Issue 19 by Kevi Chishios

ISSUE 19 OCTOBER 2012 PRICE €6.95 POWERED BY:

THE INTERNATIONAL INVESTMENT, FINANCE & PROFESSIONAL SERVICES MAGAZINE OF CYPRUS

KEEPING THE

FAITH Financial Services Professionals and Foreign Investors remain positive about Cyprus + EVAN GAVAS, YANNIS MATSIS, DAVID WESSEL BANKING UNION Reform or Redecorating?

INTERVIEWS

DEMETRIS NICOLAOU CHARIS PAPACHARALAMBOUS JULIA PAPAGEORGIOU

RICE TO RICHES Investing in Agriculture

PLUS:

MONEY / BUSINESS ECONOMY TAX & LEGAL LIFESTYLE

More than just a holiday destination with pristine white beaches and 300 days of sunshine, 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 member 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.

“Columbia’s growth and expansion over the years is attributed to the uniqueness of Cyprus; being the island’s strategic position at the crossroads of three continents, its comprehensive legal framework, double tax treaties regime,

communication

system,

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

the

excellent

infrastructure,

business

climate,

telecommunications 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 decide to move its regional offices to Cyprus in the 80’s.

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.

Cyprus Investment Promotion Agency Tel + 357 22 441133 Fax + 357 22 441134 www.cipa.org.cy info@cipa.org.cy

gold cover me diafimiseis.indd 2

Gradually, NCR managed to expand the office in Cyprus to cover also all the African Countries.” Managing Director of NCR Cyprus, Mr. George Flouros

The Ministry of Commerce, Industry and Tourism Tel + 357 22 867100 Fax + 357 22 375120 www.mcit.gov.cy/ts perm.sec@mcit.gov.cy

01/08/2012 09:29

©2012 KPMG Limited, a Cyprus limited liability company and member of the KPMG network of independent member firms affiliated with KPMG International Cooperative (”KPMG International”), a Swiss entity. All rights reserved.

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issue 19 october 2012

10 EDITORIAL 12 UP FRONT 18 FIVE MINUTES WITH…

KEEPING THE

FAITH

Financial services professionals and foreign investors remain positive about Cyprus GRASPING THE OPPORTUNITY TO DRIVE JOBS AND GROWTHPROFESSIONAL SERVICES IN CYPRUS 34

SUSTAINABLE TOURISM by Petros Mavros

TUITION FEE WARS by Constantinos Charalambous 58 ARE THE GREEKS EUROPEANS? by Peter Economides

50 54 | THINGS CAN ONLY GET BETTER

The basics of a Europe-wide Banking Union have yet to be ironed out

The outgoing President of the CFA Society of Cyprus is optimistic about the future of Cyprus and the financial services sector

40 | PROMOTING CYPRUS AS AN INVESTMENT DESTINATION Interview with Charis Papacharalambous, Director-General of the Cyprus Investment Promotion Agency (CIPA)

36 | REFORM OR REDECORATING?

50 | COMPETING JURISDICTIONS

LEARNING FROM OTHERS by Andreas Neocleous

FEATURE

+ OPINION

60 | KNOCKING ON EVAN’S DOOR Interview with Evan Gavas, Country Manager of Barclays in Cyprus

64 | MAKING A DIFFERENCE

There is a growing demand for recognised Financial Services Industry: Is Cyprus Trailing professional qualifications in PR and its European Peer Group? Communication

68 {money} 72 {business} 78 {economy} 81 {tax&legal} 86 {lifestyle}

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

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02/10/2012 09:19

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EDITORIAL

Outside Looking In PUBLISHED BY IMH ISSN 1986 - 3543

he Cypriots have a long tradition of believing that (a) they are unique in the world and (b) outsiders cannot understand them or their situation. Perhaps the most glaring example of this is the way that after almost 40 years of UN-sponsored peace talks, Greek-Cypriot politicians and the media are still accusing the UN Secretary-General’s Special Advisor of bias towards the Turkish Cypriots (Alexander Downer is only the latest in a long line to come under fire). They blast the Secretary-General himself for allegedly failing to see the truth behind the island’s situation and they hardly dare refer to the UN’s plan for a solution that they rejected outright in 2004. And yet, Cyprus supposedly wants the UN to help resolve its longstanding division. To an outsider, this is absurd. The same impression has been given by the way the government has requested a bailout of its two main commercial banks and the economy while behaving as if it has all the time in the world and even suggesting that it may not agree to the terms imposed by the Troika anyway. Eugene Ionesco would have loved this place. In recent years, Cyprus has made considerable progress in its efforts to consolidate its reputation as a well-organised, trustworthy and sophisticated regional centre for professional and financial services. But is the country’s self-image the one that the ‘uncomprehending foreigners’ see? The answer would seem to be yes and no. Thanks, to a large extent, to an efficient, modern, well-organised private sector in which the providers of professional services are, in the main, companies manned by highly-qualified, talented people, Cyprus has succeeded in creating a sector that now contributes more to the economy than tourism. However, it has to deal with an extraordinary lack of evident state interest in the sector and, even worse, with a civil service that, in some cases, appears to be actually fighting the whole idea and for which the initials PPP (Public-Private Partnership) are meaningless. For this month’s cover story, we try to discover what the all-important foreign investors and their advisors/service providers really think of Cyprus. The fact that they are here is positive but does this mean that they are here to stay? Are they not concerned about operating from a country whose banking system and economy are in disarray? Is the island really a genuine competitor with jurisdictions such as Malta and Luxembourg? The experts are almost unanimous in their view that investors are sticking with Cyprus for the time being. And unlike the foreign press or observers in other countries who, in Cypriot eyes, always get it wrong when it comes to understanding the decades-old ‘Cyprus Problem’, the people who have made this place their base or business headquarters are very aware of the fact that the island is a victim of the global financial crisis just like every other Western nation and that, were it not for Greece, the two main Cypriot commercial banks would never have found themselves in their current predicament. That said, they welcome the intervention of the Troika and their measures as possibly the only way to ensure that longstanding but politically unpopular structural reforms are implemented. They are extremely critical of the civil service and its antiquated mentality, comparing it to the investor-friendly practices in rival jurisdictions which have wisely ditched bureaucracy and made it easier for foreigners to do business (a point expanded further by Yannis Matsis (See page 50). It is reassuring that, at a time of difficulty for the economy of Cyprus and many of its EU partners, the view from the outside is not so different from that expressed by the experts who are working within this important – and growing – sector. Indeed, when it comes to economic issues, the foreigners understand Cyprus only too well. They know how to resolve the problems provided that their measures are followed in good faith. If a solution to the island’s division were a prerequisite for a multi-billion loan, there is every chance that it would be much closer to implementation than it is today. As Greece has shown, when the financial situation is critical, the politicians will agree to what was once unthinkable. It is to be hoped that those in power will listen to the views of the people who know the professional services sector inside out and will do what is needed, not only to save the economy but to let Cyprus fulfil its true potential.

John Vickers, Chief Editor john@imh.com.cy

MANAGING DIRECTOR:

George Michail

GENERAL MANAGER:

Daphne Roditou Tang

MEDIA MANAGER: Elena Leontiou

EDITOR-IN-CHIEF:

John Vickers

SENIOR EDITOR:

Kyproula Papachristodoulou CONTRIBUTING EDITORS:

Antonis Antoniou, Stella Mourettou, Maria Pilidou CONTRIBUTORS TO THIS ISSUE:

Dr. Constantinos Charalambous, Chris Damianou, Andrey Dashin, Peter Economides, Stacey Fink, Nathalie Kyrou, Petros Mavros, Fiona Mullen, Andreas Neocleous, Steven Newbery, Chloe Panayides, Andrey Tereshenko, Dr. George Theocharides ART DIRECTION:

Anna Theodosiou SENIOR DESIGNER: Maria Kyriakou PHOTOGRAPHY:

Olesia Constantinou, Jo Michaelides MARKETING EXECUTIVE:

Kevi Chishios

SALES & BUSINESS DEVELOPMENT EXECUTIVE:

Christos Kyriakides

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 22679820 e-mail: gold@imh.com.cy website: www.goldmagazine.com.cy subscriptions: goldsubscriptions@imh.com.cy

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

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02/10/2012 09:20

Gold September 2012 .pdf

CMY

9/27/12

9:35 AM

UP FRONT

Cypriots launch Innovative tourism app

NEW ECB HQ COSTS €200M MORE THAN PLANNED

t was revealed last month that the spectacular new twin-tower skyscraper building housing the European Central Bank in Frankfurt will cost €200 million more than originally estimated. In 2005 the cost

was put at €850 million but as ECB executive board member Joerg Asmussen said in a speech during the building’s “topping out” ceremony on September 20, the final costs could amount to €1.2 million. The 185-metre-tall building is scheduled to be

ready by mid-2014. The highrise section will house the majority of the workstations while the complex includes the Grossmarkthalle (hosting the conference area and a visitors’ centre), the entrance building and various ancillary buildings.

wo Cypriot owned companies – Avantless and Cocoon Creations – recently launched a genuine first for Cyprus and Europe in the shape of the first collaborative marketing tool for travellers. Pafos Treasure Hunt is an app, which comes free via your iPhone/iPad (from the middle of this month it will also be available on Android) and gives visitors to the town a tour of the main tourist attractions in three languages (English, Russian, Greek). Along with tourist attractions, users can check into other “featured locations” – shops, cafeterias, restaurants, etc. – offering a gift or discount when they visit. For the local market, this is a perfect and much-needed example of how the public and private sector can work together to stimulate the local tourism industry. The app delivers fresh content to visitors which draws them into learning more about the places of interest. It is user-friendly and, for families and friends, provides a ‘game’ element. The Pafos app will soon be followed by a similar one for other towns in Cyprus before bringing other European towns and cities alive via a hand-held device. For more information: www.pafostreasurehunt.com Download the free app from the iTunes App Store.

6TH CYPRUS-RUSSIA GALA

G Elena Paparizou

up_front.indd 12

reek singing star Helena Paparizou topped the bill at the 6th CyprusRussia Gala at the Presidential Palace on

September 8. The event, held under the patronage of First Lady Elsie Christofias, was attended by politicians, businessmen and other personalities

from Cyprus and Russia. Once again, all proceeds were donated to the annual Radiomarathon charity fundraiser. This year’s CyprusRussia Gala was

sponsored by wargaming.net and supported by the Embassy of the Russian Federation and the Ministry of Education and Culture of Cyprus.

28/09/2012 13:46

The Marshall Islands The Marshall Islands TheCorporate Marshall Islands Registry Registry The Marshall Islands TheCorporate Marshall Islands Corporate Registry Corporate Corporate Registry Registry

Business Book of the Year Shortlist

he shortlist for the 2012 Financial Times and Goldman Sachs Business Book of the Year Award was announced last month. The £30,000 prize will go to the book

that is judged to have provided the most compelling and enjoyable insight into modern business issues, with £10,000 awarded to each runner-up. The winner will be announced on November 1 at a ceremony in New York.

The six finalists are: PRIVATE EMPIRE BY STEVE COLL

THE HOUR BETWEEN DOG AND WOLF BY

STEVE JOBS: THE EXCLUSIVE BIOGRAPHY BY

JOHN COATES,

WHY NATIONS FAIL BY JAMES

ROBINSON AND DARON ACEMOGLU

©Corbis ©Corbis ©Corbis ©Corbis ©Corbis

WALTER ISAACSON

WHAT MONEY CAN’T BUY BY MICHAEL SANDEL

VOLKER: THE TRIUMPH OF PERSISTENCE BY WILLIAM SILBER.

PSB celebrates 10 years in Cyprus

JSC Promsvyazbank (PSB) recently celebrated the 10th anniversary of its Cyprus Branch (PSB-Cyprus). Since opening in 2002, PSBCyprus has continued

up_front.indd 13

to develop and expand its business. It is one of the largest branches of PSB and one of the leading international banks in Cyprus. PSB is a privately-owned Russian commercial bank with a nationwide branch network and representative offices in China, India, Ukraine, and Kazakhstan. Founded in 1995, PSB currently ranks 11th by assets among Russian banks and is the 3rd largest privatelyowned bank in the country.

The The leading leading jurisdiction jurisdiction for for The leading jurisdiction for leading jurisdiction •The Management, The leading jurisdiction for for • Asset Asset Management, • Asset Management, Asset ••• Vessel Ownership Asset Management, VesselManagement, Ownership • Vessel Ownership Vessel Ownership ••• Real/Intellectual Vessel Ownership Real/Intellectual • Property Real/Intellectual Holdings Property Holdings •• Property Real/Intellectual Real/Intellectual Holdings Property Holdings •• Initial Offerings/ Property Holdings Initial Public Public Offerings/ • Publicly Initial Public Offerings/ Traded Companies Publicly Traded Companies •• Initial Offerings/ Initial Public Public Offerings/ Publicly Traded Companies Publicly Traded Publicly Traded Companies Companies

IRI Hellas Ltd. IRI Hellas Ltd. IRI Hellas Ltd. inIRI affiliation with the Marshall Hellas in affiliation with theLtd. Marshall Islands Islands IRI Hellas in affiliation theLtd. Marshall Islands Maritime & with Corporate Administrators Maritime & with Corporate Administrators in affiliation the Marshall Islands

Maritime & Corporate Administrators affiliation the Marshall Islands tel: 4294 404 piraeus@register-iri.com tel: +30 +30 210 210in 4294 404&||with piraeus@register-iri.com Maritime Corporate Administrators tel: +30 210 4294 404 | piraeus@register-iri.com Maritime & Corporate Administrators www.register-iri.com www.register-iri.com tel: tel: +30 +30 210 210 4294 4294 404 404 | | piraeus@register-iri.com piraeus@register-iri.com www.register-iri.com www.register-iri.com www.register-iri.com 28/09/2012 13:47

UP FRONT

Evan Gavas (Country Director, Barclays) & Tonia Ioannou

African band Belther of Voices

MAD4Africa volunteers Deborah Page & Sergej Lysionok

BARCLAYS MAD4AFRICA EVENT RAISES OVER €8,000

Gala Dinner held last month at the Four Seasons Hotel in Limassol and hosted by Evan Gavas (Barclays), Alexis Tsielepis (Costas Tsielepis Accountants) and Deborah Page (Barclays Manager and founder member of MAD4Africa) raised more than €8,000 with the help of Barclays, FX Pro, Alpari, Starom Property Developers, Demetris Serghides, Costas

Tsielepis & Co Ltd, Sovereign Trust, Hellenic Bank, Fileminders and individual supporters of MAD4Africa. So far the Barclays Team has raised over €25,000 from various fundraising events and Barclays Bank has matched all funding and provided another €25,000 to take the total to over €50,000. For some time, Barclays has been working in partnership with the registered charity MAD4Africa on a project to build a school for approximately 100 orphaned and vulnerable children in Uganda. The day after the latest fundraising event, 15 Barclays employees and two members of the Four Seasons staff flew to Uganda to participate Lunyenya – the village houses are scattered around this rural area.

in building three classrooms, a store and an office, as well as assisting with a health programme. The project provides education for orphaned and vulnerable children while funds raised will also pay for the purchase and installation of a water tank at the school, allowing communal access to clean water for the whole village. During last month’s trip, the volunteer team handed out soap, towels, toothbrushes and toothpaste, part of encouraging good hygiene from an early age. As health and hygiene is an important factor to both MAD4Africa and the Barclays Team, local children have been vaccinated and

medication has been provided provided to the village doctor including antibiotics, penicillin, de-worming tablets, skin infection cream, diarrhoea treatment, vitamins and – importantly – malaria treatment drugs. MAD4Africa is a small registered charity started in 2008 focusing on education and health projects that are sustainable in East Africa. All funds raised go directly to projects in Africa. The team comprises unpaid volunteers who pay for their own flights, accommodation and food. For further information, contact Deborah Page (deborah.j.page@ barclays.com) or visit www. mad4africa.org.uk Deborah Page & Martin Gardner (Barclays Volunteers) weigh babies before they are vaccinated.

The Barclays & Four Seasons team of volunteers in front of the newly-built school (left).

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

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Gold Magazine - September 2012 Ad.pdf 1 31-Aug-12 11:14:51 AM

CMY

UP FRONT

THE SAFEST BANKS IN

WESTERN EUROPE

lobal Finance magazine (GFmag. com) has named the Safest Banks in Western Europe in an exclusive survey published in its October 2012 issue. The winners were selected

through an evaluation of long-term credit ratings – from Moody’s, Standard & Poor’s and Fitch – and total assets of the 500 largest banks worldwide. German banks performed strongly at the top of the list this year, taking three of the top five and four of the top

eight positions. The Netherlands also performed well, with three banks in the top ten. The full report evaluates the safest banks in Western Europe, Central and Eastern Europe, Asia, the Middle East, North America, Latin America and Australasia. “More than ever, customers

around the world are viewing long-term creditworthiness as the key feature of the banks with which they do business,” says Joseph D. Giarraputo, publisher of Global Finance. “These banks have solid capital positions and superior risk management capabilities.”

TOP 10 1. 2.

KFW (GERMANY)

BANK NEDERLANDSE GEMEENTEN (BNG) (NETHERLANDS)

S ND LA ER TH NE

3. 4. 5.

ZÜRCHER KANTONALBANK (SWITZERLAND) ANDWIRTSCHAFTLICHE L RENTENBANK (GERMANY) ANDESKREDITBANK BADENL WÜRTTEMBERG - FÖRDERBANK (L-BANK) (GERMANY)

EDERLANSE N WATERSCHAPSBANK (NETHERLANDS)

8. 9. 10.

NRW.BANK (GERMANY)

BANQUE ET CAISSE D’EPARGNE DE L’ETAT (LUXEMBOURG)

LUXEMBOURG

FRANCE SW ITZ ER LA ND

AISSE DES DEPOTS C ET CONSIGNATIONS (CDC) (FRANCE)

ANY GERM

ABOBANK GROUP R (NETHERLANDS)

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

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INTERVIEW

five minutes with... David Wessel’s bestseller.

