it, we’re not shying away from it, and had to be taken: “my objective was economy.” we’re tackling it." to stabilize the situation and to start building confidence.”

It’s what he calls “a growth-friend- An encouraging sign that the strately fiscal consolidation” achieved gy works is the positive feedback re- And so he did. The summer of 2014 by being careful to not disrupt key ceived from the private sector. John found him on the road visiting over productive sectors which were not Hourican, CEO of Bank of Cyprus, 100 investors in London and New seriously affected by the downturn, speaks highly of the unrestricted ac- York, clarifying the fundamental diflike tourism, shipping, and in gen- cess to the Minister of Finance, high- ferences between Cyprus and Greece. eral the services industry. “We nur- lighting the symbiosis between the Cyprus, due to its colonial past, bentured everything that was healthy in government’s agenda and that of the efits from a strong legal system of the economy”, he adds. A key mea- private sector. He is keen on working British influence and a tax collection sure of the success is the public sec- with them to develop a sound vision process that works. The American tor reform. The ongoing overhaul which will lead to wealth creation for investor Wilbur Ross came onboard of the welfare system and the civil future generations. first and was instrumental in bring-

Being focused paid off. Fitch rating agency recently upgraded the LongTerm Issuer Default Rating of Bank of Cyprus to B- from CCC, with a stable outlook.

Architects of Revival 7 The thorny issue of the non-performing loans (currently at 60 percent) is the one test the banks still have to pass. The new legislation, including a new insolvency law, a foreclosures law, banking mediation and the sale of loans framework are instruments aimed at facilitating a viable restructuring process.

be able to bundle good loans along with bad ones, as a means of making their package more attractive to investment funds. The bill is instrumental as it allows banks to free their balance sheet of bad debt and fund the economic recovery, and sets the stage for the development of a national asset management agency.

Passing the necessary legislation through the Cypriot Parliament was not an easy feat. The bill regulating the sale of loans by banks to third parties came with its share of controversy and passed by a slim margin (26 to 25 votes) through the parliament. It affords debtors the right to bid to buy back their non-performing loan at a discount within 45 days of receiving the notification, but before it can be sold to third parties.

However, the debtor’s bid will not be binding for the bank, according to a last minute amendment. Banks will

Averof Neophytou, the head of the ruling Democratic Rally Party and a seasoned politician with over thirty years of experience in Cypriot politics, deserves full credit for the approval of the law. He took on the responsibility of negotiating a compromise over the aforementioned amendment and he succeeded.

He explains that the country’s greatest post-crisis achievement is international credibility. Cyprus is now perceived as a pillar for cooperation in the Eastern Mediterranean.

8 Bankers’ Square

CYPRUS 2016

CYPRUS 2016

Bankers’ Square Sustainability, ethical banking, and client engagement are the key words that define a completely overhauled banking system in Cyprus.

Banking professionals agree: at this point in time, the biggest opportunities for the banking sector in Cyprus lie in encouraging entrepreneurship and new business formation to foster economic growth, all the while moving towards a more ethical and sustainable way of doing business.

Bankers’ Square 9 ic bank not only in Cyprus, but in the region, that has not had any reliance on a Eurozone financing for its capitalization.”

George Appios CEO, Piraeus Bank Cyprus

Nicholas Hadjiyiannis CEO, Cooperative Central Bank Cyprus

Irena Georgiadou Chairwoman, Hellenic Bank

by implementing a strategy that brings value to our customers, educating them on responsible banking practices, all the while solidifying our base so that we are able to carry forward the tradition of a century-old bank.”

vices accordingly, with full transparency in terms of the costs and affordability.”

quarter of 2016 compared to the previous one, currently at 58 percent with a coverage ratio of 49 percent, in line with the European Union average. Its Chairwoman, Irena Georgiadou clarifies the context: “the bank has been able to weather the problems with the least of damages. It has not been bailed in, nor has it been bailed out. It’s actually the only system-

Ancoria Bank, the first bank to receive a license in Cyprus after the crisis and a testament to its founder’s faith in the potential of the banking system in the country, is committed to implementing ethical banking practices as well. Sievert Larsson, the Swedish national that has a thirty-year ex-

Ancoria Bank has one important advantage in the absence of non-performing loans (NPLs) on its balance sheet. The commitment to a new way of doing business across the system is laudable, but the thorny issue of the NPLs needs to be addressed. George Appios, CEO of Piraeus Bank, is optimistic and assesses that “the system has recovered and is now based on sound regulations. A portion of the NPLs was caused