“Many European leaders don’t have the political skill or courage to convince their people what needs to happen if Europe is to prosper”

David Wessel

Economics Editor at The Wall Street Journal

n your 2009 book In Fed We Trust, you say that Federal Reserve Chairman Ben Bernanke adopted a “whatever it takes” approach in order to avert another crisis. Would you say that this is also the case with the ECB? Although the European Central Bank did move aggressively in the early stages of the 2007-2009 financial crisis, Jean-Claude Trichet’s approach often seemed – at least from my vantage point – to be to withhold monetary aid to try to force European politicians to act. Mr. Bernanke, in contrast, seemed to think his job was to act when the politicians were paralyzed, for the good of the overall economy. Mario Draghi, it seems to me, has moved in Mr. Bernanke’s direction on this front. Cognizant of the politics in Germany and the need to avoid anything that would provoke Germany into abandoning the euro, he has come closer than Mr. Trichet to declaring that he’ll do “whatever it takes” to save it. The two central banks have different mandates, of course, and they confront very different economic and political problems. But Mr. Draghi and Mr. Bernanke appear to be closer in their “whatever it takes” approach than Mr. Trichet was. Europe’s leaders have been criticized for showing a lack of determination which

has led the European economy to the edge of the abyss. What is your view? I don’t know if it’s a lack of determination. Many European leaders seem determined enough. It’s just that they don’t have the political skill or courage to convince their people what needs to happen if Europe is to prosper. Leadership sometimes requires delivering a message to the voters that they don’t want to hear, and convincing them that the unpopular is in their best interest – even at the risk of losing the next election. There’s some of that in Europe, but not enough. I worry a great deal, as any caring human person would, about the pain inflicted on the people of Greece, Portugal, Ireland, Spain and Italy. Sure, some of this is the result of past sins, but 25% unemployment is awful. And I worry that Europe simply puts a Band-Aid on problems long enough to get to the next summit, a strategy that is very risky. How bright is the eurozone’s future? I would call it cloudy. The euro was, after all, a political project. The founders were determined to prevent another war between France and Germany and they have succeeded. It was not only, perhaps not even primarily, an economic project. I’m impressed by all the effort underway to save the euro at

the ECB, in Brussels, in the governments in Lisbon and Rome and Madrid. In Fed We Trust is a bestseller that has been read and admired by economists and non-economists, one that has unveiled many secrets of an organisation as well-protected and sealed as the Fed. How did you gather all those little and big secrets? Well, first of all, thank you very much for those kind words. I have been covering the Federal Reserve since about 1987, and I had a fair amount of credibility and trust built up over time. I think my sources at the Fed knew that journalists and historians would be writing about this episode for years to come, and they saw some value in being reasonably open to a reporter whom they knew and who understood some of the history and economics of central banking. I also benefited from a major error in foresight. I thought the rescue of Bear Stearns in early 2008 was the big event so I began working on the book in the middle of 2008. I had no idea that the big events – Lehman, AIG, Fannie Mae, Freddie Mac, etc. – were still to come. That made the project challenging but it also meant that I was well along in my reporting, talking frequently with officials at the Fed and elsewhere, when the really traumatic stuff happened.

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

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03/10/2012 11:08

COVER STORY

KEEPING THE

FAITH Financial Services Professionals and Foreign Investors remain positive about Cyprus By John Vickers

s the government of Cyprus finally starts crucial negotiations with the Troika all eyes are – naturally – on the measures that are most likely to affect people’s pockets and standard of living. Unfortunately, the broader internal debate has hardly touched upon the professional services sector, in spite of the fact that it is the only area of the economy that has continued to grow over the past three years and will soon be making the largest contribution to the country’s GDP of any sector. What economist Fiona Mullen refers to as “the quiet revolution” in the professional services sector (see her article on page 34) is of enormous importance to the economy and it is clear that successive governments have failed to give it the attention and financial support it deserves. So what kind of image does the island have among the people running the thousands of Cyprus-based international companies? How comfortable are the foreign investors and High Net Worth Individuals who have chosen Cyprus as the preferred base for their business activities and investment strategies? In an effort to find out the extent of how the country’s current economic difficulties and the banking crisis have affected them, we asked the views of leading firms – lawyers, accountants, fiduciary service providers and consultants – that deal to a large extent with foreign clients. As you will see on the following pages, a fairly clear picture emerges and, for now, those working in this influential sector remain

optimistic that the island’s standing and reputation as a professional/financial services centre will be left unscathed, provided that certain measures are taken, either voluntarily or with the generally welcome intervention of the Troika. “Foreign investors do not fully comprehend how bad the situation is and the sooner an agreement is reached with the Troika the better,” says Ioannis Demetriades. If there is a single key advantage that international companies see in Cyprus, it is the low (10%) corporate tax rate and the experts whose views we sought are unanimous in their conviction that this should not be changed at all costs. “We must avoid even the mention of touching the tax system,” says Andreas Athinodorou. Investors hate uncertainty, wherever it may come from and, as Elias Neocleous notes, “They want to be able to make investment decisions knowing what tax and other rules will apply, so that they can budget reliably.” Christis Christoforou agrees: “Prolonged indecisiveness and uncertainty is damaging the image of Cyprus which, unfortunately, is worsening”. Uncertainty as to what the government and the Troika will agree on under the terms of the bailout is also affecting investors and while there has not been a notable flight of capital, there is concern. “We desperately need to devote our full attention to resolving our banking crisis,” says Peter G. Economides, a view echoed by Nicos Nicolaides: “There is no doubt that our standing as a regional profes-

sional and financial services centre has been tarnished by the crisis, especially the problems of our banking sector which was something that we used to brag about.” Not all the experts share the same view about the extent to which the country’s image has been negatively affected by the banking crisis and the requested bailout. Phivi Tramountanelli is reasonably optimistic, saying “Foreign investors used to have a very positive image of Cyprus and they still do overall”, as is George Pamboridis (“Cyprus is viewed by professionals globally as a secure and reputable jurisdiction”) while George Savvides believes that foreign investors regard the island as being “short of the proper mentality and a long-term vision” and Savvas Charalambous notes that “the lack of big banks on the island has not helped us”. The message that emerges from our survey is that foreign investors are keeping the faith with Cyprus – for now. The Troikaimposed measures are welcomed since they are expected to correct longstanding problems that the island’s politicians have been unwilling to touch so as not to appear unpopular. And if the public sector is aligned better with the admittedly successful private sector, and legislation is passed to make Cyprus an attractive place for the Funds industry in particular to develop, the country will emerge from its present difficulties as stronger and more competitive jurisdiction. But the present climate of uncertainty needs to be tackled urgently. Failing this, Cyprus will quickly destroy its own competitive advantages.

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

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t u o b a l e e f s t n e li c r u 1. How do yo d n a ic m o n o c e t n e s e the pr ? s u r p y C in e t a m li c t investmen Andreas Athinodorou: Our clients are very observant of what is going on here. They are very cautious with their transactions. If, for example, they need to flow money through Cyprus for a transaction, they will time it in such a way so that the money does not stay in Cyprus for too long. Clients are very sensitive to media reports so if something is blown out of proportion, they can overreact!

➜

SAVVAS CHARALAMBOUS: I have always maintained that Cyprus’s competitive edge lies in its treatment of dividends, capital gain, inheritance and its double tax treaties. The problem with the current climate is that clients using Cyprus are reluctant to keep considerable funds here, mainly because there just isn’t the infrastructure to cater for them. The banks here are small and now they are risky and expensive in comparison with those elsewhere.

Christis Christoforou: Our International Business clients are very concerned but, despite the uncertainty, they still show faith in Cyprus. Ioannis Demetriades: About 80% of our clients are overseas corporate clients who set up a Cyprus company for their non-Cyprus operations. Very few have invested or wish to invest in Cyprus and, for this reason, they are especially concerned by the present economic climate here. PETER G. ECONOMIDES: Although Cyprus and its economy are now deep in the whirlpool of the global economic crisis, the local corporate services sector is still holding strong. Unfor-

tunately, the crisis has serious implications for clients all over the world and this has resulted in an unavoidable decrease in investments. Our clients are worried about the stability of our corporate tax system and the

robustness of our banking system in particular. We have been appealing to our clients to keep their faith in our jurisdiction by presenting them with all possible arguments in favour of our tax and banking systems.

Elias Neocleous: Our clients’ first concern is the security of their investments. From my conversations with them, I believe that most are realistic about the current economic situation. They recognise that the crisis is a global one and that Cyprus is no more risky than most places in today’s uncertain world. However, this is hardly a vote of confidence. If we had dealt with the public sector deficit years ago, Cyprus would now be seen as a safe harbour and would be attracting investment from all over the world, rather than struggling to hold onto it. Their biggest worry at the moment is uncertainty, which is something business people greatly dislike. They want to be able to make investment decisions knowing what tax and other rules will apply, so that they can budget reliably. In particular, the public sector deficit needs to be dealt with, so that they can feel confident that they are dealing with a stable economy, not one that will lurch from crisis to crisis.

Elias Neocleous is an Advocate – Partner, Head of the Corporate and Commercial Department.

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GEORGE PAMBORIDIS: Foreign investors using Cyprus as a jurisdiction, through which they can structure or channel their investments in third countries, continue to do so. However, there has been a significant decline in the number of clients who opt to keep their assets (mainly deposits) on the island. At the same time, recent policies on the granting of permanent residence to third country nationals has attracted some new clients from Asia. In addition to this, the Syrian crisis didn’t hurt us. PHIVI TRAMOUNTANELLI: Some of our clients are expressing expected concern over the current situation in Cyprus. However other clients have chosen Cyprus as a jurisdiction to make their investments despite the situation. NICOS NICOLAIDES: Inevitably everyone who lives and works in Cyprus, including those who use Cyprus for their business operations (i.e. International Business Companies), are very worried about the present climate.

George Savvides: They are concerned but not to the point where they would consider making a move out.

George Savvides is a Partner in Fiducenter.

r u o y f o y n a e v a H 2. h s i w a d e s s e r p x e s client o t s d n u f r i e h t e v o to m ? n o i t c i d s i r u j r e h t o an

Christis Christoforou: Given the current banking crisis, we have seen some movement out of the Cypriot banks but although the majority of our clients are monitoring the situation closely, they have not proceeded to move funds out.

ANDREAS ATHINODOROU: We have had UK clients move their money to Malta but no other major moves from Cyprus. However, we have seen a big shift of money from Cyprus banks to Barclays Cyprus and the Russian Commercial Bank. Most of our new business goes in this direction. I have not seen existing clients shift substantial capital out of Cyprus but at the same time we are not seeing substantial new funds coming into Cyprus.

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Savvas Charalambous: Currently the jurisdiction is not the problem. The problem is the financial sector. Clients have requested alternate banking arrangements and any new substantial amounts hardly

stay in Cyprus, at least on the part of Westerners who have other options. It is fortunate that the Eastern Europeans still find difficulties with their banking arrangements in the West, though I am

Ioannis Demetriades: A lim clients have expressed such ited number of our a wish bu kept their funds in Cyprus. t most have Peter G. capital actually reliable and Economides: entering the favourable tax The situation Cyprus banking elements and has clearly system. We the attractive caused concern have had a and unique with foreign few incidents non-tax investors. Some of intended elements that have indeed redomiciliations Cyprus offers transferred of companies. and which have funds out of We try to established Cyprus. I know prevent clients it through first hand of from doing so the years as substantial by emphasizing a reputable amounts of the stable, business centre.

not sure how long this will play out, as it seems that the hunger for deposits globally seems to have harvested a hunt for the cash that international banks would not touch in the past. ELIAS NEOCLEOUS: I have not seen this happen to any significant degree and my impression is that the main banks’ deposits in Cyprus are fairly stable, although deposits in Greece have declined due to the economic and political uncertainty. Most international investment passes through Cyprus and does not settle here. In most of the transactions we are involved in, the main operating assets are in another country – it could be Russia, India

or elsewhere – or, in the case of ships and aircraft, the assets could be anywhere at any particular time. In many instances the funds pass directly from investor to investee. However, as prudent investors, some of our wealthy clients whose personal wealth is held in Cyprus international trusts, spread their risk between countries and types of investment. It is a great shame that, due to successive governments’ failure to place public finances on a sound basis, Cyprus has lost its “blue chip” rating.

Nicos Nicolaides: What we have seen is some funds leaving the two Cypriot banks in the middle of the turmoil and going to other banks in Cyprus but even this has not taken place to a great extent or at least not the extent that one would have perhaps expected. Although our clients are clearly worried, we have fortunately not seen a significant exodus of funds to other jurisdictions.

George Pamboridis: Some of our clients have expressed such a wish, though not those from the CIS countries. They are mostly Greek and British clients. George Savvides: As noted above, this has not happened although, based on information from peers and banks, I know that some clients of other providers have already transferred to Malta or Luxembourg. PHIVI TRAMOUNTANELLI: Some of our clients (few in number) have expressed the need to move their funds outside Cyprus and the funds of some clients have indeed been transferred to other jurisdictions. However, we are referring to insignificant numbers.

Phivi Tramountanelli is an Advocate with Christos Patsalides LLC.

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3. HOW MUCH OF A PROBLEM IS IT TO CONVINCE THEM THAT CYPRUS HAS ADVANTAGES OVER COMPETITIVE JURISDICTIONS SUCH AS MALTA? ANDREAS ATHINODOROU: Malta has taken very proactive steps to move into specific markets that Cyprus cannot compete in. One example is the Malta-US Double Tax Treaty which is effectively assisting Malta to route a significant percentage of US investments into and via Europe through Malta. Furthermore, their single regulator is very industry-driven and very proactive to resolve client issues in order to get them to relocate to Malta. You know all the issues with red tape in Cyprus and the delays in taking action? Imagine the opposite – a world where things move fast and get resolved quickly! This is Malta! SAVVAS CHARALAMBOUS: Cyprus is a much friendlier jurisdiction than Malta. The system is much more straightforward and our niche markets such as Russia are hardly affected by the Maltese. Needless to say, we boast a wider variety of professionals and treaties and we have closer ties to the more interesting places such as Eastern Europe, India and China, which is where the money is coming from. Malta, though, has been prudent and forwardthinking, it has created incentives and markets them much more effectively than we do. Malta has also managed to

pass legislation on gaming and collective investment schemes, catching us asleep in Cyprus. CHRISTIS CHRISTOFOROU: The advantages of Cyprus are here, irrespective of the crisis. Having said that, our competitors are exploiting the situation and we cannot blame them for doing so. What we need to do is to stop the uncertainty and proceed immediately to finalise the Memorandum with the Troika that will, in turn, restore trust in our banking system. PETER G. ECONOMIDES: Malta is an extremely proactive jurisdiction and its authorities move faster, better and smarter than ours. Cyprus has shot itself several times in the foot with its bureaucracy, delays in the decision-making process and the various vested interests that get in the way of certain projects and legislative decisions. Malta has taken advantage of our shortcomings and tried to elevate itself to our playing field. Despite it all, many clients still prefer the multilateral advantages of Cyprus. The Republic has a highly trained, multilingual and experienced workforce with many graduates from top universities in the UK and the USA. But

Cyprus offers more. With its delightful climate, high quality of life and real estate, relaxed immigration policies and low crime rate, it is an ideal country to reside in or to invest in real estate, energy and other sectors. And due to its geographical strategic location, it serves as a stepping stone to Europe, Africa and Asia through the Middle East. Additionally, the excellent network of tax treaties on the avoidance of double taxation, especially with certain third countries, such as Russia, Ukraine, South Africa and India, as well as access to EU Directives and the quality of our financial services sector, makes Cyprus an attractive choice through which to carry out international activities. IOANNIS DEMETRIADES: For investment in certain countries such as Ukraine, Russia, India, etc., we have no difficulty in presenting the competitive advantages that Cyprus has to offer. However, for other countries there is intense competition. Fortunately, in 2011 and 2012, Cyprus passed some favourable tax and trust law amendments which will help strengthen Cyprus’ position as a financial services centre. Hopefully, further favourable measures will be taken in the near future.

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ELIAS NEOCLEOUS: Most investors use an international financial centre as a “forward base” for investment into a territory with whose laws, institutions, customs and language they are unfamiliar and which, perhaps, they do not trust. They prefer to do business in a familiar environment and seek out a half-way house. Western

investors, who had learned all their lives to distrust and fear the Soviet Union, were initially very uneasy about dealing with Russia and the other states following the collapse of communism. Cyprus gives them the assurance of a transparent and reliable legal system and business infrastructure when investing in Eastern

Nicos Nicolaides is Managing Director at Abacus Ltd.

George Savvides: It is more difficult to convince them that Cyprus has the right mentality than the advantages themselves

Europe. Many of the world’s most successful international financial centres are, like Hong Kong, Singapore and Cyprus, former British colonies with a legal system based on AngloSaxon law, which is the “lingua franca” of international finance. Malta’s civil law system is a distinct disadvantage for it. On the

other hand Cyprus is disadvantaged by the fact that interaction with government departments has to be in Greek and government departments do not have English language websites. The English language is dominant in international finance and this is a real turn-off for business people from abroad.

Nicos Nicolaides: In our discussions with clients, we are trying to separate the problems faced by the Cypriot economy from the advantages of Cyprus as a place from where to carry out the operations of International Business Companies which primarily have to do with our tax regime and the network of Double Tax Treaties that Cyprus has in place with other countries. Hopefully we will not disturb these.

George Pamboridis: Malta is not a real competitor. Countries like Luxembourg and Singapore are, though, and it is becoming more and more difficult to convince them that Cyprus is better when it comes to maintaining their funds here.

PHIVI TRAMOUNTANELLI: We never had to ‘convince’ our clients about Cyprus; we just had to inform them about what Cyprus offers, its benefits and advantages, and the clients were wisely deciding to go with Cyprus. Nowadays, Cyprus has become a rather less attractive jurisdiction due to the current situation. Clients need to feel secure about their investments and it depends on each lawyer/ consultant and company, through the services provided and personal communication with them, to provide such security to their clients.

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l a c lo e h t s a h t n e t x 4. To what e d e t s e u q e r e h t d n a is is banking cr ’s d n la is e h t d e t c e f f bailout a l a n io s s e f o r p l a n io g e r standing as a ? e r t n e c s e ic v r e s and financial Christis Christoforou: An international business centre cannot really flourish without a solid banking system. As such, the banking crisis has forced us to adopt a defensive mode as marketing efforts to sell Cyprus are become more difficult. Andreas Athinodorou: Our existing markets are slowing down and we miss out on new markets, e.g. Indian business that should be flowing through Cyprus is routed to Singapore because of low international standing.

Savvas Charalambous: Unfortunately it has hit us hard. Banking is part of the package and successive governments have, to say the least, been too slack in this area. Is it not questionable why there is only a handful of reputable international banks in Cyprus? What has our government done to attract the likes of HSBC, CITI, Goldman, Deutche Bank, etc.?

Nicos Nicolaides: There is no doubt that our standing as a regional professional and financial services centre has been tarnished by the crisis, especially the problems of our banking sector which was something that we used to brag about. George Pamboridis: The effect has been tremendous. Our banks used to be the spearhead of our competitive advantages. No more! George Pamboridis is Managing Partner Pamboridis LLC, Advocates and Legal Advisors.

PETER G. ECONOMIDES: The successive downgrades of the Cypriot banks and the risk of the requested bailout should have awakened the government and all stakeholders to take urgent and important decisions and implement specific financial and other nec-

essary measures. Alas, that has not been the case, so far. Even at this late stage of the game, there are coordinated efforts to rectify the negative situation. It is of high importance to maintain a steady image of Cyprus in the areas which have established the island as one of

the preferred options for foreign investors, not only with words but also with actions. For now we need to keep one step ahead of developments in order to minimize losses, and we desperately need to devote our full attention to resolving our banking crisis.

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ELIAS NEOCLEOUS: In my experience, the local banks’ difficulties and the prospect of an international bailout have had little, if any, impact on Cyprus’s attractiveness as a professional and financial services centre. Funds in international investment transactions might pass through Cyprus but they do not remain here, so the stability of the local banks is rarely an issue. However, there has inevitably been an psychological effect. Investors find it hard to have confidence in an economy that cannot put its own house in order, and confidence is key to the country’s success as a financial centre.

Ioannis Demetriades is Managing Director, Horwath DSP Limited.

GEORGE SAVVIDES: It depends on the country the clients are from. For most countries other than those of the CIS, it has never been the case that they make heavy use of the Cypriot banking system. PHIVI TRAMOUNTANELLI: It has affected the island’s standing as a regional professional and financial services centre to a reasonable and expected degree, taking into consideration the global financial situation. IOANNIS DEMETRIADES: I cannot specify the extent in quantifiable terms but overseas clients are certainly displeased to hear regular reports of the bad economic situation in Cyprus. These reports contradict the country’s economic stability which had been one of the main advantages of investing through Cyprus in the past few years.

5. Do you think the measures likely to be demanded by the Troika in Cyprus will be viewed by your clients as positive? Andreas Athinodorou: The housekeeping measures will be

seen as positive. impact on direct or but we must avoid However, the indirect taxation. even the mention concern is whether So far there are of touching the tax they will have an no real concerns system

SAVVAS CHARALAMBOUS: I think the biggest current problem is uncertainty: uncertainty about the measures, whether the taxation system will be affected, whether there is risk of bank runs and bank closures, etc. I think the measures will be a blessing that will bring stability, which will reinforce our European image and our low tax regime.

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Christis Christoforou: Yes. The majority of the Troika’s measures will correct longstanding structural imbalances. It appears that the Troika appreciates that the fiscal deficit should be managed mainly through cost-cutting rather than tax increases and, as such, both local and international clients will be supportive.

Christis Christoforou is CEO Deloitte Cyprus.

Ioannis Demetriades: I believe so, but most importantly, and hopefully with the signing of a memorandum with the Troika, there will be an end to all the uncertainty and the continuous negative reports in the foreign press. NICOS NICOLAIDES: So long as we do not disturb the tax regime and, in particular, the rate at which business profits are taxed, international business companies should not be affected. If anything they will be viewed as positive as the aim will be to sort out our messy public finances.

George Pamboridis: It all depends how aggressive our government will be in implementing them. If the government demonstrates a stance similar to that of the Greeks, clients will run away fast.

George Savvides: If they are in line with the information published in the press so far, they will be viewed positively as they will leave the international business sector largely unscathed ELIAS NEOCLEOUS: There are many rumours doing the rounds about the likely outcome of the negotiations with the Troika and I do not want to add to them. What I can say is that international business people want stability and predictability.

They want government departments to respond promptly, efficiently and constructively and not to put obstacles in their way. Anything that increases the cost of doing business in Cyprus, such as further taxes on employees, levies and surcharges on the

private sector, will make Cyprus less competitive. I was pleased to see from one memo that has been published that the Troika is recommending a strengthening of regulation. For a long time my firm has been arguing for

this, particularly for the long-overdue enactment of the draft law on regulation of fiduciary and corporate service providers, and I hope that the government will finally take notice. The Troika also recommends an improvement in

regulation and quality of services and I hope that the various professional bodies will heed this wake-up call and act upon it to tighten professional standards, enforce them rigorously and close down unregulated organisations.

Peter G. Economides: The publicized measures proposed by Troika have not introduced changes that may affect foreign investors or the Cyprus vehicles they use. We are hopeful that in addition to promoting development, the measures will also remain focused on tidying up the public service and semi-government sectors. 30 Gold THE INTERNATIONAL INVESTMENT, FINANCE & PROFESSIONAL SERVICES MAGAZINE OF CYPRUS

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Phivi Tramountanelli: We believe that our clients will be viewing the measures positively, as long as the corporate tax rate stays intact at 10% since an external official body such as the Troika will be in control, with the ultimate result of bringing Cyprus back to the good days of not too long ago. Most importantly, the measures imposed by the Troika will offer our clients – and mainly foreign investors – the security and safety they are seeking.

6.WHAT KIND OF OVERALL IMAGE DOES CYPRUS HAVE FOR FOREIGN INVESTORS? ANDREAS ATHINODOROU: Cyprus should have had the image and the standing of a world class financial centre by now. This is not where we are now. The fact that we have to convince investors that we are safe to use us as a conduit shows how far off the mark we are. The aim is to convince them to collect investors’ funds in Cyprus and

use Cyprus as a base for investments (e.g. Luxembourg) and not just as a tax efficient overnight conduit. We have to have a shift in consciousness in our understanding of the world in order to achieve this. SAVVAS CHARALAMBOUS: It depends from which angle you look at it. In my view, Cyprus should be one of the best holding jurisdictions globally. However, we face the following problems: We have been a harbour for dodgy Eastern European money for too long, which has given us a bit of a stigma in the West as a shady jurisdiction. The lack of big banks on the island has not helped us and banks here are more commercial than investment-seeking. They should be more Swiss-looking, i.e. focusing on private banking. IOANNIS DEMETRIADES: At the moment I believe that foreign investors do not fully comprehend how bad the situation is and the sooner an agreement is reached with the Troika the better. CHRISTIS CHRISTOFOROU: Prolonged indecisiveness and uncertainty is damaging the image of Cyprus which, unfortunately, is worsening.

PETER G. ECONOMIDES: Cyprus, for investors, is famous for its attractive tax regime and a plethora of non-tax elements. Alongside this, Cyprus is one of the few countries in the EU that grant residence permits through certain investment schemes. Unfortunately, the island’s positive image used to include our previously robust banking system, which, for now at least, is no longer the case. ELIAS NEOCLEOUS: The reputation of a financial centre is paramount. However attractive the incentives on offer, serious investors will avoid places where they believe they are at risk. Cyprus has a good reputation, especially compared with its near neighbours, but it has a long way to go in order to put itself on a par with Singapore, which combines an entrepreneurial attitude with efficiency, effective regulation and an impeccable reputation for probity. NICOS NICOLAIDES: I believe that Cyprus continues to have a positive image among foreign investors who realise that our present plight is part of the wider difficulties faced by the eurozone whilst the problems of our banking sector were caused primarily by the problems in Greece

Peter G. Economides is Chairman, Totalserve Management Ltd

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GEORGE PAMBORIDIS: Different investors have different views. The CIS people view Cyprus as a safe and reputable jurisdiction which applies Western standards by top professionals; Europeans see Cyprus as a sophisticated safe haven with a soft spot for Russians and their money. However, Cyprus is viewed by professionals globally as a secure and reputable jurisdiction on which Group structuring can rely. GEORGE SAVVIDES: Cyprus is seen a country with many competitive advantages but short of the proper mentality and a long-term vision and plan as to where it is heading in the international business arena. PHIVI TRAMOUNTANELLI: Foreign investors used to have a very positive image of Cyprus and they still do overall. Of course, for some clients this image has been affected by the global financial crisis but Cyprus has all the necessary means and the required infrastructure to overcome the present situation and to continue, maintain and improve its position in the world’s financial and investment markets.

s e r u s a e m e t e r c n o c 7. What s u r p y C e k a m o t n can be take more competitive? Andreas Athinodorou: Stra-

Andreas Athinodorou is CEO of the Aspen Trust Group

tegic studies of how Cyprus can jump back on the competition board in an advantageous way are available. One such study regarding Funds is being conducted by CIPA right now. There should be a single regulator for all services; legislation needs to be streamlined. Public Private partnerships are needed to eliminate government sector inefficiencies in areas like the Registrar of Companies, CySEC and the Central Bank. New legislation is required that will allow international clients to use Cyprus as an all-round base for their business. Finally, reform of the judicial system is essential to allow dispute resolution to be carried out in Cyprus and not outside . One solution is to use part of the discounted cash from the gas reserves to re-build the financial services industry and to build a new economy around the oil and gas sector. Some politicians are already tapping into this idea.

PETER G. ECONOMIDES: At the moment, bureaucracy is a huge impediment to Cyprus’ competitiveness. There have been recent incidents where we have lost investors to competitive jurisdictions on account of our slower administration and passive governance. We need more action and less bureaucracy from the authorities in order to enrich our arsenal of arguments in favour of our jurisdiction. For example, the recent passing of the Amendment to the International Trusts Law 2012 has made the law more appealing to interested investors while the recently relaxed immigration law is stimulating third country nationals to invest in Cyprus by buying properties over €300.000 and to secure a permanent resident permit. The same applies to the recent introduction of the Intellectual Property tax regime that exempts 80% of IP-related profits from taxation. On the other hand, the Regulation of Trustees and Company Services Providers Law 2012 has been pending for the past six years. This is a prime example of measures that could be taken to boost the island’s competitiveness.

ing our best civil servants from all the velopment and training more of them Christis Christoforou: Cyprus has sector’s mentality towards intertax incentives to attract international national business. And because the ministries involved – those who will to become client-focused and look at business and it has the professionals whole public sector cannot change have the right mentality and attitude international business and investors towards international business and as their clients in the same manner that can support international busi- overnight, we must move fast and create a real One Stop Shop by select- foreign investors – and invest in de- that we do in the private sector! ness. It needs to change the public

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Phivi Tramountanelli: Strict measures need to be taken including restructuring and downsizing, fiscal reforms and efforts to make the island’s economy more competitive. IOANNIS DEMETRIADES: Firstly, the public sector has to become more efficient and responsive to change and the government has to implement recommendations already made so that Cyprus can become a better financial, educational and medical centre. Furthermore, I hope that there will not be any more delays in developing the island’s energy potential. Another measure which will make Cyprus more competitive is the Fiduciaries Bill, a corporate piece of legislation pending in the House of Representatives, which will regulate the activities of corporate service provid-

ers. It is essential that this proposed legislation be passed in the next couple of months as this will ensure that we maintain a high quality of services in this essential service sector. ELIAS NEOCLEOUS: Regaining our AAA rating will take time, but it is essential that we take the necessary actions to achieve it. We also need to recognise the huge contribution that international investors make to our economy and employment in all sectors, and not forget that they have a choice over where they do business. If we make it more expensive for them to do business in Cyprus, by continually increasing taxes and other burdens on the private sector, they will go elsewhere. If we provide them with third-rate service, and if the government servants they deal with continue to treat them with indifference and surliness and do not speak their language, they will go elsewhere. At the moment we need them far more than they need us,

and we need to make Cyprus as efficient, welcoming and well-regulated as the best of its competitors. NICOS NICOLAIDES: The main thing that a foreign investor looks for is the stability of the system so I repeat that it is imperative not to disturb our tax regime which has been our most important advantage. Other measures include reducing red tape and improving the speed of service from public sector departments such as the Registrar of Companies GEORGE PAMBORIDIS: A major review is required of the judiciary and the (non-functioning) flexibility of the legislature when it comes to keeping up with global financial developments. The civil service needs training in how to deal with foreign investors. Also, we need to start thinking outside the box and introducing new products to attract investment instead of waiting for others to demonstrate leadership and then running to catch up with them. GEORGE SAVVIDES: First we need to come up with a vision, objectives and a plan as to where we want to be in five, ten and fifteen years and work towards it. Then there are some very simple measures/changes which can be taken with a minimum extra cost but with the potential of delivering great benefits, both actual and psychological, to foreign investors

Savvas Charalambous: Cyprus needs to update its legislation with regards to gaming, Funds, etc. It has to spend more money on advertising the jurisdiction and assist professionals such as ourselves to promote the island further. It needs to move forward with regulation that is fundamental to moving this industry forward. The government has been sitting on a bill that regulates the fiduciary sector ever since I can remember. We need to move forward with the Troika as soon as possible and leave the Russian money behind. When you have a serious problem, who do you turn to, your friends or your family? Who is the more reliable choice?

Savvas Charalambous is Manager at a Bonalbo.

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PROFESSIONAL SERVICES

GRASPING THE OPPORTUNITY TO DRIVE JOBS AND GROWTH PROFESSIONAL SERVICES IN CYPRUS By Fiona Mullen

f one were to ask a random group of people which is the largest sector of the Cyprus economy, the most common answer would be tourism. Certainly, it attracts more policy attention than other sectors (with the possible exception, these days, of natural gas) and a great deal more in terms of funding. The government’s budget for the Cyprus Tourism Organisation was €62.5m in 2012, whereas the current budget for the Cyprus Investment Promotion Agency (CIPA) is around €1-€1.5m. Yet while the focus of attention has been on other sectors, a quiet revolution has been taking place in another sector, namely professional services – the accountants, lawyers and fiduciary services providers who serve a large international client base. Professional, scientific and technical services grew on average by 3.8% year on year in the first half of 2012; financial services, despite the difficulties, grew by 2.1%, whereas overall GDP contracted by 1.9% in the same period. But how much does the professional services sector contribute to the economy, especially compared with tourism? Is its contribution to the economy smaller or bigger than tourism? How does the sector compare with its other financial centres such as Ireland, Malta, Luxembourg and Singapore? What risks and opportunities does the sector face in the coming

period and how much more could the sector contribute to jobs if it innovated and received the right support? Last, but not least, what can the government and the professionals do to grasp these opportunities? How can we create new jobs for skilled graduates and contribute more to the country’s growth in these difficult times? These are the key questions which, together with Marina Theodotou, Founder and Managing Director of Curveball Ltd, I have explored, analysed and answered in a forthcoming research report entitled Professional Services: Driving jobs and growth in Cyprus. The report, sponsored by PwC Cyprus, is currently being independently reviewed by Stavros Zenios of the University of Cyprus. We believe that it is the first time that anyone has compared the true contribution of tourism and professional services at the specific sector level. This is because the readily available data is available only at the aggregated level – accommodation is thrown together with food services all over the island, professional services are thrown together with scientific and technical services, and domestic and financial services are measured together. In addition, economists, including myself, often refer to the more readily available balance of payments data, showing inflows of these sectors on a gross basis, rather than output on a gross value-added basis, which is a better measure of the true contribution to GDP. In our research, we go to some lengths

to differentiate the sectors at the disaggregated level where we Fiona Mullen find that what we term “international services” (legal and accounting services and financial services serving international clients) accounts for 6.5% of gross value-added (GVA), while tourism (accommodation and air transport), accounts for 5.8% of GDP for tourism. This is because “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” has grown more than 40 times faster than tourism in the past five years. It would be nice to say that international services is now the largest sector in Cyprus. Unfortunately, it is still dwarfed by public services, public administration and defence, which amounted to 11.8% of GVA in 2011. As regards employment, we find that tourism still employs more people than “international services”, not least because it is less labour-efficient. However, the difference has been narrowing fast as the tourism sector sheds jobs. From a gap of nearly 11,000 in 2001, it is now just under 4,000. Employment in international services grew at an average rate of 3.9% per year in 2007-2011, whereas employment in tourism shrank by 1.9% per year. If this trend continues, Finally, looking at balance-of-payments data, we already know that “other business services” (legal, account-

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ing and merchanting services) surpassed travel (tourism) in 2010. In 2011 other business services reached €1.9 billion, whereas travel amounted to €1.8 billion.

CYPRUS BOTTOM OF THE CLASS AS AN INNOVATOR

In the next part of the report we benchmark Cyprus against Ireland, Luxembourg, Malta and Singapore – not only as a general place to do business but also as an innovator with the same peer group. Ireland, Luxembourg and Malta are chosen because they are essentially competitors in the eurozone for professional services and Singapore is the “best in class” of all jurisdictions offering professional services. We found that on the general place to do business rankings, Cyprus is ahead of Malta but way behind Singapore, a fair way behind Ireland and in most cases behind Luxembourg. But the results on innovation were the most striking. In a high value-added service economy, the ability to innovate at all levels and in all parts of the economy will be critical to our future survival. But on innovation Cyprus is bottom of its peer group, falling down particularly in the area of creative outputs. In the remainder of the report we analyse the strengths, weaknesses, opportunities and threats (SWOT) affecting the sector and we conclude with ten key recommendations for the sector itself, its representatives (voice of the industry) and the government and regulators.