The Cooperative Central Bank, one of the systemic banks that was able to successfully pass the stress tests after it received a bailout from the state three years ago, underwent a rebranding and positioned itself as a friendly bank, as explained by its CEO, Nicholas “We are strategically positioned to grow responsibly, to give new Hadjiyiannis. The bank is now an loans to help stimulate the economy, to attract foreign investors, active participant in the Europeand assist them in the financing of new projects.” an Cooperative Banks network, Irena Georgiadou in order to create a platform alChairwoman, Hellenic Bank lowing knowledge sharing on best practices and client engagement, perience of doing business in Cy- by the reduction in turnover and which will ultimately benefit the prus, founded the bank with the it is likely to be fixed through the communities they serve. objective of promoting the entre- country’s economic recovery.” Pipreneurial spirit in various sectors raeus Bank, recently acquired by Nicholas Hadjiyiannis describes as an important driving force to a Lebanese investor and a former the new culture he wishes to in- rebuild the economy. subsidiary of the Greek bank, was still: “it is important for us to do one of the few banks in Cyprus business in a simple and trans- Yiannis Loizou, CEO of Ancoria that maintained a good standing parent way, banking without the Bank, explains that “banking, in and high liquidity levels throughsmall letters, we say, which means our vision, means sitting down out the economic upheaval. no hidden charges and a compet- with the clients, building trust itive pricing. We have the largest and rewarding relationships by Hellenic Bank is successfully dealbranch network in Cyprus and understanding their needs and ing with the NPLs, having seen a we want to utilize it to its fullest then providing products and ser- decrease of 3 percent in the first

Back in March 2013, when the system was collapsing around it, the bank was attracting investors and it received the first post-crisis foreign direct investment in Cyprus. Two credible international institutions, the American-based hedge fund Third Point and Wargaming, a Belarussian gaming company, have fully recapitalized the bank “at a time when people here were just lining up at ATMs”, in the words of Irena Georgiadou.

She describes Hellenic Bank as an institution that was quick to realize that business couldn’t continue as usual if Cyprus was to return to growth and that was the main lesson learned from the crisis.

A net loan to deposit ratio of just 50 percent and nearly EUR 4 billion of excess liquidity on the balance sheet, currently held at the European Central Bank, ensure depositor confidence in Hellenic Bank and allow it to consider new investments. Irena Georgiadou explains: “we are strategically positioned to grow responsibly, to give new loans to help stimulate the economy, to attract foreign investors, and assist them in the financing of new projects.”

Fitch Ratings recently upgraded Hellenic Bank’s Long Term Issuer Default Rating to B from B- with a stable outlook, stating that 2015 was a turning point for the bank’s assets quality and expecting the new insolvency framework and the improvement in economic prospects for Cyprus to help sustainably restructure the NPLs.

10 Where the Opportunities Lie

CYPRUS 2016 SHIPPING

Where the Opportunities Lie DATA & RESEARCH CENTERS Encouraging foreign investment in information and communications technology is crucial for the government and with good reason, as it holds the key to diversifying the economy and reducing youth unemployment. With multiple local universities delivering highly skilled graduates and a high-speed global connectivity based on a network of eight fiber optic submarine cables, Cyprus is the ideal hub for data recovery centers and cloud computing set in a secure location, positioned strategically to cater to the troubled region of the Eastern Mediterranean and beyond. A sophisticated workforce is readily available as proven by the creation of the Microsoft Innovation Center at the European University Cyprus aiming at facilitating innovative research in technology and software solutions. The Institute of Genetic Research is another well-respected institution in Cyprus. It has produced the country’s biggest R&D success story to date, NIPD Genetics, which just last year started commercializing globally its non-invasive prenatal test, Veracity.

INSURANCE & FINANCIAL SERVICES In light of the recently discovered gas reserves in the Eastern Mediterranean, Cyprus has the potential to become a hub for specialist insurance companies that cater to the oil and gas industry, developing products and services tailored to the niche offshore market, benefiting from a mature insurance market infrastructure that throughout the years has delivered top level professionals.

Currently this service is provided by existing companies through brokers abroad. Cyprus is also aiming at becoming the destination of choice for the funds industry, with new legislation in place and service providers up to the task, well positioned to attract funds not just from the region, but from the rest of the word as well. The major opportunity in the sector consists of setting up a sizeable custodian bank able to cater to major funds with a considerable portfolio.