EMPOWER YOUNG PEOPLE OR SEE THEM EMIGRATE

One key risk is emigration of young talent, a by-product of the fiscal and banking crisis. The best educated Cypriots may just choose to stay in the UK and the US if there are no jobs at home. But the young also need jobs that will keep them interested. There is a tendency in Cyprus to view young people merely as cheap labour to do low-value work, rather than using their social media and technology skills, for example, to find new markets or reduce costs. Leveraging the power of social media is a lowcost but high-return approach to strengthening the perception of the market and clients about Cyprus. And it also keeps young people engaged and interested in their work.

OTHERS INNOVATE, SO CAN WE

As much of the growth in the previous decade was based on an unsustainable property con-

Professional Services Sector - SWOT Analysis Strengths

• Common Law based legal system • Robust and reliable tax system • EU and OECD Compliant • Educated, English speaking, certified professionals • Expertise in corporate, fiduciary and tax advisory services • Convenient geography and timezone • High standard of living

Opportunities

• New Sectors (e.g. Oil & Gas, renewables ) • Enterpreneurship Ecosystem & VC • New Trust, IP and EU-wide Laws • Engage and nurture talent • Use of Social Media and Internet • Innovation and Efficiency

Weaknesses

• Fragmented business development • Lack of niche capacity in new areas • Smaller, younger firms often marginalized • Trails in innovative internal strategies • Not leveraging social media enough • Not prioritized by policy makers • Overdependence on one market • Lacking agility and proactive approach

Threats

• Trailing more innovative countries • Increasing global competition in key sectors • Loss of favourable tax regime • Wider impact of economic crisis • Loss of clients to more agile countries

Positive

Internal factors

External factors

Negative

struction boom, finding new ways to generate growth organically is now critical. As professionals in the sector have noted, the new law on tax exemptions for intellectual property investments provides a new opportunity for R&D investment. One way to encourage R&D and innovation in other sectors is by building an “entrepreneurship ecosystem”. This means more than just subsidizing incubators, as Cyprus has done in the past. It involves creating a supportive network that includes the legal, regulatory and cultural infrastructure and creating new funding mechanisms such as venture capital funds investing in Cyprus start-ups. Accelerators provide not just the space for start-ups to grow, but also mentoring and guidance on business presentation, marketing and funding issues, and they differ from incubators as they are largely funded by the private sector. There are plenty of countries to learn from. Israel was a pioneer and others, such as Ireland, Denmark and Estonia among others have followed. According to the European Private Equity

and Venture Capital Association (EVCA), in countries where the entrepreneurship ecosystem has been fostered and encouraged to grow, it has shown to be a key driver of economic growth. But this cannot be done without one of our other key recommendations, namely that the government, regulators and voice of the industry collaborate regularly on a structured basis to generate new growth areas. As a specific recommendation we suggest more ad hoc teams focusing on specialist areas, along the lines of the existing Tax Ad Hoc Expert Team, which comprises four tax experts from the Big Four firms in Cyprus. The industry can create a stronger voice by including other professionals such as lawyers in their deliberations. These are just a few of the recommendations in our report and we estimate that the sector could create an additional 9,700 new jobs within five years if the opportunities are grasped by the policy-makers, the sector itself and its “voice of the industry” representatives.

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BANKING UNION

Reform or Redecorating? THE BASICS OF A EUROPE-WIDE BANKING UNION HAVE YET TO BE IRONED OUT By Kyproula Papachristodoulou

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n June, when EU leaders asked the European Commission’s technocrats to design a Single Supervisory Mechanism (SSM) “shortly” and the Council to consider it “as a matter of urgency” by the end of 2012, they knew their demand was ambitious. But did they know just how ambitious it was? It is now clear that not only will it take much longer than initially imagined, but reaching an agreement that will satisfy even a majority of the 27 EU member states is highly unlikely if not impossible at the moment. No sooner had José Manuel Barroso laid out the Commission’s proposal on a banking union on 12 September than varying and – most significantly – contradicting views were heard. Germany, Sweden, Poland and the Netherlands called for a more “realistic” negotiating timetable to resolve problems, while Swedish Finance Minister Anders Borg described as “unacceptable” the idea of aiming to reach a deal by the end of the year. Moreover, the negotiation is underlined by a Franco-German dispute over if and when European rescue funds should be able to pump money directly into struggling banks. Germany supports the idea of the European Central Bank (ECB) having some responsibility for monitoring the big financial institutions but it is resisting the broad scope and high degree of centralisation proposed by the European Commission. Germany also objects to what it feels is the hasty implementation of the scheme that sees the ECB taking on the responsibility for the supervision for all banks by 2014. This slow implementation approach is at odds with the position of France, which is pressing for the eurozone to move rapidly towards a centralised system for supervising all 6,000 lenders in the common currency area. As well as disagreements within the eurozone, the debate over the banking union that took place in Cyprus during the informal Eurogroup and Ecofin meetings in September highlighted the reservations of the non-euro countries. The strong doubts, expressed mainly by Sweden, Poland and the UK, have made it clear that the risk of derailment of the move towards centralised eurozone supervision is high. The three countries are concerned about the terms offered to non-euro countries that wish to be placed under the proposed supervision system and will therefore have to adhere to ECB decisions while being in no position to influence them since they do not participate in the ECB’s decision making bodies. But not all statements from the “out” countries were negative. Eurozone outsider Denmark may actually consider joining the banking union if it succeeds in boosting the credibility of euro area banks, said the head of the Danish central bank Nils Bernstein. “If the framework is established, it could well lead to a strengthening of confidence towards the banking sector of the euro countries, which could make it difficult for Denmark to remain outside,” he added. Despite last month’s disagreements in Cyprus, the banking union

WHY A BANKING UNION? TO BREAK THE LINK BETWEEN MEMBER STATES AND THEIR BANKS Between October 2008 and October 2011, European countries mobilised €4.5 trillion in public support and guarantees to their banks. By its proposal on capital requirements for banks (“CRD IV”) made in July last year, the Commission wants to ensure that the capital of banking institutions is sufficient both in quantity and in quality to face future shocks. The future ESM could have the potential to

recapitalise banks directly once a Single Supervisory Mechanism (SSM) is established for banks in the eurozone. This will contribute to breaking the vicious cycle between banks and sovereigns as the European Stability Mechanism (ESM) loans would not add to the debt burden of countries facing intense market pressure. TO RESTORE THE CREDIBILITY OF THE FINANCIAL SECTOR The proposals already tabled by the European Commission to improve regulation of the financial

system represent a solid basis to go further in the harmonisation of the rules, which will be made easier in the framework of a banking union. Giving the ECB the responsibility for supervision of banks in the eurozone will contribute to increasing confidence between the banks and increase financial stability in the euro area. TO PRESERVE TAXPAYERS’ MONEY To make sure that supervisory authorities have all the tools they need to deal with bank failures without using taxpayers’ money.

plan is not dead and buried. Indeed, everyone at the Brussels summit in June agreed that it is necessary. EU taxpayers have shelled out €4.5 trillion to rescue banks since the start of the financial crisis in 2008 and the European Commission says that its plan for a Single Supervisory Mechanism (SSM) is the first step toward putting an end to this situation. It also says that “coordination of national banking supervision is no longer an option for the euro area. A move to an integrated system is necessary”. It is important to note the member states’ decision to make the set-up of an SSM a precondition for the possible direct recapitalisation of banks by the European Stability Mechanism (ESM). As for the view from abroad, The Wall Street Journal sees major flaws in the European Commission’s plan: “The major omission of the Commission’s plan is a clear plan for an EU-wide resolution fund that would pay for bank failures. Without this, regulators in Frankfurt could decide whether a bank in Spain needs winding down, but

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BANKING UNION

If there is to be a banking union, it should be about creating a true single market for financial services politicians in Madrid could be left responsible for pulling the trigger, and for raising the capital for a restructuring. That isn’t reform. It’s redecorating.Too often in Europe’s crisis, solutions have come together ad hoc, without offering any comfort that national interests are being either protected or surrendered to the EU on agreeable terms. The Commission’s plans look like an attempt to get the money in the EU bailout funds flowing into Europe’s banks as quickly as possible. But if there is to be a banking union, it should be about creating a true single market for financial services, not simply greasing the euro-skids for more bailouts”.

THE EUROPEAN COMMISSION’S PROPOSAL

The Commission has proposed a Single Supervisory Mechanism in which ultimate responsibility for specific supervisory tasks related to the financial stability of all eurozone banks will lie with the ECB. National supervisors will continue to play an important role in day-to-day supervision and in preparing and implementing ECB decisions. The Commission also proposes that the European Banking Authority (EBA) develop a Single Supervisory Handbook to preserve the integrity of the single market and ensure coherence in banking supervision for all 27 EU countries. Specific supervisory tasks will be shifted to the European level within the eurozone, notably those that are key to preserving financial stability and detecting viability risk in banks. The ECB will become responsible for tasks such as authorising credit institutions; compliance with capital, leverage and liquidity requirements, and

Panicos Demetriades

‘‘GOOD T FOR CYPRUS’’

incentives this perception creates for a flight of capital. “Ev en if unfounded, perceptions of such a risk can be self-fulfillin g,” he says. To resolve this pro Athanasios blem, Orphanides proposes “a Orphanides federal institution offering deposi t insurance to all depositors in the single currency”. Wit hout such federal deposit insu rance, the destabilising dynam ic between banks and sta tes remains. For Orphanide s, the absence of a solid propos he European al to cre ate a Eur opean agency for Commission’s proposal dep osi t insurance – similar to for a banking union represents considerable the FDIC in the USA – is not encouraging. “The euro progress, says area needs an institution sim Athanasios Orphanides, ilar to former the FD IC. The same institution Governor of the Centra l Bank of that is res ponsible for insuring Cyprus, but he believes that “an depositors , working together important element, perhap s the with the ECB in its new most crucial for contain ing the supervisory authority, sho crisis at this juncture, is uld also missing”. have bro ad early intervention For Orphanides the issu e is and resolution authority the risk that depositors for may the euro area as a whole believe they face by ma . It is intaining essential to deepen the common deposits in a bank in a member market by pooling together the state if that member sta te management of the ban faces fiscal problems and king the sector in the euro area”.

DEPOSIT INSURANCE IS ESSENTIAL

conducting the supervision of financial conglomerates. The ECB will be able to intervene early by demanding remedial action when a bank breaches or risks breaching regulatory capital requirements. Within the framework of the European System of financial supervision, the ECB will cooperate with the EBA, the role of which will be similar to its present one. It will continue developing the single rulebook applicable to all 27 member states and make sure that supervisory practices are consistent across the whole Union. For cross-border banks active both within and outside member states participating in the SSM, existing home/host supervisor coordination procedures will continue to exist. To the extent that the ECB has taken over supervisory tasks, it will carry out the functions of the home and host authority for all participating member states. The Commission is proposing that the SSM be in place by 1 January 2013. To allow for a smooth transition to the new mechanism, a phasing-in period is envisaged. As a first step, as of 1 January 2013, the ECB would be able to assume full supervisory responsibility over any credit institution, particularly those which have received or requested public funding. As of 1 July 2013, all banks of major systemic importance will be placed under the supervision of the ECB. The phasing-in period should be completed by 1 January 2014 when the SSM covers all banks.

he urgency of establishing the SSM was highlighted by Central Bank Governor Panicos Demetriades in a speech at the EU Financial Services Attachés Meeting in September. Demetriades said that the current crisis demands that we move forward

decisively. Admitting that the timetable of the Commission proposals on the SSM is quite ambitious, he stressed that “every effort should be made to move ahead as quickly as possible based on a phasingin approach, especially as the set-up of the SSM has been made a precondition for the possible direct recapitalisation

of banks by the ESM”. In an interview with The Wall Street Journal in August, Demetriades pointed out that smaller member states with large banking systems – such as Cyprus – would greatly benefit from the proposal which he described as a way “to decouple sovereign risk from our banking systems.”

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CIPA

G C Y N I P T R O U M S O R P AN INVES

THE RECENTLY-APPOINTED DIRECTOR-GENERAL OF THE CYPRUS INVESTMENT PROMOTION AGENCY (CIPA), CHARIS PAPACHARALAMBOUS, TELLS GOLD ABOUT THE WORK OF THE AGENCY, THE CHALLENGES FACING IT AND CYPRUS, AND WHAT HE HOPES TO ACHIEVE. By JohnVickers, Photograph by Jo Michaelides

TMEN T

DESTINATION

Gold: Having worked in the tourism sector for 15 years, how challenging on a personal level is your recent appointment as Director-General of CIPA? Charis Papacharalambous: By nature, I consider every new endeavour a welcoming challenge and I am certainly prepared to take this specific one on. My previous experience in the tourism industry which included the hotel sector, travel & tourism as well as international cruising will certainly help me a lot,

especially considering the similarities in the international profile of the two. Furthermore, there are clear similarities between promoting Cyprus as a tourism destination and promoting it as an investment destination. At the same time, coming from a different background I expect to bring with me – and more importantly to introduce – some fresh ideas. Certainly, to do well in any job one needs to love it and the product/service one is involved with. In this case it’s my own country, Cyprus and this special bonus makes the challenge not only more interesting but also more emotional, thereby giving myself and everyone involved extra strength and the will to perform at our very best. Gold: You have joined the Organisation at a crucial and extremely difficult time for Cyprus. How much harder do you think your job will be than it would have been, say, two years ago?

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CIPA

Gold: One of CIPA’s stated aims is “to promote Cyprus as an attractive international investment centre in key priority growth sectors”. What, in your view, are these sectors? C.P.: Linking this to the need for the overall strategic approach mentioned earlier, I would personally argue that the stated aim, although correct, should actually be wider in that

Gold: Everyone seems to have particularly high hopes for the energy sector. C.P.: Understandably so. The energy sector will undoubtedly play a major role in the progress and direction that the country’s economy will take over the next decade and thereafter. I consider that the natural gas reserves recently confirmed in the Exclusive Economic Zone of Cyprus will bring the country to the forefront of the European Energy market at least and they will have both direct and indirect effects on the coun-

try’s economy. Many foreign investors have already expressed interest in undertaking energy-related projects and, realizing the overall potential, many others are looking into other investments. Moreover, the opportunities for domestic and foreign investment in the development of Renewable Energy Sources (RES) and Technologies have also attracted significant interest from new investors. Gold: And there is more? C.P.: There is more. Due to its strategic location, Cyprus has been tipped as a platform for investors focusing on warehouse, logistics, distribution and headquartering activities with the aim of reaching the European, Asian or African markets. Cyprus provides great opportunities for companies wishing to penetrate new geographical markets and to expand their reach internationally. A number of large development projects, such as marinas and golf courses, as well as more integrated development projects which include residential, commercial and high-quality educational and health/rehabilitation services, are currently under way or under review by local and foreign investors. As you can see, there is no lack of opportunities.

not enoug t s u ht is j o

ts d men ore esire est anym the d inv t ac ttr

Gold: What does this mean from CIPA’s standpoint? C.P.: It means that we will continue to effectively promote Cyprus as an attractive destination for foreign investors but we will certainly also be reaching out to new territories that will hopefully develop the Organisation further. It is clear that CIPA needs significantly more financial support because such efforts require the necessary funds as well as human capital and I would argue that this is the time to invest in this area and expand our customer base which will bring more growth. Let’s not forget that we are facing stiff competition from other jurisdictions. We consider it essential to increase our promotional efforts while, as a country (public, private sector and everyone related), we need to come up with a very specific, long-term strategic plan that will be above political affiliations and ideologies. This is one of the key areas in which we often lag behind our competitors and, as a result, although we start as pioneers we end up chasing the rest.

CIPA should also contribute to defining these sectors and crafting the future strategy of the country. We should be asking ourselves not what these sectors are now but what they will be in 5, 10, 20 or more years from today. That said, it may easily be determined that, at present, Cyprus’ economy is mainly based on the services sector with an overall contribution of about 80% of the Gross Domestic Product (GDP). It is expected to remain the main driver, with international business activities significantly contributing to GDP. At the same time, other key sectors that are among the prime movers of the economy and offer interesting investment opportunities include shipping and energy.

An attractive tax reg i onme its o

C.P.: Well, we are all experiencing the effects of the economic challenges around us and although your description of the present as “crucial” and “difficult” is a reasonable one, I honestly see little point in dwelling on the changing landscape and, generally, on things that are simply way beyond my personal reach. Rather than getting into the process of evaluating whether my job is more or less challenging under the present circumstances, I prefer to adopt the position that we are living in more “interesting” times and that the external environment is what it is and it is up to us to manage these challenges as quickly and effectively as we can. Without sounding too optimistic, this is where I actually see significant opportunities. I firmly believe that people perform significantly better when under pressure and, as a result, I am convinced that we now have an opportunity, along with an obligation and a need, to make more things happen in a shorter time by bringing about the necessary changes that will boost our economy.