With a tradition in shipping going back thousands of years, Cyprus saw the first modern age shipping company established locally in 1972 and since then the sector has become the highest contributor to the country’s GDP. The third flag in Europe and the tenth globally, with a local ship management cluster catering to 25,000 third-party ships of 50 million gross tons, which represents approximately 20 percent of the global shipping operations, it is one of the industries that has proven most resilient in the face of global and regional crises due to its qualitative services, high standards of safety in operations, marine environment and air protection, and efficient coast operations. In 2010 Cyprus, as an open registry, received the approval of the European Commission on its revised, upgraded, and specialized shipping taxation system, currently based on a tonnage tax.

MEDICAL TOURISM Benefiting from a strategic location, with direct flights connecting the island to its neighboring countries, the rest of Europe, Middle East and Asia, Cyprus can become a meeting point for medical professionals coming from countries with a highly sophisticated medical industry, such as Israel, which is merely 30 minutes away by plane, to cater to customers arriving from the rest of world.

With an ideal climate, inland waters having proven curative properties, and a safe environment, Cyprus has received investment in new, state of the art medical training centers at the European University Cyprus, member of the Laureate International network, and the University of Nicosia. The latter offers internships in hospitals in the USA to its sixth year students and was recently included in Oman’s scholarship program dedicated to Omani nationals admitted to the school.

CYPRUS 2016

Where the Opportunities Lie 11

Cyprus’ tax efficient framework further enhanced by recent tax law amendments Corporate taxpayers Cyprus has an efficient corporate tax framework with resident companies subject to corporate income tax (CIT) on their worldwide taxable profits at the headline flat rate of 12,5%.

Other main direct taxes include Special Defence Contribution (SDC) and Capital Gains tax (CCT). These are limited in their scope of application however.

Cyprus tax resident companies may benefit from Cyprus’ extensive double taxation treaty network with over 50 countries worldwide as well as access to EU directives.

Highlights for corporate taxpayers •Full exemption for dividend income, subject to specific anti-avoidance provisions.

•Full exemption for gains earned on disposals of qualifying securities (such as shares) provided that the disposed-of company does not hold immovable property located in Cyprus.

•Full exemption for profits earned by foreign permanent establishments, subject to specific anti-avoidance provisions.

•A notional interest deduction (NID) on qualifying equity finance (refer below).

•An Intellectual Property (IP) Box achieving an effective CIT rate of a maximum 2,5% for qualifying IP incomes.

•Qualifying shipping profits may by election be taxed only under the Tonnage Tax System.

•Double tax relief is available unilaterally for foreign sourced income.

•No withholding taxes on payments out of Cyprus, with certain limited exceptions.

Recent corporate tax developments A notable enhancement to Cyprus’ corporate tax efficiency is the introduction of a notional interest deduction (NID)

on qualifying equity finance.

Paid-up share capital or share premium introduced as from 1 January 2015 (qualifying equity) are eligible for an annual NID. The annual NID is calculated as an interest rate on qualifying equity.

The applicable interest rate is the yield for 10 year government bonds of the country where the funds are employed plus a 3% premium (subject to a minimum rate of the yield for 10 year Cyprus government bonds plus 3%).

The NID is a deductible expense for CIT in a similar manner as actual interest expense, subject to an annual cap of 80% of taxable profits (as calculated prior to the NID). Certain anti-avoidance rules apply.

Personal taxpayers Cyprus has a favourable personal tax system providing many incentives to investors and highly paid employees. The Cyprus personal income tax (PIT) rates are progressive and reach a competitive top marginal tax rate of 35% (for taxable income over €60.000).

Other main direct taxes include SDC and CGT which are again limited in their scope of application.

Highlights for personal taxpayers •Full exemption for dividend and ‘passive’ interest income for resident but non-domiciled individuals (refer below).

•Full exemption for gains earned from disposals of qualifying titles (such as shares) provided that the disposed-of company does not hold immovable property located in Cyprus.

•50% exemption for remuneration earned from any employment exercised in Cyprus by an individual who was not previously a resident of Cyprus. It is available for a period of five years provided annual remuneration exceeds €100.000.

Marios Andreou Partner, Tax Advisory, PwC Cyprus

•Pensions from services outside Cyprus are taxed the flat rate of 5% unless the taxpayer elects for normal PIT. Recent personal tax developments Due to a recent tax law amendment individuals not domiciled in Cyprus (nondoms) are exempt from tax on local and foreign sourced dividend and ‘passive’ interest income.

Individuals whose domicile-of-origin is outside Cyprus (as per the Wills and Succession Law, WSL) are considered nondoms for tax purposes for at least the first 17 years of their Cyprus residence. Domicile-of-origin is acquired at birth and is the father’s domicile at that time (exceptionally it is the mother’s domicile).

Individuals whose domicile-of-origin is Cyprus may also qualify as non-doms for tax purposes, subject to conditions.

The combination of Cyprus’ favourable PIT law and the non-doms regime makes Cyprus a tax efficient place to invest, live and thus manage one’s global business.

This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. © 2015 PricewaterhouseCoopers Ltd. All rights reserved.

PwC refers to the Cyprus member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.

www.pwc.com.cy

We help you find your way in Cyprus We are here to support you by providing simple, flexible and effective solutions to set up your business and invest.

© 2015 PricewaterhouseCoopers Ltd. All rights reserved

12 Why Cyprus?

CYPRUS 2016

CYPRUS 2016

Why Cyprus? 13

Why Cyprus?

An attractive legal and tax framework is complemented to perfection by the unique natural attributes of a geostrategic location.

A majestic island strategically located in the Eastern Mediterranean Sea, Cyprus has long been a trading post, a peaceful meeting place and a safe haven for neighboring countries. It remains so today more than ever, in a troubled region.

Elea Golf Course, Cyprus

A growing economy, Cyprus aims at setting the record straight when it comes to its reputation as a regional hub for international business. It does so by enacting legislation incentivizing investment, such as the exemption on capital gains tax for property acquired until the end of 2016, abolishing the immovable property tax starting with January 1st 2017, residency and citizenship programs based on investment, as well as very favorable fiscal rules for corporations and non-domiciled individuals.

If there was ever an ideal climate conducive to work-life balance, Cyprus is it. The birth place of Aphrodite, the legendary goddess of love, boasting 57 Blue Flag beaches, exquisite 5-star resort hotels with some of the world’s best spas, opulent property developments with breathtaking views, a select choice of award-winning golf courses, and a state of the

art private terminal for executive jets, Cyprus is quickly becoming a high-end destination for leisure and business travelers. Due to its strategic position and non-domiciled rules, the island can host expatriate executives that manage regional businesses anywhere from Europe to Africa and the Middle East.

al acclaim. A close second is the friendly character of the locals, followed by the sense of security.

The foreign companies that have chosen Cyprus as a base for their operations have done so in order to take advantage of the overall business-friendly environment offering the whole package of attributes to consider when investing The exceptional quality of life is in a location: a favorable tax sys"The quality of the workforce in Cyprus and the ability to easily find skilled and adaptable graduates is certainly an advantage for this location."

Philip van Dalsen CEO, MTN Cyprus often mentioned in conversations with international executives residing there. The sea and the sun come first in any ranking, as Cyprus offers a unique combination of effortless sustainable living with eco-tourism and authentic gastronomy, of which the halloumi cheese has gained internation-

tem coupled with an enforceable rule of law and highly skilled, English-speaking workers, many of whom traditionally receive their degrees in the UK. Philip van Dalsen, CEO of MTN Cyprus, emphasizes that “the quality of the workforce in Cyprus and the ability to easily find skilled and adapt-

able graduates is certainly an advantage for this location.”

Elena Ambrosiadou CEO, IKOS

Olga Rybalkina CEO, FOREX TIME

The island has a fully digital network with reliable high speed international connectivity via eight fibre optic submarine cables including the world’s longest submarine telecommunications cable, which directly links South East Asia, the Middle East and the rest of Western Europe. Cyprus has a broadband coverage of 100 percent, all three telecommunications providers, Cyta, MTN and Primetel, offer the 4G technology at the costs that are some of the lowest in Europe. Moreover, Cyprus is implementing the objectives of the Digital Agenda for Europe, therefore by 2020 the fiber broadband network is expected to cover every private residence which has the potential of opening entire new sectors for business.

Cyprus was selected by ForexTime when the company’s Russian management decided to identify a European country from which they could target not only Europe but also the Gulf region. The island’s strategic location makes it easy to travel to the Gulf countries and to Asia, while still being close to the European countries. The appeal to the Russian business community is not only Cyprus’ location (Moscow can be reached with a direct 4-hour flight), but also traditional good relations between the two countries, as Cyprus used to have a double tax treaty with the former Soviet Union.

The setup is further improved by the government’s understanding that its role in the business world shouldn’t go beyond catering to companies’ demands of best practices and smart infrastructure.

Minister of Transport, Communication, and Works, Marios Demetriades clearly states this modus operandi as his main policy: “I believe that the government should IKOS has created a new distributnot be running businesses.” ed trading system, in order to proCyprus is therefore in a position vide better latency management, to facilitate geopolitical stability provide disaster recovery for inand development for the region, vestors, allow for global expanserving as a model of resilient sion. This was a superior structure institutions determined to learn for running a quantative managefrom past mistakes and ensure ment company and it also providsustainable growth, functioning ed the company with the flexibility ”as the Switzerland of the East- of location and service providers ern Mediterranean”, in the words and technology, as it became the of the Minister of Foreign Affairs, driver for further development of the IKOS investment system.