CYPRUS WILL EMERGE FROM ITS CHALLENGES LEANER, STRONGER, MORE FLEXIBLE AND MORE EFFICIENT

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Gold: What practical steps is CIPA taking to promote Cyprus to investors? C.P.: CIPA is a very young Organisation, having effectively started its operations in 2008, but it already has some significant achievements to be proud of. CIPA has proactively become the link between the public authorities, professional organisations and the private sector for the enhancement of Cyprus as an attractive investment destination and a robust business centre, by proposing various improvements and amendments to legislation as well as the introduction of new legislation that touches on new investment territories, mainly in the services sector although other sectors have also been assisted. CIPA is continuously reviewing the international investment roadmap and monitoring our competitors’ activities and suggesting ways in which the island can maintain its competitive advantages as an international business and financial centre. CIPA promotes the country as a preferred investment destination and a high quality centre enabling investors to do businesses both in or through Cyprus. Promotion focuses on advertisements in foreign business publications, publishing articles, participating in conferences and other events abroad and organising events in targeted markets such as China and Russia with specific potential investors. In the near future we aim to focus on targeted promotional events as well as one-to-one meetings/presentations with key decision-makers and opinion leaders in the various sectors. There is certainly significant room for improving and expanding our promotional efforts and, therefore, achieving a greater end result. CIPA also provides well-rounded support to foreign investors which includes the facilitation and fast tracking of issues that they may be facing. We act as their local specialist/consultant in their efforts to overcome difficulties and to cut through the red tape that is undoubtedly around us and sometimes even gets between us! This is an area where there is significant work to be done while we need to ensure that CIPA remains an entity that is not affected by ‘red tape syndrome’ and thus lives up to the expectations of its founders. Gold: An organisation like CIPA cannot fail to be aware of the country’s economic and financial situation. How has it tried to make a contribution to improve things? C.P.: CIPA has coordinated its efforts with other stakeholders and come up with an array of suggestions on how the economy of Cyprus can be boosted during these challenging

times. The Government has already adopted a number of these measures and is moving forward with more of them. It is good to know that the efforts of CIPA and other stakeholders are being taken into consideration and that measures are actually being introduced. Specifically, CIPA has recommended measures on: • the legislative and regulatory reforms related to foreign investments, company law and the tax framework; • the processing of applications and the direct licensing of foreign direct investments; • increasing the number of Double Tax Treaties with additional countries; • the adoption of a fast-track process for the implementation of large development projects; • the implementation of a one-stop-shop system for providing customer support and services to foreign investors especially in the areas of permits and application processing. As you would expect, given the times we are living in, CIPA has come up with an expanded plan of promotional activities for 2013. Most of these actions are specific and focused on maximizing return, although the overall image building of Cyprus as a second to none, fully-fledged destination for foreign companies to set up their headquarters is a message that also needs to be developed in time. Everyone here is ready and up for the challenge which, after all, is nothing less than an investment in the future of the country. Gold: You mentioned ‘red tape syndrome’ earlier and you are obviously aware of the poor image that the civil service has among entrepreneurs and investors in Cyprus, particularly regarding bureaucracy and the need to create a more business-friendly environment and mentality. What can CIPA do to change this situation? C.P.: The image itself is not so much the problem. The unfortunate thing is that some areas of the public sector still operate with bureaucratic processes and procedures. CIPA has had some success in getting things done and bypassing red tape but the key to a successful Cyprus would be the abolition of these practices and the transformation of the public sector into an efficient engine where private sector processes and mentalities prevail. Although CIPA will continue working in this direction, it is very clear that it cannot significantly influence the overall performance and mentality of the public sector. It is my humble opinion that for this to succeed on a large scale, government employees need to

come up with the solutions themselves while they must also be willing to undertake more responsibility. The government should lead this exercise by offering specialist support as well as incentives for such initiatives. Certain sectors of government have had considerable success in reforming their processes, so it can be done. This exercise needs to become a continuous one and be constantly measured against specific pre-set targets. I would like to note that no matter how difficult this exercise is, it has to be done and we have to succeed in it if we really want attract more foreign investment. I have only been with CIPA for a few months and have already come across some cases (thankfully few) where investors have cancelled their plans to invest in Cyprus because of the bureaucracy they faced. This is simply unacceptable and we all need to understand the huge impact that such actions can have, even if these are not always directly visible or measurable. Gold: How significant is the Fast Track concept in Cyprus’ efforts to become more attractive as an investment destination? C.P.: The Fast Track principle exists in many countries and was suggested in the past by CIPA. Thankfully, this has proved to be another measure that the Government has embraced and CIPA has now been put in charge of collecting all these possible investments, as a point of first contact if you like, and then subsequently evaluating and proposing to the ministerial committee whether a specific investment should be given special Fast Track status or not. This is critical for major investments and will hopefully lead to a friendlier environment for big and strategically important investments at least. Having said this, we must not forget smaller investments which also need the significant support that we should be offering at all times. Ideally, CIPA should also have the responsibility of following through the investment as a coordinator until its fruition even if it does not carry the responsibility of the actual evaluation process of the investment itself. Gold: What are the main priorities/targets that you have set for yourself and your team during your first year in charge of CIPA? C.P.: CIPA, like any other national Investment Promotion Agency, has a very significant role to play. A key priority right now is to establish or even re-build confidence in the international investor’s mind. Recent developments in our banking sector, the economy

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CIPA

new p geogra

UNDOUBTEDLY PLAY A MAJOR ROLE IN THE PROGRESS AND DIRECTION THAT THE COUNTRY’S ECONOMY WILL TAKE OVER THE NEXT DECADE AND THEREAFTER

hic al m arke lly ts and a n o i to expand their reach internat

and the strong links to Greece have, with the “help” of some of our competitors, raised questions about the strength of our economy and what the final outcome will finally be. I firmly believe that the present environment of uncertainty is probably the worst thing for foreign investors who only read the headlines and CIPA is making every effort to convey the realities of the Cypriot economy and to explain that the fundamentals of this attractive investment territory have not materially changed. At the same time, CIPA is pushing for the introduction of additional and new legislation that will enhance the competitive advantages of Cyprus as an attractive investment destination and as an international and regional business/financial centre. We are committed to getting some positive results in the short term but we are certainly also focusing on the medium and long term which we will have the chance to influence more, based on the strategy that is being drafted as we speak. Gold: How well does Cyprus compete with other jurisdictions with a strong services sector (Luxembourg, Malta, etc.)? C.P.: Cyprus has inherent competitive advantages over many jurisdictions. I am convinced that neither of the two you mention or, for that matter, any other can compete with Cyprus when it comes to the overall setting up of a business and its headquarters. The quality of life, infrastructure, safety and many other features beyond the most attractive corporate tax rate are

simply unbeatable. However, we have seen some of our competitors make strides in eliminating some of their disadvantages/ weaknesses while becoming very creative at the same time. We have also seen them doing a great job in copying other jurisdictions in an effort to become more competitive. As in any industry, the players are looking to adapt as quickly and as effectively as they can. For example Malta has managed, with the coordinated efforts of its supervisory authorities, agencies and government, to proceed very rapidly and attract investments in the financial sector and beyond. It proves that where there’s a will there’s a way and we just have to adapt to the speed of our competitors if we want to stay in the game. We have seen countries such as Ireland, Switzerland, the Netherlands, etc., seriously investing in FDI and their respective Investment Promotion Agencies with budgets as much as 50 times ours! They seem to understand the simple rule of an investment i.e. that you have to spend it if you want to make it and I cannot stress the term ‘investment’ enough. CIPA and various professional bodies and organisations are continuously identifying further areas for improvement which will help Cyprus to become an even more competitive – and therefore more attractive – investment destination. These measures, however, need to be adopted and implemented at the right time. Long delays and half-measures will simply not suffice. We need to come up with the goods and deliver, no excuses accepted. Furthermore,

penetrate to

at opportunities for comp e r g s e d anies rovi p wis s u r hin p Cy g THE ENERGY SECTOR WILL

we need to convey the overall advantages that make Cyprus such an attractive place to set up a business. In the tourism sector, sun and sea are no longer enough to attract the desired number and level of tourists; similarly an attractive tax regime on its own is just not enough to attract the desired investments anymore. Gold: What needs to happen for you to say to yourself at some point in the future, “I have succeeded in this position”? C.P.: I can’t see myself making such a statement or even thinking that “I have succeeded in this position”. I’m well aware that success and failure (unfortunately) will appear on the road ahead but, by planning well and by focusing on the important attributes, we will hopefully be able to obtain positive results in most of the important aspects and limit the less successful tasks to a small percentage and to secondary issues. This I would call a positive result. The key target is to make Cyprus prosper, by increasing FDI into Cyprus, and to develop our image as a major strategic investment jurisdiction. I am confident that, despite the present challenges, the signs of a reasonably quick and strong recovery are there. Cyprus will emerge from its challenges leaner, stronger, more flexible and more efficient, with significant tools to build further on its successful economic history. I am convinced that natural gas will play an important role in this, possibly that of kick-starting the recovery process, while also ensuring the country’s long term prosperity.

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OPINION

Learning from Others Cyprus needs investors more than they need Cyprus

By Andreas Neocleous

n these difficult times we would do well to keep in mind the words of Socrates, who advised us to remember that there is nothing stable in human affairs and that we should avoid undue depression in adversity. The present circumstances are an opportunity to learn from the mistakes of the past. It is easy to blame others for our difficulties but if we are honest with ourselves we must accept a large part of the responsibility. In many ways Cyprus and the Cypriots have become lazy and complacent over the past twenty years. We have carried on thinking that the golden age would last forever, more intent on cutting one another’s throats than facing the emerging competition from Singapore, Malta and other jurisdictions that not only provide their clients with the products they want, but also treat them with respect and give them a proper service. Apart from the Tonnage Tax Law and the long-overdue reform of the International Trusts Law, Cyprus has offered nothing new to potential investors for twenty years or more. Rather than giving investors dependability, innovation, quality service and integrity – the sine qua non of a successful international financial services centre – all we have offered is cheapness, in the form of a low corporate tax rate. We have failed to regulate ourselves properly: a draft law to regulate trustee and corporate services providers has been under discussion for almost six years, obstructed by a variety of interests, including those of my own profession. Meanwhile the unscrupulous flock to Cyprus to take advantage of the lack of adequate regulation while investors who are looking for a stable, well-regulated financial centre vote with their feet and transfer their interests elsewhere. International investors, particularly those investing millions and sometimes billions, have a choice of where to invest. If we make it more expensive for them to do business in Cyprus, by

If we wish to attract investors to Cyprus we must make it as easy as possible for them

continually increasing taxes and other burdens on the private sector, they will go elsewhere. If we provide them with a third-rate service, and if the civil servants they deal with continue to treat them with indifference and surliness, they will go elsewhere. We should not be too proud to learn from others. Despite having no natural resources other than its people, Singapore has developed into one of the world’s most prosperous and stable nations. It has achieved this by a combining an impeccable reputation with innovation and a customer service ethic. It welcomes investors and makes it as easy as possible for them to do business. All the information potential investors need is available in a language they can understand and they can interact with government departments and register for tax and any services they need, again in a language they can understand, using the Internet. Compare this with the situation in Cyprus, where most government departments’ websites are available only in Greek. I am as proud as any of my cultural heritage but if we wish to attract investors to Cyprus we must make it as easy as possible for them. We must not put obstacles in their way by making official documents and essential information available only in a language that they do not understand. We must ensure that in the public sector and the private sector, we all provide an efficient and courteous service to overseas investors. My hope is that we will emerge from the current economic difficulties leaner and better-equipped to meet the challenges of today’s world: leaner, in the sense of having eliminated wasteful public expenditure and being more ready to work for what we want, rather than expecting it as of right; betterequipped, in our attitude to the investors on whom we rely for our livelihood, whether we are in the private sector or the government sector. At the moment, we need them far more than they need us.

info: Andreas Neocleous is Founder and Chairman of the Board of Andreas Neocleous & Co LLC 46 Gold THE INTERNATIONAL INVESTMENT, FINANCE & PROFESSIONAL SERVICES MAGAZINE OF CYPRUS

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OPINION

Sustainable Tourism A radical re-think of policy is required in today’s changing travel environment

By Petros Mavros

e are heading towards the end of another summer season. Soon we will hear the smug satisfaction in the voices of those in charge of tourism in Cyprus as they tell us, “We have had an increase in arrivals and income over last year, which means that we are doing well”. “My goodness,” we say to ourselves, “We are doing well, even better than expected”. But the $64.000 question has to be this: What exactly have our tourism experts done in order to present us with these apparently improved statistics? This year, the circumstances have been highly favourable in that we have had Russian tourists to fill the gaps that the falling UK and German markets had left. With the Middle East under siege, our small, tranquil island then became a peaceful summer oasis for travellers. It’s becoming increasingly clear that we should be managing tourism as a natural resource. In order for us to do this, however, the Cyprus Tourism Organisation (CTO) needs to evolve swiftly so as to become a creditable engine of sustainability and not, as it currently operates, an engine of sterile promotion. The CTO has to radically change its modus operandi by moving away from its purely policing policy and adopting the serious role of an effective professional consultant, offering much-needed expertise to business owners. The key to this 21st century thinking has to be a radical break from the political handcuffing it currently struggles under, and the entire organisation needs to run by true travel professionals. In the good old days, three or four agreements with the biggest tour operators were sufficient to satisfy the short-term need to fill all those empty rooms but times have changed. Marketing to the masses is dead. We will swiftly forget the term e-tourism and will soon only be talking about m-

It’s becoming increasingly clear that we should be managing tourism as a natural resource

tourism (mobile tourism). I predict that the next 5 years will see more smartphone and tablet users than the combined population of France and the UK. This means that our travel products will have to become mobile and be much more engaging but to achieve this aim we need to become a truly sustainable travel entity. Becoming a world-class sustainable travel destination is certainly not going to lift us out of the recession but it will lead to a more equally shared travel pie, a slice of which will give jobs to the young, create investment opportunities for the foreign investor, and assure state and private funding for generations to come. Today, Cyprus is straddling the two concepts of sustainability and feasibility. And while a feasible business is not necessary a sustainable one, a sustainable business is definitely a feasible one. We should learn from the example set by the third world Colombian Amazon village of Nazareth. This community does not allow tour operators and travel agents to bring tourists into the Amazon jungle. The indigenous people take care of all accommodation, guidance, information and general hospitality. Travellers appreciate this human, user-friendly approach much more than the one we adopted long ago to “cater to meet needs“. From a tourism standpoint, the Colombian Amazon and the rainforests are no more or less important than the Akamas Peninsula. British tourists who visit Sumatra and Nazareth are banned from careering around on Quad Bikes in their protected environments. Why, then, are they allowed to do it here? We seem to be many miles behind when it comes to understanding how important tourism is as a long-term natural resource, one that can and should feed us all and, if handled properly, one that will allow businesses to flourish, and importantly, one that we can pass on to the next generation, not with regret but with pride. Let’s act now before it is too late.

info: Petros Mavros is a Tourism Consultant and Managing Director of Avantless ltd. 48 Gold THE INTERNATIONAL INVESTMENT, FINANCE & PROFESSIONAL SERVICES MAGAZINE OF CYPRUS

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FINANCIAL SERVICES

annis Matsis, a partner in Point Nine – a firm that offers middle and back office outsourcing services to fund managers – was a banker in London for 17 years, involved in emerging markets. His only connection with the Cyprus beyond his family ties was that his team would often approach the ‘Big Four’ accountancy firms here for advice and he was impressed. “Totally impartially, I always found that the service was excellent, as good as any we could get in London,” he says. “I always felt that Cyprus was a great place to do business because we understand the Anglo-

Saxon mentality (a great deal of the global financial services industry is Anglo-Saxon), we understand English law (a lot of our local laws are based on English law) and, very importantly, everybody speaks English. It is not like this in many European countries. Also, in the private sector, most of those at senior level have been educated abroad or have obtained their professional qualifications abroad. What’s more, service here is professional but friendly; people are accessible.” Of course, the private sector is only one component of what makes Cyprus an attractive place for foreign companies and investors to set up offices. Recently, Matsis undertook research for a presentation that compared the

island to other jurisdictions and he discovered that despite an excellent private sector, much needs to be done if Cyprus is to achieve its desired potential. He gives good marks to the banking sector which he describes as “doing very well” (while noting, of course, that “currently we are going through a crisis but so is everyone else. For local reasons we may be facing a bigger crisis than our peers in Europe but I believe that we’re going to get through it”). There are 41 banks, of which 7 are local, but, Matsis argues, they are “not international enough. There are mainly Greek, Russian and Middle Eastern, plus a few of the big players that tend to be present in a very small way. Malta has fewer banks but they have the ‘big

Last month, during the East Meets West 2012 conference at the University of Cyprus, Yannis Matsis gave a revealing presentation entitled Financial Services Industry: Is Cyprus Trailing its European Peer Group? during which he compared Cyprus with Malta, Luxembourg and Ireland. He later expanded upon his findings in conversation with Gold. By John Vickers, Photograph by Jo Michaelides.

Competing

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

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FINANCIAL SERVICES

players’ and they are present in a much bigger way, both in terms of employment and the operations they carry out locally. Due to the regional realities, the political situation and the way that we’ve grown as a centre for professional services, the type of banks that we have attracted are all from specific areas. For various reasons, such as our double taxation treaties, our low tax regime and the fact that we used to be an offshore centre, they have come and found us. However, we haven’t really ever gone out as a unified public and private sector to attract financial and professional services in an effort to try and make Cyprus a global centre. We have always been reactive, never proactive.” Nowhere has this concept of private and public sector working together in a proactive way been more obvious than in Malta where the government and the Malta Financial Services Authority (MFSA) have come together with the aim of attracting global business and decided on the appropriate regulation and legislation that is going to attract that type of business. “We haven’t done that,” says Matsis. “In Cyprus we have failed to create this essential partnership and, from what I have seen, it is the public sector that is failing us. No-one has taken the necessary aggressive stance to go out there and market Cyprus.” If there is a single area in which not only Malta but virtually every competitor leaves Cyprus trailing far behind, it is the Funds industry. “In terms of assets, it is even bigger than banking in Malta, Luxembourg and Ireland and, frankly, we are nowhere,” says Yannis Matsis. “In Malta, which is much smaller than Cyprus in every sense, the industry is huge. There is €8.3 billion worth of collective investment schemes there, compared to €2.1 billion in Cyprus. Of course, there is no comparison with Ireland (€1,655.5 billion) or Luxembourg (€2,096.5 billion) but a fair question to ask is ‘Why Luxembourg and not us?’ It’s a smaller place with a smaller population. At least one study has shown that growth in the financial services sector and growth in GDP in Luxembourg are 100% correlated. Moreover, In Luxembourg 10% of the population is employed in financial services and 60% of those employed in the sector are foreigners. So Luxembourg not only accepts foreigners but lets them take the highly paid jobs. We don’t have that here. And if we are ever to compete with Luxembourg and similar places, we have to develop the same culture.”

A key aspect to gaining a reputation such as that of Luxembourg in the global financial services industry is regulation. In certain areas, such as banking, Cyprus is well-regulated but when it comes to Funds, there are some basic problems. In a ‘normal’ regulatory framework, a single regulator is responsible for banks and Funds, given that both are involved in managing money. Originally the regulator in almost all countries was the Central Bank but over time fund regulation tends to have been taken over by another authority. In Ireland it continues to be the Central Bank but in the UK and

Service here is professional but friendly; people are accessible Malta for instance it’s the Financial Services Authority (UKFSA and MFSA respectively) and in Luxembourg it’s the Commission de Surveillance du Secteur Financier (CSSF), and so on. In Cyprus? “In Cyprus we have two regulators: the Central Bank and the Cyprus Securities and Exchange Commission (CySEC). The Central Bank is the regulator of the banks and of some Funds, while CySEC is the regulator of other types of Funds. This means that Fund managers wishing to set up UCITS and ICISs have to go to two different regulators and to understand and monitor two different regulatory frameworks… This is a serious barrier to entry. It doesn’t make any sense! There are other serious restrictions in the current legislation. Hedge Funds, for example, cannot be set up here because of all the restrictions. Unlike other countries, we haven’t adapted our legislation to the needs of the market.” The good news is that this is changing and the whole of the Funds industry is going to be regulated by CySEC as from next year but how is anyone supposed to know this? It is not in any marketing material and marketing is another key factor that is sadly lacking, according to Yannis Matsis.

“The Cyprus Investment Promotion Agency (CIPA) is doing a great job. Bank of Cyprus and a lot of the local players are aggressively trying to attract foreign Funds to set up here but I don’t see any association or coordination with the public sector and if you don’t have that you will fail.” Matsis recounts a story of how, 2-3 years ago, he was contacted by a team representing a UK-based Fund administrator that was thinking of setting up a Fund in Cyprus or Malta. “They came to Cyprus for a week, starting on Monday and they came to see me on the Thursday. The first thing they said was, ‘We’ve already made up our minds that we’re not coming to Cyprus.’ When I asked why, they said that the environment was too hostile and nobody seemed to know what they were talking about. They explained that they had contacted the Central Bank where nobody would see them because, they were told, the Central Bank was not responsible for regulating their kind of business and they should go to CySEC. There, they were told that they needed to go to the Central Bank… They couldn’t even get a meeting! Compare that experience with the first meeting that they had in Malta, which was with the Chairman of the MFSA who basically rolled out red carpet for them and went about selling the country. These were people who couldn’t find anyone to see them in Cyprus.” If he was not a Cypriot and obviously keen to see his country prosper, would Yannis Matsis recommend Cyprus to an investor? “If someone asked me if it was a good idea to set up Fund in Cyprus I would probably say yes. But if the question was “Should I go to Cyprus, Luxembourg or Malta?” I would probably say Luxembourg or Malta. Or even Cayman. That is for Funds and I hope that things will be different in two years’ time. However, if you told me you wanted to set up a company in order to invest in Eastern Europe, for instance, I would have no hesitation in saying that you should use Cyprus. We are improving. I don’t want to be negative. The combination of all the regulation coming under CySEC, the work being done by CIPA and the private sector will gradually turn Cyprus into the centre it can become. The private sector in Cyprus is good so it‘s a question of the public sector working together with it. I think the future is positive.”

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

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INVESTMENT

The outgoing President of the CFA Society of Cyprus is optimistic about the future of Cyprus and the financial services sector. By JohnVickers, Photograph by Jo Michaelides

Things Can Only

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Get Better

Demetris Nicolaou

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INVESTMENT

We may have to wait for 3-4 years

but we will certainly return to healthy growth in Cyprus

he CFA Society of Cyprus is a local society of the CFA Institute, a US-based global, not-for-profit organisation dedicated to developing and promoting the highest educational, ethical, and professional standards in the investment industry. The Institute has over 110,000 members in more than 130 countries and territories. The CFA Society of Cyprus was established in 2003 and its current membership numbers 100 Chartered Financial Analysts who are employed in key positions in major banks, investment firms, insurance companies and financial service providers in Cyprus. Gold spoke to the outgoing President of the Society, Demetris Nicolaou.

D.N.: We have built on our experience of previous years and, as a consequence, this year’s conference will be different from those we have held in the past, with topics covering a broader range and covering all asset classes. It will give investors and professionals a broader view of the global markets. The timing is also significant – November is almost the end of 2012, and investors are looking forward, not back so they want to understand what will be happening in 2013 and 2014. We typically invest for the long term so having a time horizon for the next 3, 5 or 10 years is extremely useful.

Gold: Every year you hold an Investment and Wealth Management Conference*. What will be the focus of this year’s discussions?

* The CFA Society of Cyprus’ next Investment and Wealth Management Conference will be held in Limassol on 29 November, 2012.

Gold: What do you think you have achieved as President of the CFA during the past 2 years? D.N.: Every time a new Board takes office, a new business plan is Gold: What is the value of the Chartered Financial Analyst (CFA) adopted. When I became President, the number one priority was to inqualification? crease the visibility of the CFA Society of Cyprus and to raise awareness Demetris Nicolaou: The CFA designation is a universal qualificaof our activities. We have seen a very healthy growth in our numbers tion and a global passport for the investment and financial industry. – we have 100 members now and 150 candidates have registered to Employers all over cite the extensive knowledge that CFAs possess in investment topics outside their own specialisation as one of the primary take the exam – but we also wanted to promote the CFA Society to the Central Bank, the Stock Market, the media and even to local colleges reasons for hiring them. and universities. We recently had a meeting with the Cyprus Securities Gold: How important is this qualification, especially in today’s dif- and Exchange Commission and we have also been in contact with the Cyprus Investment and Promotion Agency (CIPA) and secured our parficult investment climate? ticipation in CIPA’s Consulting Committee for Investment Funds. So D.N.: Today is not the best investment climate, it’s true, but we see I believe that we have achieved the goals set out in the business plan to a more and more professionals signing up to take the CFA exam. They want to distinguish themselves and become more competitive in the job certain extent. Additionally, in an effort to further develop the activities of the Society, we have set up committees covering three very important market and, especially in the financial services industry, possessing the CFA qualification really helps. Many of the larger financial services com- areas of interest: Education & University Relations, Public Awareness & Employer Relations, and Advocacy & Legal Affairs. panies, Hedge Funds, Investment Funds, etc., offer incentives to their employees to register and take the exam, which is gaining in popularity. The CFA curriculum provides a strong foundation of real-world invest- Gold: How do you view the next 2-3 years in Cyprus? D.N.: The solution is easy: it’s like a sick patient who has to take ment analysis and portfolio management skills along with the practical some unpleasant medicine knowing that he will get better. We know knowledge you need in today’s investment industry. It also emphasizes the highest ethical and professional standards. The exam has three levels that we need structural reforms, a lot of cost-cutting in the major banks, to improve procedures such as risk management, diversificaand requires in-depth knowledge of ethical and professional standards, tion (issues that the banks clearly ignored in a big way over the last investment tools, corporate finance, economics, financial reporting and few years, as we can see from the situation today) but things can analysis, asset classes. portfolio management and wealth planning. And it is not simply a case of passing an exam – even when you achieve that, only get better. We probably have another difficult year ahead of us you still have to prove that you have three years of relevant work experi- but we are very close to the bottom and I think we will see a very healthy turnaround in the next 3-4 years. I’m optimistic. This is the ence before you can call yourself a Chartered Financial Analyst. time to roll up our sleeves and try to accomplish even 80% of the Gold: Would you agree that investing today is more about retaining things that need to be done, and if we do we will have a very healthy banking sector, we will see growth in the financial services sector in wealth rather than increasing it or is it still a question of knowing Cyprus. We have the know-how and the expertise, a very good legal where to look in order to make money? D.N.: If you look at the performance of the major stock markets during system, an efficient, high-tech banking system despite the problems. the first nine months of this year, most of them are up, despite the prob- Just the fact that in order to become a bank employee you have to speak English is significant – this doesn’t happen in Italy or France lems. So a professional – or indeed any – investor who does his homework and due diligence, who studies the markets, economies, companies – and it means that we can cater to the foreign investor. We will just need to make a greater effort to attract investment back to Cyprus. and the sectors they are operating in, will always find ways of investing that will pay off. The markets are, by nature, forward-looking so if they Interest rates have to fall and that will be the driving force to boost the economy again. We may have to wait for 3-4 years but we will believe that the global economy is going to pick up slightly next year, certainly return to healthy growth in Cyprus. this belief will be reflected in today’s stock market performance.

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

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The world is yours!

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OPINION

Tuition Fee Wars Safeguarding the Higher Education sector in the cost vs. quality battle

ducation, and more specifically higher education, is the key for a country to achieve economic growth and thus combat the perils of recession. In a recent study conducted by our research team, the employment multiplier in the education sector was estimated to be fifteen (using the shift and share analysis model). In other words, for every additional educator that is hired, fifteen more job positions are created in other sectors of the economy. This result is not surprising given that educational institutions provide the core knowledge for future young professionals not only to succeed on an individual level but also to add to the country-wise aggregate production. Naturally, the aforementioned finding also hints towards a way of battling unemployment, a serious problem which currently plagues the younger age groups. Cyprus’ goal to become a regional education and research hub able to attract international scholars and students is a noble one and it can be achieved, in theory, by safeguarding the quality of education with regard to higher institutions, both public and private. The economic recession, however, has brought about some serious changes to the higher education market. I am afraid to admit that if measures are not taken soon, the quality of education will decline exponentially in the years to come. Higher tuition fees at UK-based universities, as well as the recession-struck income of Cypriot families, have led to a decrease in the outflow of students towards foreign educational destinations. Naturally, demand for domestic higher education institutions has risen during the past two years. The impact of this increased demand on the domestic market is threefold: (1) UK-based institutions are now seeking to enter the Cypriot market via the franchise path or by establishing campuses on the island; (2) price (tuition fee) wars have surfaced among institutions as a way of attracting prospective

If measures are not taken soon, the quality of education will decline exponentially in the years to come

By Constantinos Charalambous

students and (3) a wave of advertising has swept into Cypriot homes, leaving many families at a loss about how to make the right choice. The market for higher education can be split into two sections. The market for institutions that provide accredited programmes and university level degrees (this includes public and private universities as well as a small number of colleges) and the market for institutions that provide non-accredited qualifications. Because of its nature, the latter market has traditionally been a perfectly competitive one as there is freedom of entry and exit and fierce price competition. It appears that the “accredited market” is slowly but steadily moving in the same direction. Increasing competition in any market will undoubtedly lead to lower prices and happier consumers. Higher education, however, is not just another services market. In the advertising war that we all witnessed this summer, tuition fees were the focal point. Has quality taken a back seat and in what way will this impact the future of our children? In the wake of the 2011 “University of Wales” fiasco, the UK education authorities are taking a harder stance to ensure that students receive quality education. Cyprus is obligated to take similar measures to ensure the educational goals set forth by the Bologna process of 1999. Prospective students owe it to themselves to enquire and research the employment possibilities upon completion of their studies in the institution of their choice. Employers are becoming extremely demanding in a world that is literally choking the life out of SMEs. Employers know that hiring the graduates of a high quality institution is the vital step towards success. We all need to realize that higher education is not something to toy with. It is our future and the future of our children. And as far as our future is concerned, we can accept no discounts!

info: Dr. Constantinos Charalambous is an Associate Professor of Economics and Head of the Department of Research and Development at PA College in Larnaca. He is Associate Editor of the Cyprus International Journal of Management and he maintains a popular economics blog at www.everyday-economist.com. 58 Gold THE INTERNATIONAL INVESTMENT, FINANCE & PROFESSIONAL SERVICES MAGAZINE OF CYPRUS

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PROFILE

KNOCKING ON EVAN’S DOOR

A UNIQUE PERSON DESERVES A UNIQUE NAME AND THE COUNTRY DIRECTOR AT BARCLAYS IN CYPRUS HAS THAT AND MORE. GOLD TALKS TO EVAN GAVAS. By JohnVickers, Photography by Jo Michaelides

van Gavas was born in Zambia where he lived until the age of 12, but you might be surprised to know that the unusual name hides Cypriot origins. Like many expatriate families, his decided to truncate the name to make it easier for everybody to pronounce. As a result, “Evangelos” was cut down to “Evan” while his surname was made up by his grandfather. “He had a typical Cypriot name – something like Iakovou or Ioannou – and he wanted to be different,” he recalls, “and he came up with the name Gavas. In the early days of the Internet, I did a search for the name and just one person came up in Australia. I complained to my father that he had always said our name was unique and he said, ‘It must be your cousin’. I e-mailed her and he was right!”

Gavas’ father was the Consul of Cyprus in Zambia and he remembers his years there as “a great childhood”, thanks in part to being surrounded by nature and animals and he still has a great love of the outdoors. At the age of 8 he was sent to boarding school in South Africa (“because my parents wanted me to have a better education – they were weighing up between the UK and South Africa which was closer”) , where he spent 4 years that he describes as “like being in the army. South African society back then was very conservative and very disciplinarian. But I had to get used to it”. His parents took the decision to leave South Africa in 1986 because they were growing worried about the situation there. “My family were very liberal in their views on race and growing up

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PROFILE

in Zambia had certainly turned them against the policies in South Africa at the time. They were concerned about their children’s future (Gavas has one sister) so they decided to move to Cyprus, and he found it quite easy to adapt, probably, he says, because he made some good friends as soon as he moved over. After a year at the Junior School, they all went to the English School in Nicosia together, so there was no real culture shock. But there was still no sign of banking on the careers horizon. Gavas studied Civil and Environmental Engineering and obtained his Masters in Environmental Engineering in London, subjects that reflected more the school’s careers advice than any great passion for the subject. “I was told that engineering would give me a solid foundation of a degree and then I could branch out so I did that to leave my options open.” Upon graduation he decided to move back to Africa and specifically to South Africa at what was “an interesting time; Mandela was in power and the economy was opening up to the outside world following the lifting of international sanctions. And although a lot of white South Africans were leaving I saw it as a time of opportunity there.” With his father’s assistance, he was introduced to Mistubishi and given the distributorship for the company’s airconditioning equipment in South Africa. He spent 3 years building up the business and then in 2001, a difficult period for South Africa started and there was speculation on the country’s national currency (the rand) as well as a knock-on effect from the Asian crisis so business conditions grew tough. He decided to sell the business and it was then that the first opportunity to go into banking arose. “I was weighing up my options, considering leaving South Africa when I was offered a one-year rotational leadership programme at Nedbank, one of the country’s largest banks, and they literally took me to every part of the bank – it was quite a big investment they made – and I ended up working for two years for the head of Private Banking. It was a great experience and he pretty much gave me free rein to manage a division of the bank and that made me want to get more international experience outside South Africa.”