Ioannis Kasoulides.

It was important for ForexTime to understand the market first and foremost, whether it was able to cater to their needs, and the rigorous analysis they conducted initially showed, quite surprisingly at the time, a well-developed financial sector with a high level of corporate service providers, with an established know-how and technical expertise for the forex industry. The Cyprus Securities and Exchange Commission is a highly praised institution which has managed to turn Cyprus into a hub for the industry and currently oversees the 230 forex companies registered.

14 A Breath of Fresh Air

CYPRUS 2016

CYPRUS 2016

A Breath of Fresh Air

Europe, the Middle East and Asia.

NIPD Genetics has since raised EUR 5 million for the initial startup phase, has won research grants worth EUR 2 million from the European Union, and is currently engaged in a new round of funding which will allow it to grow at a faster rate in a sector that is expected to reach a 30 percent growth each year.

A new generation of thought leaders steps forward to put Cyprus on the map of innovation and shape a new cluster of R&D in the Eastern Mediterranean.

Advanced medical research and IT acumen might not be the first words that come to mind when thinking about an island in the Eastern Mediterranean, and yet, inspired perhaps by their close neighbors to the east, Cypriot innovators and entrepreneurs took a leaf out of the Israeli book and started putting increased emphasis on creating a successful startup culture locally.

The company is one of only two European companies in the field,

and one of the seven globally with 4 companies operating in USA and one in China.

The government does its part in supporting the innovation and technology initiatives by including the Research and Technology fund on the list of possible investment options for the applicants to the residence and citizenship program, who can choose to make an EUR 500,000 donation to the fund in the process of acquiring the Cypriot nationality.

What Cyprus is Not Double DNA Helix. Paulista/AdobeStock

port innovation, which ranks high ing also chose Cyprus as its base. on its agenda, together with identifying emerging trends that will Disruptive technology is making push the economy forward. The its way to mainstream business realization of such potential most practices all over the world and the likely came with the first sale of a Cypriot entrepreneurs have unCyprus-registered tech company, derstood that in this field everyFrom private sector executives to the Israeli-founded messaging thing is up for grabs. Major startpolitical leaders, supporting and app Viber, sold in February 2014 up events such as Startup Live and empowering youth and new ini“Technology entrepreneurship is still in embryonic stages in Cyprus tiatives has become a key talking but it brings the excitement of creating new areas of business harpoint over the past two years, nessing the highly educated local human capital.” which has not previously been the Evgenios Evgeniou, case.

CEO, PWC Cyprus to the Japanese company Rakuten Startup Weekend came to Cyprus, together with accelerators and for USD 900 million. incubators aimed at bridging the Viber was not the only interna- knowledge gap for the early stage tional innovative company to re- startup founder. Given the small alize the benefits of setting up in size of the island, the entrepreCyprus, a business-friendly envi- neurs are forced to think globally ronment, based on English com- from day one and that has proven mon law but with one fifth of costs particularly successful for startup of running a business in London companies that have reached the and strategically positioned at crucial milestone of becoming inthe crossroad of three continents. ternational players.

Valued at USD 1.5 billion and PWC Cyprus is one institution 150-million-global-users-strong, The most successful local examthat has made it a mission to sup- the Belarusian-founded Wargam- ple of research and innovation It is all part of a new-found understanding of the growth potential arising from technology, which, in the words of Evgenios Evgeniou, CEO of PWC Cyprus, “is still in embryonic stages in Cyprus but it brings the excitement of creating new areas of business harnessing the highly educated local human capital” that has been heavily affected by the crisis-induced unemployment.

A Breath of Fresh Air 15

making the difficult crossover to the global marketplace as a solid business venture is NIPD Genetics, a biotech company that commercializes a noninvasive method of prenatal testing. Developed initially at the Cyprus Institute of Neurology and Genetics, a major research center, the Veracity test is a screening procedure based on the analysis of the fetal DNA to identify possible genetic disorders like Down Syndrome, Edwards Syndrome, and Patau Syndrome and determine the sex of the child. It has a rate of above 99 percent accuracy and it can be performed starting with the tenth week of the pregnancy through a blood draw which eliminates the risk of the invasive procedure of amniocentesis which has a 1 percent risk of fetal loss.

A revolutionary method for which the patent was obtained in 2011, not only highly accurate but also very affordable, it received international acclaim and its penetration is quickly spreading through

Cyprus is Not part of Greece.