The way he chose to do that was to study for an MBA at Harvard Business School, after which Gavas found himself facing a range of career offers. He decided to go in for strategy consulting for an American firm based in London. “I ended up advising Fortune 500 companies on their strategy, their operational models in Korea, Mexico, Germany, France and elsewhere. I was on a plane every week for two years. I discovered that the most successful consultants were those who charged the most per day – I can now admit that mine was exorbitant! – there I was, still pretty young, giving advice to grey-haired CEOs and it was another great experience because I would be brought in when the company was facing big challenges to help them fix the problems. I would go in, work to fix things for three months and then leave for another company and another project but in the end I didn’t really find it so satisfying so I took the decision to go back into banking, which was something I had particularly enjoyed in South Africa.” And that’s where Barclays finally comes into the Evan Gavas story. The bank offered him the position of Director of Strategy in Europe to help with formulating strategy for corporate banking in Europe at the time. The attraction of banking was twofold: The very client-oriented nature of the business and the idea that as a banker you are supporting people to build their own businesses or their personal wealth. “I

found that very interesting,” says Evan Gavas. “People come to you as a banker for advice on how to build their future effectively and you can develop some excellent relationships with very interesting people – entrepreneurs from all over the world. Every time I meet a client and they talk passionately about what they are doing, it motivates me”. The second attraction of banking was that, especially in a multi-divisional bank like Barclays, the work is extremely diverse. There are roles in finance, marketing, PR, operations, IT, sales or general management. Three years ago Gavas was working on strategy but his goal was general management and a vacancy arose in Cyprus. “It was unexpected that I would end up in Cyprus. I was working for the commercial division while Barclays in Cyprus is under the Wealth Management division but somehow they found out that I was Cypriot and they were looking for someone so they sought me out internally to bring me to Cyprus”. Asked to describe a typical working day, he says that his schedule is “fortunately quite varied” though there will inevitably be some things that are fairly constant. He looks at what the markets are doing, reads the news (“It’s important to be well-informed, especially if there are topics which could affect clients or their businesses”) and checks how the team is performing. He tries to make it an objective to meet a couple of clients a week with the relationship

CYPRUS WILL GO THROUGH A PERIOD OF PAIN AND RECESSION FOR THE NEXT TWO YEARS

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

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managers. “Typically I will also walk the floor among the sales team and the operations team. Inevitably there will be a couple of conference calls with the UK or Switzerland. Barclays has moved to a very centralised management model so my boss is in London, where he runs not only the UK but Switzerland, Gibraltar and Cyprus”. Barclays Cyprus has no retail banking, having sold its network 15 years ago and has no intention of re-entering the market which was seen as a relatively small, saturated low-margin market. “Our focus here is, and will continue to be, on the international market, providing corporate banking services to international clients who are setting up in Cyprus, and the emphasis will be more and more on building wealth management capabilities here. Barclays is putting a lot of investment into wealth management –something like £350 million over three years. The reason I was brought to Cyprus in 2009 was to develop a strategy for the business. When the rest of the world was going into recession, I drew up a 3-year plan to grow the business so we went completely contrary to the prevailing trend but we have hit every target the last 3 years. This has enabled me to put together a new 4 year plan and to obtain a lot of investment from Barclays, even at this time of constrained costs. We’re moving into new offices in Nicosia and Limassol and we’re launching new products, especially in the wealth management space. Barclays is taking a long-term view on Cyprus, regardless of the current troubles and we expect to be a much bigger business over the next 3-4 years”. Asked for his views on Cyprus as a professional services centre, Evan Gavas considers that the country has reached “a level of providing good service at good rates within that ‘vanilla’ corporate services space but not necessarily with a high degree of sophistication”. But, he says, opportunities do exist to make it more sophisticated, such as by supporting the Funds industry, offering Fund management, custody services to Funds and perhaps asset management services from Cyprus. “There are areas where the market can grow but it’s difficult, for example, to offer a proper and full range of services

to Funds without enough sophisticated international banking institutions on the island. The domestic banks that had started to build private banking divisions of wealth management services have pretty much had to stop that investment right now. The crisis has put things on hold, as it were. So as a country we need to restore confidence in Cyprus as an international centre. The next steps will be critical”. While hindsight is a wonderful thing, Evan Gavas says that the signs of the current crisis were clearly visible three years ago. He recalls stating in an interview in 2009 that he definitely wouldn’t invest in property at the time and suggesting that investors should look to diversify beyond property and even beyond Cyprus into

and, he says, “I certainly saw the negative sentiment in the market, not only towards Barclays but towards all banks, but on a personal level I have not been affected, nor has the business in Cyprus been impacted”. Like any successful businessman, Gavas does not want to remain static in his career and within the company, ways are being considered for him to expand his range of responsibilities. “The more I can learn and the greater impact I can have, so much the better. The CEO of Barclays Wealth lives in New York and commutes to London every week. He doesn’t sleep much, obviously! I would like to be able to do more from Cyprus, though there are also personal and family consider-

AS A COUNTRY WE NEED TO RESTORE CONFIDENCE IN CYPRUS AS AN INTERNATIONAL CENTRE international asset classes. “I could see the problems,” he says, “but frankly I didn’t expect the lack of action that has led us to requesting a bailout.” Gavas is optimistic by nature but he does not think that the present crisis will be resolved quickly. “It will be resolved because others will impose actions and solutions on us but Cyprus will go through a period of pain and recession for the next two years. But if we follow the advice and take the actions proposed and we demonstrate to the market that we can do what is needed, then I think we can come out of the situation quite quickly. Everything will depend on how efficient we are in taking the action required of us”. Bankers, particularly those in the West, have had a rough time over the last three years but Evan Gavas has not personally felt the backlash. He was in London when the LIBOR scandal broke

ations to be made. They may alter my professional ambitions”. Outside the office, Gavas has retained his childhood love of the outdoors and so he enjoys as much sport as he can fit in. “I do gym, I enjoy tennis, I love swimming and I’m always looking to try something new. This summer, for example, I learnt to sail. I find that, with all the other advantages, sport helps to relieve stress”. Finally, we play the “What if?” game and I ask Gavas what he would be doing now had he made a different career choice. “I realised along the way that I enjoyed business so, had I not gone into banking, I would probably have started another company. I think ultimately I would have been in business, if not working for a company then for myself. So at this difficult time, I would probably be going to the bank and asking my manager for a loan!

THE INTERNATIONAL INVESTMENT, FINANCE & PROFESSIONAL SERVICES MAGAZINE OF CYPRUS

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Making

a Difference THERE IS A GROWING DEMAND FOR RECOGNISED PROFESSIONAL QUALIFICATIONS IN PR AND COMMUNICATION

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EDUCATION

n today’s competitive business environment, it is no longer enough to have good products and services, excellent corporate governance and laudable corporate social responsibility projects. A key element of entrepreneurial success is Public Relations. It is not by chance that there is a growing demand for the academic aspect of PR, says Chartered Trainer and CIPR Accredited Practitioner Marcos Komodromos, who lectures at the University of Nicosia and is CIPR Course Leader for Cyprus, Greece and Romania at Intercollege Globaltraining. He told Gold about two CIPR courses of study and the relevant diplomas awarded to successful candidates. Gold: Tell us about the CIPR and the collaboration with Intercollege Globaltraining. Marcos Komodromos: The Chartered Institute of Public Relations (CIPR) was established in 1948 and it is the largest body in the UK Public Relations sector with over 10,000 members around the world. Since 2006, the CIPR has been represented in Cyprus, Greece and Romania by Intercollege Globaltraining, which offers two professional study courses leading to the Diploma in Public Relations and the Diploma in Internal Communication.

M.K.: It consists of three research and planning projects spread over 50 hours of teaching time and the three units are completed within 9-12 months. The main components of the theoretical part cover issues pertaining to PR, management function, theoretical approaches, corporate social responsibility, stakeholder theory and more. Gold: What are the key aspects of the CIPR Diploma in Internal Communication? M.K.: The CIPR Diploma in Internal Communication includes a research project and takes 21 teaching hours, spread over 6 months. The main components of the theoretical part cover issues of internal communication, culture, organisational change and planning strategy. Gold: To what extent are CIPR diplomas recognised in Cyprus and abroad? M.K.: The prospects for those with a CIPR Diploma are huge. They are already recognized in many countries by private companies and

Gold: How important are these diplomas in terms of professional development? M.K.: Both courses help participants to broaden their knowledge of issues concerning strategy, management, internal communication and professional image development. I consider a professional qualification to be essential to any PR professional wishing to have a career in the sector. The objective of the CIPR Diploma course of study is to provide students with both theory and practical experience. Gold: What are the criteria for the scholarships offered by Intercollege Globaltraining? M.K.: We offer a scholarship for each course of Study. For the CIPR Diploma in PR it is worth €2,750 and for the CIPR Diploma in Internal Communication it is worth €1,000. The scholarship for the CIPR Diploma in PR covers tuition fees too. Applicants need to meet the entrance requirements for the courses

Through its two courses, Intercollege Globaltraining equips participants with the strategic PR and internal communication skills they require

Gold: And these courses are aimed at what kind of people? M.K.: They are for professionals already working in PR, marketing, advertising, human resources and management. They are also aimed at people who have not yet obtained a diploma in PR but wish to underpin and increase their professional and personal development in the field. More specifically, through practical PR examples and case studies, students are taught to develop their PR planning and communications management skills.

Gold: Why should anyone wish to obtain a professional CIPR qualification? M.K.: Financial and economic instability has forced many organisations to reduce their advertising budgets and develop Public Relations programmes. More and more professionals, politicians and executives are investing in their public image and profile. Through its two courses, Intercollege Globaltraining equips participants with the strategic PR and internal communication skills they require. Moreover, the job market wants people with a sound knowledge of the profession. Gold: What does the CIPR Diploma in Public Relations cover?

various organisations. More specifically, they are considered the equivalent of a Master’s degree by a number of UK universities including Manchester Metropolitan University, Queen Margaret University College in Edinburgh, Leeds Metropolitan University and others. As for Cyprus, Greece and Romania, many organisations have already begun to ask for the diplomas which they consider an essential qualification for every PR and communications professional. Gold: What are the registration requirements for these courses? M.K.: The selection process requires that participants have four years’ work experience in PR, marketing, advertising and management, or they hold any other academic qualification relevant to the sector. For those who are interested but have no connection with PR we hold an intensive 14-hour seminar that they can attend in order to be eligible to follow the courses.

as mentioned earlier. They will then be judged on an essay written on one of three topics provided. The applications and essays will be evaluated within seven days by Intercollege Globaltraining’s CIPR Diploma teaching staff and the winner’s name will be published in IN Business magazine in November. Gold: Do you believe that there is a genuine interest in lifelong learning in the PR and communication sector? M.K.: Yes. There is considerable interest in lifelong learning and the response to our courses has been considerable, which is a very positive thing, particularly these days when free time is limited and the financial crisis does not leave much room for such ‘luxuries’. Professionals with an interest in attending our courses need to know that in addition to obtaining a professional qualification, they will also be in a better position to aim at greater career development.

THE INTERNATIONAL INVESTMENT, FINANCE & PROFESSIONAL SERVICES MAGAZINE OF CYPRUS

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{October 2012}

84 68

ISSUE

{money}

68 The Name is Bond… Understanding Debt Instruments 70 Rice to Riches If you choose to invest in the Agricultural sector you won’t be alone

Positioned for growth

{business}

72 Management and Decision-Making in Times of Economic Instability By Andrey Dashin 74 The Online Route to Marketing Success More and more companies are using the Internet to generate sales, publicity and custom

77 Employee productivity levels sink to new lows Stagnant job market is to blame, says PwC

{economy}

+ BOOK REVIEW BUSINESS: Dark Art: The Changing Face of Public Relations By Tim Burt 74 ECONOMY: Pocket World in Figures 2013 By The Economist 81

78 From Compliance to Competitive Edge PwC’s Risk Assurance Consulting Services

{tax&legal}

81 ADIT: A Global Standard in International Taxation By Stacey Fink 82 Benefits of the Protocol Amendments to the Cyprus-Russia Double Tax Treaty promise to help investors

84 Positioned for growth Russia investment attractiveness: a step forward

{lifestyle}

86 Good Vibrations Investing in musical instruments

THE INTERNATIONAL INVESTMENT, FINANCE & PROFESSIONAL SERVICES OF CYPRUS

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bonds

{MONEY}

THE NAME IS BOND… UNDERSTANDING DEBT INSTRUMENTS. By Dr George Theocharides

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ue to the local and global financial crises of the past few years, the public has been bombarded with finance terms, the meaning of which, I would venture to say, not everyone understands. Furthermore, given the recent unfortunate episode with Contingent Convertible bonds (so-called CoCo bonds) issued by the two largest banks in Cyprus and the substantial loss of wealth by a number of our fellow citizens, I think it is about time we all started to become more financially literate. Below I attempt to explain the basic features of debt instruments, starting from the simplest and moving on to more complex securities. The most basic type of debt instrument is a “plain vanilla” fixed-rate bond. Essentially, this is a contract between the holder (buyer) and issuer (seller) where the holder lends money and, in exchange, receives equal periodic payments (coupons) as well as the original amount (principal) upon maturity of the contract. Interest payments are usually made semi-annually and the issuer (borrower) can be the government, banks, other corporations or agencies. Bonds can have a short-term duration of 1-, 3-, 6-, or 12-months (bills), an intermediate-term of 2-, 5-, and 10-years (notes), or even longer duration of more than 10-years (bonds). The frequency and the duration of issuance will depend on the issuer’s financing needs. The trend is for long-term issues to provide a higher annual return than short-term issues from the same organisation, since they tend to carry more risk. Remember, one of the most basic concepts in finance is that if a security provides a higher return, it is because you will be exposed to more risk. In a developed, efficient market, there is no such thing as free lunch! Issues can be unsecured, secured by some form of collateral, or guaranteed by a third party. For example, in the recent past Orphanides Supermarkets issued bonds guaranteed by Laiki bank. Note that the risk of the issue will depend on who is the issuer, what is its duration, if it is securitized or not, or if it has any other

specific features that can create extra risk. This is where the rating agencies can prove useful as their job is to protect investors by assigning the corresponding rating based on the risk that the issue carries (and monitor this throughout the life of the contract). But, as we have painfully found out on a number of occasions in the past, they are not always right (or they are too late to react) and sometimes the market gets it better than them. A prime example is the default of the US oil giant Enron in December of 2001. The bonds of Enron, as well as the spreads on insurance products covering the loss in case of Enron’s default (CDS contracts), were indicating for months before that the company was already in default. But the rating agencies failed to act promptly, causing the loss of substantial wealth for many investors. Another type of debt instrument is a floatingrate bond. As the name suggests, the interest rate received is not fixed but based on a general floating-rate, e.g. the 6-month LIBOR or EURIBOR. Obviously, this creates another source of risk as future interest payments will depend on the current level of this floating rate. Some bonds are also issued without coupon payments (zero-coupon bonds) but offered at a discount on their nominal value. Usually, this is the practice used for short-term securities. Organisations can also issue convertible bonds. These bonds provide an option to the holder to convert them to ordinary shares of the company at a pre-specified period in the future, using a pre-specified conversion ratio (number of shares per €100 or €1,000 of nominal value of the bond). So there is an advantage to the holder of the contract but, again, this advantage is usually priced by providing a lower return (yield) than an otherwiseidentical non-convertible bond. A popular debt instrument that corporations tend to issue is a callable bond, i.e. a bond that gives the right to the issuer to redeem (call) back the bond from the holder prior to maturity. This can occur at a pre-specified time in the future, and at a pre-specified callable price. Why would a company be interested in issuing these bonds? Well, if they expect in the future that interest rates will fall, then they would have the chance to call (buy) the bonds back and refinance their debt at a lower interest rate. Obviously there is extra risk to the holder of the bond, but he is being compensated for that through a higher callable price than the original amount. The opposite of a callable security is a puttable bond. This issue gives the right to the holder to put back (sell) the bond to the issuer at a pre-specified period in the future,

and at a pre-specified puttable price. Naturally this can happen when interest rates rise so an investor can sell the bond back and invest his money into newly-issued securities that offer higher coupon rates. The advantage here is to the holder and again this should be included accordingly in the puttable price. As with any other type of investment, debt securities are exposed to inflation. The interest payments and the principal that will be received in the future will not have the same purchasing power. To protect the investor from inflation risk, some governments (e.g. the US and UK) issue index-linked bonds where the interest payments and principal are adjusted at each period to the corresponding inflation rate. Finally, another important characteristic is a sinking fund provision placed on some bonds. This implies that part of the original amount is periodically retired prior to the maturity date, which adds another layer of protection to the holder who does not have to wait until the maturity date to receive back the principal. Finally, the infamous Contigent Convertible

COCO BONDS SHOULD NEVER HAVE BEEN MARKETED TO ‘NAΪVE’ INVESTORS (CoCo) bonds issued by our main banks are a hybrid between debt and equity, and a new way for banks to raise necessary capital. For example, the CoCo bonds issued by the Bank of Cyprus initially provided a fixed coupon rate that would change into a floating rate five years from issuance. However, the holder of the bond had the option to convert to equity if bank’s share price reached a certain level. At the same time, the issuer could convert the issue to equity (at nominal value) if bank’s core tier 1 capital ratio fell below 5%. The issuer had the choice also to forego the interest payment if the bank’s financial position deteriorated. Note that these instruments were undated bonds, i.e. with no given maturity date. Given the complexity of these bonds, my personal opinion is that they should never have been marketed to “naïve” investors but only to institutional investors or very wealthy individuals who clearly understood the risks embedded in these instruments. It is essential that ordinary people fully understand the key characteristics not only of such bonds but of all types of financial instruments if we are to avoid such unwelcome incidents in the future.

info: Dr George Theocharides is an Associate Professor of Finance at the Cyprus International Institute of Management and Director of the MSc in Finance & Banking Programme THE INTERNATIONAL INVESTMENT, FINANCE & PROFESSIONAL SERVICES MAGAZINE OF CYPRUS

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alternative investment

{MONEY}

IF YOU CHOOSE TO INVEST IN THE AGRICULTURAL SECTOR YOU WON’T BE ALONE By Steven A. Newbery

Rice to

he United Nations World Food Agency has stated that food prices worldwide are at their highest levels ever and are only going to rise. The sustained increase in the price of commodities has caused the price of key crops such as rice to increase by more than 75% over the past 10 years (IMF figures). Productive agricultural land has also increased significantly in price and this is set to be boosted by expanding communities and a vast shortage of arable land. As land continues to be used for other types of development rather than agriculture, the remaining producers are under pressure to keep up with demand from an ever-increasing population. Demand for rice remains strong all year round and outpaces supply. According to Dr Robert Zeigler, Director General of the International Rice Research Institute, “To put it simply, there is not enough rice to feed

the world… many countries do not have the capacity to grow enough rice on their own land to meet existing or anticipated demand. To meet their needs governments or the private sector import rice and some are exploring ways to invest in rice production or rice growing land in other countries.” If you choose to invest in the agricultural sector you won’t be alone. Significant capital is currently being invested in agricultural land by financial institutions and governments to ensure that there are sufficient key staple food crops to feed ever-expanding populations. Governments are also acquiring arable land in other countries, as they seek to reduce their dependence on the world market. China, for example, is home to 20% of the world’s population but it only has 9% of the world’s

SIERRA LEONE’S INVESTMENT OPPORTUNITIES IN AGRICULTURE ARE AMONG THE BEST IN WEST AFRICA

arable land. Japan is the world’s largest corn importer, and South Korea is the second largest. The Persian Gulf States import 60% of their food. As a result of this, the President of the Democratic Republic of Congo has offered to lease 10 million hectares to South Africa; the Sudanese government has leased 1.5 million hectares of prime farmland to the Gulf States, Egypt and South Korea for 99 years, Kuwait has leased 130,000 hectares of rice fields in Cambodia and Egypt plans to grow wheat and corn on 840,000 hectares in Uganda and Cambodia. Investment banks are making substantial allocations to agricultural land: Black Rock has, for example, established a $200 million agriculture fund and has earmarked $30 million for the acquisition of farmland; Renaissance Capital has acquired more than 100,000 hectares in Ukraine; and Deutsche Bank and Goldman Sachs have invested money in pig breeding operations and chicken farms in China – investments that include the legal rights to farmland.