Although the majority of the population on the island is of Greek ethnicity, Cyprus is an independent country, with significantly different institutions and culture.

A former colony of the British Empire, Cyprus relies on a strong legal framework and a functioning tax collection system. After its 2013 crisis, the Cypriot banking sector has been completely ring fenced from the Greek one.

Cyprus is Not a money laundering destination.

The island has been accused numerous times of money laundering, despite a number of independent studies that came out stating the opposite. A final review conducted by Deloitte Italy found no such practices in Cyprus, but it concluded that Cyprus has too many complex company structures for its size and there was a need for regulation enhancement.

The directive regarding anti-money laundering practices came out in February 2014, a preemptive measure ahead of a similar directive which came into force in the European Union only recently.

Cyprus is Not in conflict.

The island rejoices a peaceful, safe, and stable environment. The division between the Greek community in the South and the Turkish community in the North is a consequence of the Turkish invasion in 1974 which in its turn was a result of a coup d’état by pro-nationalist Greek forces aiming to unite Cyprus and Greece, which was perceived as a threat by the Turkish minority living on the island. The Turkish occupation that followed the military invasion remains in place to this day, but the northern republic lacks international recognition. Recent years have seen a thawing of the relations between the two communities, with the opening of multiple crossing points and the beginning of negotiations to achieve a peaceful and mutually acceptable solution aiming to end the divide. The United Kingdom has two British Armed Forces bases in Cyprus in two sovereign parts of the islands, which it retained after the establishment of the Republic of Cyprus in 1960, in order to maintain a presence in a strategic location in the Eastern Mediterranean.

16 Energy as Catalyst

CYPRUS 2016

CYPRUS 2016

Energy as Catalyst

frastructure projects is not easy to achieve in the region and not justified for anything less than a gigantic gas discovery, hence cooperating for a joint utilization of the LNG facilities in Egypt or the storage facilities in Cyprus is clearly an interesting proposition.

The new gas discoveries bring important investment opportunities to the region and the potential for nations to come together in the Eastern Mediterranean.

The global context Consumption of liquefied natural gas (LNG) all over the world has been on an upward trend for several years and the surge in supply is expected to only increase in the future (by 45 percent between 2015 and 2021). New LNG projects are expected to add 175 billion cubic meters (bcm) to the market by 2020, coming mainly (90 percent of it) from Australia and the United States, an increase based on investment decisions taken before the gas price plunge. Increased supply can only bring the prices further down and the major exporters can only look towards smaller profits, as a significant cost would have to be added for liquefaction, transportation, and regasification.

A solution to maintaining higher margins and controlling variable costs is developing new gas fields in areas closer to the demand markets, which is why the new exploration contracts in the Eastern Mediterranean appeal to the world’s largest gas companies, such as BP, ExxonMobil, Statoil, ENI, Total, Qatar Petroleum, and Cairn.

Due to the proximity of large con-

Energy as Catalyst 17

Oil Rig and Tanker, Ship Side View. Muchmania/AdobeStock

sumers such as Europe, Turkey, and Egypt, the planned output should be easier to contract from the start. It is clear however that a major collaborative effort needs to be undertaken by the countries in the region in order to fully benefit from the potential of the new discoveries and find the most cost-effective and efficient transportation methods.

The European Union (EU) is specifically looking to diversify gas supplies and integrate its markets in the aftermath of the Russian invasion of Crimea and the consequent straining of the relation with Russia.

The International Energy Agency forecasts that, by 2020, Europe and China will have the highest LNG import demand, with an increase by 70 bcm for Europe and by 90 bcm for China, with Asia’s total import needs estimated to reach 400 bcm by 2040.

Importantly, significant arguments for a continued rise in gas

demand revolve around the environmental concerns. The United Nations Conference on climate change held in Paris in 2015 put forth a clear agenda for reducing the impact of fossil fuels on the environment, and LNG is the cleanest of all the other hydrocarbons. China’s example is the most telling, with natural gas demand doubling since 2010 in Beijing despite stagnation in electricity generation, which is in line with the government’s efforts to address the major pollution challenge.

The regional context Despite the projected growth, global LNG export infrastructure will not run at top capacity, which adds another component to any new investment decision. Two of such idle facilities are in Egypt.

Companies developing new gas fields in the Eastern Mediterranean and buyers alike will consider all options available regionally, which is why political and economic cooperation is key.

Markets such as Turkey and the

neighboring Greek islands emerge as the more obvious destinations for the gas produced in the region, both in terms of pricing – Turkey is purchasing gas with a minimum price of USD 10 per million British Thermal Units (mBTU), while average LNG prices fall below USD 7 per mBTU in Europe – and in terms of transportation options.

In the absence of pipelines, the need for LNG plants, floating LNG vessels and storage capacity becomes paramount. A couple of pipeline scenarios are currently being looked at, such as a pipeline connecting Israel and Cyprus to Greece – a common interest project according to the EU framework which refers to a special group of projects approved by the European Commission as eligible to receive funding for the study of their technical and financial feasibility – and a pipeline connecting Israel to Turkey.

Regardless of the chosen method of transportation, a single country investment in such major in-

Most countries in the Eastern Mediterranean have understood the urgency to increase dialogue and work together to take advantage of the gas trade opportunities. Multiple trilateral cooperation talks, which culminated with summit events hailed as historic, have taken place over the past year, between Cyprus, Israel and Greece, and Egypt, Greece and Cyprus, respectively. They are expected to be the starting point of a larger regional association mechanism and a unification of commercial interests.

At this point, only Israel and Cyprus would become exporters, as Egypt’s discovery of a potential 845 bcm in the Zohr field, the largest ever gas find in the region, will be used to satisfy internal demand. The need for both Cyprus and Israel to become exporters is greater than that of Egypt, as internal demand is not high enough

to justify the major investments needed to develop the fields. The ties between the two countries, traditionally peaceful and cordial, are currently further strengthened precisely by the export imperative for Israel, which has led it to thaw relations with Turkey. The latter could constitute a major market for the Israeli Leviathan (620 bcm) and Tamar (280 bcm) fields and the Cypriot Aphrodite (128 bcm) field.

A pipeline transporting gas to Turkey and perhaps further to Europe can only be constructed through the Cypriot exclusive economic zone (EEZ). Turkey is looking to diversify both its gas supply options and its energy mix.

A combined production of Israel and Cyprus could potentially cover half of Turkey’s demand, which is a highly appealing option.

However, in order for such developments to take place, a solution has to be found to the Cypriot problem, which is the expected outcome of the current talks between the Cypriot and Turkish communities, benefiting from momentum generated precisely by the commercial expectations surrounding gas.

TURKEY

GREECE CYPRUS Vasilikos Storage Tank Farm

Leviathan

Aphrodite

LEBANON Tamar

Hadera Deepwater LNG

Zohr Idku LNG

EEZ Boundaries Potential LNG/pipeline routes in the Eastern Mediterranean Potential pipeline routes to Europe Gas fields

EGYPT

Damietta LNG

GAZA

ISRAEL

Aqaba Free Trade Zone Jordan

18 Energy as Catalyst

CYPRUS 2016 parent to all the parties involved that a more stable region attracts bigger investments and healthier partnerships.

VTT Vasiliko Limited, Oil and Gas Tank Farm, Vasiliko Terminal, Cyprus

Cyprus as a potential energy hub As new models of flexible contractual structures will emerge, with buyers readjusting volumes, reselling surplus and using arbitrage to benefit from the best prices, Cyprus is uniquely positioned to become the regional gas trading hub, where buyers and sellers meet and establish their regional businesses, if such a market is both deregulated and incentivized by the local government.

Cyprus is the only EU member state in the region, benefiting from a sound legal framework as well as political and monetary stability.

So far energy development in the area has been mired by a number of issues, from the political crisis in Lebanon, the deep economic troubles of Greece, and the restrictions imposed on Gaza by Israel, to the negative impact that both the regulatory challenges of Israel (which saw a firm agreement for the development and sale of gas with Noble/Delek being put on hold for two years and subjected to changes and popular scrutiny) and the inability of the Egyptian authorities to meet their payment obligations to LNG suppliers have had on the reputation of doing business in the region. Egypt is however expected

to recover and it will bring gas to shore from its vast fields Zohr and the West Nile Delta (5,140 bcm) which will cover internal demand, allowing it to then resume exporting. Egypt can therefore share the role of a hub with Cyprus, due to its more developed infrastructure in terms of liquefaction capacities at the Damietta and Idku plants.

Such partnership can only be considered due to the excellent relations that Cyprus has cultivated throughout the years with its neighbors (aside from Turkey) and it is truly a testament to its diplomacy that has always been committed to achieving regional stability and a better communication for all the regional players. For the gas fields, there are already delimitations agreements in place with Lebanon, Israel and Egypt and a unitization framework agreement with Egypt.

Moreover, Cyprus can emerge as a knowledge-based economy for the oil and gas industry by creating a research and development, training and services cluster for the industry. Projects are under way to establish a regional network aimed at creating a set of rules for safety and environment protection, as it has become ap-

Cyprus has already been selected by a number of major oil and gas service providers as their operational hub in the Eastern Mediterranean. Major names such as Halliburton and Schlumberger have set up offices, but most notably the Dutch company Vitol chose to invest a whopping EUR 300 million in Cyprus after having examined all the other countries in the area.

They found that Cyprus was strategically positioned for ships both entering and exiting the Suez Canal, it had a proper institutional framework to cater to their needs, highly trained, English speaking professionals, no security concerns and deep water proximity to shore. With little over one year in operation, the storage terminal is already running at its full capacity of 544,000 cubic meters of white products.

This type of infrastructure investment is crucial for Cyprus, as it does not only inject money into the economy, but it brings knowhow and technology in a market that still has a long way to go before becoming a household name for the energy business. However, the conditions are there and the current pro-market government is receptive and actively involved in catering to the needs of international investors, while recognizing their challenges and working to overcome them. In terms of positioning for the coming years, it is the ideal market for a company wishing to get involved in the early stages with patient capital and start reaping the benefits of a nascent oil and gas industry by the end of the decade.

Acknowledgements

We are grateful for the collaboration of: Yiorgos Lakkotrypis, Minister of Energy, Commerce, Industry and Tourism; Harris Georgiades, Minister of Finance; Ioannis Kasoulides, Minister of Foreign Affairs; Marios Demetriades, Minister of Transport, Communications and Works; Averof Neophytou, President, Democratic Rally Party; Thomas Kazakos, Director General, Cyprus Shipping Chamber; Constantinos Petrides, Under-secretary to the President of the Republic, Evgenios Evgeniou, CEO, PWC Cyprus, John Hourican, CEO, Bank of Cyprus; Irena Georgiadou, Chairwoman, Hellenic Bank; Nicholas Hadjiyiannis, CEO, Cooperative Central Bank; George Appios, CEO, Piraeus Bank Cyprus; Yiannis Loizou, CEO, Ancoria Bank; Maurice Sehnaoui, Chairman, USB Bank Cyprus; Charis Papacharalambous, former Director General, Cyprus Investment Promotion Agency; Artemis Pantelidou, General Manager, Eurolife Cyprus; Stephie Dracos, Director General, Insurance Association of Cyprus; Evangelos Anastasiades, CEO, Altius Insurance; Constantinos Dekatris, Group Managing Director, Commercial General Insurance; Andreas Georgallis, CEO, Elements Capital Partners, Savvas Liasis, Partner, Elements Capital Partners; Elena Ambrosiadou, CEO, IKOS; Olga Rybalkina, CEO, ForexTime; Eleni Vassiliadou, Chairwoman, Natural Gas Public Company; Toula Onoufriou, President, Cyprus Hydrocarbons Company; George Papanastasiou, Director General, VTT Vasiliko; Marios Lanitis, Executive Vice Chairman, Lanitis Group of Companies; Christos Mouskis, Executive Chairman; George Leptos, Vice President, Cyprus Chamber of Commerce and Industry; Nicholas Tofarides, Managing Director, TOFARCO; Pavlos Photiades, Managing Director, Photos Photiades Group; Eliades Eliade, President, Pafilia Group, Andreas Kaisis, Executive Chairman, Business Global Expo Online; Stelios Kiliaris, Managing Director, Fortune Health Resorts; George Misirlis, CEO, Aphrodite Hills Resort; Angelos Loizou, Chairman, Cyprus Tourism Organization; Andreas Demetriades, President, Association of Large Investment Projects; Theo Hadjiyannis, Director General, The Cyprus Institute of Marketing; Christoforos Hadjikyprianou, CEO, European University of Cyprus; George Boustras, Dean, Ioannis Gregoriou School of Business Administration, European University of Cyprus; Philippos Patsalis, CEO, NIPD Genetics, Costas Anastassiades, COO, NIPD Genetics; Philip van Dalsen, CEO, MTN Cyprus; George Mavros, Managing Director, Skylink Service; Stephanos Stephou, General Manager, Fameline Oil&Gas; Andrew Michael, CEO, Adsvice; Rebecca Theodorou, Head of International Client Hub, Action Global Communications; Helen Ayres, Account Manager, Action Global Communications; Michalis Simopoulos, Senior Account Manager, Action Global Communications.

We are especially thankful to Anastasia Adamidou, Press and Information Officer, Ministry of Interior, Republic of Cyprus, and to the staff of the aforementioned institutions, for their constant diligence and availability.

Š2016 Business Intelligence Unit

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