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

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Riches “I have frequently told people that one of the best investments in the world will be farmland.” Jim Rogers, Chairman of Singapore-based Rogers Holdings

Direct agricultural investment is the next major ‘must have’ asset class in world investment, according leading research house Hardman & Co. Furthermore, they expect investor appetite to be most easily satisfied in Africa, whose economy is expected to grow at an average annual rate of 7% over the next 20 years – even faster than China – according to forecasts by Standard Chartered. Its total Gross Domestic Product (GDP) is expected to reach US$2.6 trillion by 2020. In addition, the continent also has the fastest-expanding labour force in the world. Today, there are more than 500 million people of working age (15 to 64) in Africa, and that number is expected to exceed 1.1 billion by 2040 – more than China and India. The rest of the world is taking note of the fact that African countries are trying to improve their business environment as a strategy to attract more Foreign Direct Investment (FDI). One of the key investment drivers is the increasing prevalence of peace, democratic elections and improved governance.

The World Bank’s Doing Business In Survey for 2012 – seen as a benchmark for rating the world’s business environments – tracked Morocco as the top reformer globally during the survey period, with Sao Tome and Principe, Cape Verde, Sierra Leone and Burundi also among the top 10 reformers. Changes in domestic policy in these countries have improved the process of dealing with construction permits, protecting investors and paying taxes, among other things. AGS does not believe that the surge in prices of many soft commodities such as rice in 2008 was a one-off event and so, in our opinion, now is an ideal time to consider the returns from agricultural land development. It is understandable that many investors are now looking for less traditional forms of investment that can offer the potential for robust growth. Rice farming investments in Africa offer estimated annual returns typically between 7% and 15% Through AGS you can access the considerable potential of rice farming from as little as £9,750.

SIERRA LEONE

ierra Leone’s investment opportunities in agriculture are among the best in West Africa. The country has a diverse climate, plentiful rainfall, good soil, and abundant land to be cultivated. A current base of production in staple foods (rice cassava, vegetables), cash crops (sugar, cocoa, coffee, ginger and cashew), and tree crops (oil palm, coconut), has potential for significant expansion. There is high regional demand for products such as ginger, palm oil, cocoa, coffee, and rice. Sierra Leone’s historical commercial and export success points to investment potential in palm kernel processing, kola nuts, mangos, peanuts, cassava, piassava, and livestock. Domestic production of a number of food items falls short of local demand and this trend is increasing. In 2007 and 2008, the country imported $68 million and $116 million worth respectively. Although vegetable and fruit production have started to recover, local demand for plantains, citrus fruit, coconuts, pineapples, spinach, and mangos outstrips supply, thereby creating opportunities for investment in these crops. The markets are wide open for agricultural inputs, including fertilizer, seeds and other planting materials, tools, animal feed, agro-chemicals, cold storage, packaging materials and services, and road and maritime transport. Opportunities also exist for integrated production and refining of ethanol (sugar) and bio diesel (oil palm). The agriculture sector in Sierra Leone is growing and there is scope for still more growth by improving local links. Several potentially large-scale consumers of agricultural goods, including Freetown hoteliers and manufacturers, have expressed a desire to source more agricultural products domestically.

info: Steven A. Newbery is the Director of Alternative Global Solutions Ltd. THE INTERNATIONAL INVESTMENT, FINANCE & PROFESSIONAL SERVICES MAGAZINE OF CYPRUS

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management

{BUSINESS} Andrey Dashin

ONE OF RUSSIA’S MOST PROMINENT BUSINESSMEN, ANDREY DASHIN IS CHAIRMAN OF THE SUPERVISORY BOARD AND CO-FOUNDER OF THE ALPARI FAMILY OF COMPANIES (ALPARI), A GLOBAL LEADER IN ONLINE FOREX TRADING SERVICES. HERE, HE LOOKS AT TODAY’S CRISIS-STRICKEN WORLD AND PROVIDES SOME POSITIVE INSIGHT INTO THE NECESSARY BUSINESS LEADERSHIP AND MANAGEMENT SKILLS THAT COULD HELP BUSINESSES NAVIGATE MORE EFFICIENTLY AND OVERCOME THE FINANCIAL STORM.

Management and Decision-Making

IN TIMES OF ECONOMIC INSTABILITY By Andrey Dashin

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

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any find it difficult to remain optimistic during periods of economic downturn, especially when news of tumbling economies, rising unemployment and failing businesses is flooding the media and anxiety is resounding across the world. However, our perception of any situation will determine the way we choose to handle it. Every challenge, every crisis unequivocally carries opportunity. Alpari, for instance, was founded in 1998 during a financial and banking crisis in Russia; it was a product of challenge and opportunity. In the midst of this tough economic crisis, we saw an opportunity to give people the chance to make money on their own. The decisions taken during such times of uncertainty are the ones that spur success and this is why effective leadership is crucial if a company is to withstand every crisis. During periods of uncertainty, people need to know that those in higher authority are working to find solutions to the problems; they come to represent the optimism that things will get better. The most important attributes of an effective manager are his/her abilities to build, manage and inspire a team of employees to achieve an end result; motivation has a solid impact on the success of any company. When managers handle situations with honesty and good communication it is possible to maintain high-levels of morale, even through what may seem like bleak times. If you present people with the truth, real facts and open the channels of communication, you will be able to depend on them to meet any challenge. The more employees understand an organisation, the easier it will be for them to adapt. At Alpari we have made it a tradition to hold online conferences where the employees are actively engaged in discussions with top management. Proprietary technology is in place and, as at a press conference, I sit in front of video equipment that broadcasts live to the Alpari Family via the Internet. The

only difference from a press conference is that, instead of having questions coming in from a room full of journalists, I am being interviewed by over 650 Alpari employees located around the world. Effective management relies on listening to your employees’ questions and suggestions. Through our online conference, we address these questions and suggestions on the spot or we assign a team to resolve larger problems that surface or to work on good new ideas that arise. If you want to manage properly, it is sometimes necessary to forget about the hierarchy. This

TO SUCCEED IN BUSINESS YOU MUST BE ABLE TO RESOURCEFULLY TURN NEGATIVE SITUATIONS IN YOUR FAVOUR might sound strange but it has proven to be the right thing to do; managing a company cannot rest solely on administration. Sometimes, the top management in an organisation can come up with an idea and immediately execute it without discussion. This is a dead-end path of development. At Alpari we have a business team and, of course, a hierarchy exists. However, when we come together in meetings, the hierarchy disappears; we are all on equal footing and free to openly express our views and support our case. To succeed in business you must be able to resourcefully turn negative situations in your favour. The situation should never control you – you should be able to adapt to the situation and ensure that you and the company are flexible. Change is the true rhythm of life. It is not only unavoidable but it is also the catalyst for progress. Times of crisis are an opportunity to refine a business, just as one removes dross from gold. Employees are more open to change and it is a good time to look internally and identify the inefficiencies that are a stumbling block to flexibility. It is true that difficult decisions sometimes have to be taken to ensure the survival of a company

but, during a crisis, collective decisionmaking will minimize negative impacts and make any transitions smoother. Managers often take hasty decisions to cut costs and staff indiscriminately when a crisis hits. A strategic, team approach is more appropriate. Obtaining input from a team of people from different disciplines will speed up the flow of information. However, information is not always complete. This is a reality and an obstacle when you need to make effective decisions quickly. When a lack of information hinders comprehensive decision-making in a crisis, a team approach will bring you closer to determining the most appropriate course of action. When approaching a crisis as a team you tap into the collective experience of all members; this not only increases the number of perspectives and areas of expertise but it is also a means of accessing valuable resources that will ultimately help to create synergies that will get you through the crisis. It is important never to underestimate what you can learn from your employees, partners, associates and even the most challenging of situations. Management should be about learning and being open to absorb vital information in order to be well equipped to press forward. Of course, it is unrealistic to say that you can prepare for every single crisis event. No matter how much preparation you make, plans for the future may have to be changed. It is important to realise that, as each crisis shakes the world, new realities emerge and with them a new generation of needs. Companies need to be continually looking at how the world, the economy and the markets are evolving and then prepare themselves internally to be flexible enough to change and cater for new events. Managers need to understand the responsibility of leadership so that unity is achieved within an organisation. Although a time of crisis abounds with difficulties, it also leads to countless opportunities. Just as stagnant water becomes a hazard to the environment; a world without crisis would not be able to stir the waves of change which, in actuality, will bring about even greater progress.

info: Andrey Dashin is Chairman of the Supervisory Board and one of the founders of the Alpari Family of Companies.

THE INTERNATIONAL INVESTMENT, FINANCE & PROFESSIONAL SERVICES MAGAZINE OF CYPRUS

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marketing

{BUSINESS}

THE ONLINE ROUTE TO MARKETING SUCCESS Julia Papageorgiou

MORE AND MORE COMPANIES ARE USING THE INTERNET TO GENERATE SALES, PUBLICITY AND CUSTOM Interview & photograph by Nathalie Kyrou

JPP MARKETING

ased in Limassol, Cyprus, JPP Marketing helps businesses promote their services online. JPP offers Search Engine Optimisation (SEO) services and develops and manages online advertising campaigns, including both paid search and display advertising with Google Adwords, with the overall objective of providing return on investment. JPP Marketing also offers advanced web analytics services to help track and measure the success of online marketing campaigns against targeted objectives. In 2010, JPP Marketing became the first Google Adwords Certified Partner in Cyprus. The agency serves clients from a wide variety of sectors, including financial services, Forex, professional services, travel and tourism. For more information: www. jppmarketing.com

ONLINE MARKETING IS ONE OF THE VERY FEW SECTORS TO HAVE EXHIBITED GROWTH THROUGHOUT THE FINANCIAL CRISIS

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hile Julia Papageorgiou was studying Management at the University of Leeds, she discovered that she loved marketing and realised that it was the subject she wanted to pursue. This led to her obtaining a Master’s degree in International Marketing Management, after which she worked for Metia, a leading IT marketing agency, and was involved in major projects with clients such as Microsoft, HP, Orange and Alterian, while gaining invaluable experience in online marketing. On returning to Cyprus, she worked for a few years at Aphrodite Hills before deciding to focus on this rapidly developing field and set up her own online marketing business, JPP Marketing Ltd. She told Gold what online marketing is all about. Gold: Online marketing is clearly an area of growing importance to business but why do you think it is so significant these days? Julia Papageorgiou: Online marketing is also more affordable and more targeted than its offline equivalents, which is why it has continued to grow in this difficult financial period. Marketing is increasingly under pressure to show its contribution to the bottom line and, for me, the beauty of online marketing is that everything is measurable. This means that every ad and every page on your site can be accounted for in terms of what returns it provides, how many leads or sales it brings or e-mail enquiries it generates. So there is no more wasted spend – if something does not work, next month you simply remove it from your marketing budget. There is no other medium quite so instant or flexible when it comes to optimisation of your marketing campaigns and the ability to measure what is actually delivering results. We run campaigns for our clients in Google Adwords,

for instance, and if we see that a particular banner is not delivering, we don’t wait; we simply turn it off a day later and reallocate the budget to better performing areas. This is also extremely powerful in the opposite sense, so that if something is suddenly driving a lot of business, you can easily see what it is within in a few hours, and invest more in it. Gold: How does ‘search marketing’ differentiate from other areas of online marketing? J.P.: Search marketing is different from other online marketing techniques mainly due to its superior targeting and measurement capabilities as your ad appears alongside the search results. This means you can focus your online marketing strategy on customers who are already interested in your company’s products and services as you advertise when they are actively searching for something you provide. This is more likely to convert into potential leads or a sale for a company. The other great part about using tools such as Google Adwords is the ability to measure the effectiveness of a campaign. We can measure how many leads are received and, in some cases, how much revenue is earned.

Gold: What does your agency offer which other marketing agencies do not? J.P.: Many search marketing services in Cyprus are provided by agencies from the IT or web development sector, whereas we are more from the marketing side. This means that we are not so focused on driving traffic and numbers to the site but on driving quality traffic that is likely to convert into clients and we relate this back to the company’s overall marketing objectives

and target clients. Another area where I feel we differentiate ourselves is our heavy reliance on measurement of the results, using web analytics, to show contribution to the bottom line of everything we do. We insist that our clients are able to measure what we do effectively on their websites before we start any project. In my opinion, the only true way to assess performance is through your analytics data, not through ranking reports or number of clicks. Gold: What is your view on the growing use of social media by business? J.P.: There are some great case studies for businesses using social media in an effective way to generate more business or great customer support. Similarly there are some great case studies for viral marketing on the Internet. A a lot of brands which would otherwise have remained unknown have used social media to propel themselves into becoming major players. However, social media can also be a minefield and it can destroy your business overnight if not managed properly. In my opinion, social media can be a superb addition to your online marketing strategy but it’s important to ensure that it works seamlessly with everything else you are doing. There is no ‘one size fits all’ approach so certain techniques and media work well for one industry while others do not. Gold: Your company is a Google Adwords Certified Partner. What does this mean? J.P.: It shows that members of our team have passed the Google Adwords Qualification exams and that, as a company, we have managed a required level of budget to be awarded this status. Our exams are in specialised areas such as Search Advertising, as well as Display, Reporting & Analysis and they require renewal and ongoing training, which ensures that we must stay updated on all the innovations within the platform in order to retake them. We are also required to display a badge on our website which visitors can click on to verify that our status and the areas we are specialised in are still valid. The online world is moving so quickly and innovation in the tools we use everyday – Google Adwords, Google Analytics

THE INTERNATIONAL INVESTMENT, FINANCE & PROFESSIONAL SERVICES MAGAZINE OF CYPRUS

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marketing

IN THIS SECTOR, EVERYTHING YOU KNOW TODAY COULD BE GONE TOMORROW AND REPLACED BY SOMETHING ELSE and many other platforms – is so rapid that without continuous training, you simply cannot continue to provide these services. That is why it is important to love this industry and have a genuine interest in learning, otherwise you simply cannot work in online marketing. In this sector, everything you know today could be gone tomorrow and replaced by something else so you have to have a passion for it and love the challenge of keeping yourself up to date with it all. Gold: How do you see the face of Cypriot marketing changing in the near future and what are your hopes for yourself and the industry as a female entrepreneur? J.P.: I see a great deal of positive development among my generation of entrepreneurs, with a lot of hope for pushing innovation and technology and for encouraging initiatives for new SMEs. In my sector, I would hope that more traditional marketing agencies will come to understand and appreciate the value of online marketing and that we develop this sector as it is one of the very few sectors to have exhibited growth throughout the financial crisis around the world. We also need to be more competitive and to appreciate and understand that it is OK for a business to fail and that we should not give up. There is a perception that we are not allowed to be unsuccessful in any endeavour but the truth is that most great businesses are created by people who have tried several times and failed. It is this negative past experience that will teach us how to do things better next time around. Gold: You have been selected as an Ambassador for the European Commission Network of Ambassadors of Female Entrepreneurship. How did you become involved and what has your experience with them been like?

J.P.: It was an honour for me to be chosen as one of the nine Cypriot women representing Cyprus in this European Commission initiative. The project aims to boost the rate of female entrepreneurial activity across the EU and our network, in conjunction with the coordinators (First Elements Euroconsultants), has undertaken several initiatives to encourage women in Cyprus to become entrepreneurs and set up their own businesses. For me personally, joining this network has been an invaluable experience, allowing me to meet some incredible women, not only from all over Europe but also within our own Cyprus network, and to exchange ideas and network with them on projects. It is hugely inspiring to hear success stories from women who started working from their kitchens and grew their home businesses into multi-million dollar enterprises, without sacrificing family or personal happiness. I think this is one of the biggest advantages of this network: young women can see that others before them have made it and the barriers that have to be overcome therefore seem less daunting. Gold: How do you see the situation regarding female entrepreneurs with regard to Cyprus? J.P.: Not enough is being done to encourage women in Cyprus, unfortunately. In many other European countries, a lot is done to help women – from simple things such as free crèche and nursery facilities to having the right legislation in place to ensure that, as a business owner, you are still entitled to the benefits that employees have if, for example, you have a sick child whom you need to take care of. I think a lot has changed in the last 10 years but we still need more young women to feel that everything is possible. One element of our network is a mentoring facility and for me as a businesswoman, helping someone else to nurture their business idea into reality is a rewarding experience. I also think that it is very useful for someone who is just starting out and has little experience of running a business and knowledge of what it entails. Gold: What advice would you offer to other women thinking of embarking on a career in marketing or starting their own company? J.P.: I would say that even in today’s difficult financial circumstances, if you have the drive to succeed and the willingness to work at something you truly believe

in, as long as there is a market for what you are offering, you can do it. It is hard work and you will have to sacrifice time that you might prefer to devote to yourself but in the end, if you love what you do, it will be worth it. Unfortunately, financial incentives and support are scarce at the moment but it is still possible to secure funding and investment if you try. There are angel investor networks all over the world looking to fund great ideas.

BOOK REVIEW DARK ART: THE CHANGING FACE OF PUBLIC RELATIONS BY TIM BURT (ELLIOTT & THOMPSON LTD, 2012) RRP: £14.99 (£10.49 FROM AMAZON.CO.UK)

ormer award-winning Financial Times journalist Burt sets out to explain the new tactics shaping strategic communications in the 21st century, and questions whether the industry can live up to its promises in a world where the media itself is facing an existential threat. He investigates the impact of the evolving digital environment and the likely winners and losers from the old ‘dark art’ of spin. What emerges is a tale of corporate intrigue, where largerthan-life millionaires agonise about their reputations, where business promises are made and broken, and where demands grow for strategic communications services that can be trusted. Based on high-profile examples of contemporary corporate crises, this is a unique insider view on a discreet industry at a time of unprecedented change. While not quite the exposé of nefarious tricks its title might suggest, it draws on Burt’s firsthand experience of sticky moments at a clutch of blue-chip companies and even introduces a new acronym – DABDA – to describe the five stages of business grief: denial, anger, bargaining, depression and acceptance.

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

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productivity

{BUSINESS}

Employee

STAGNANT JOB MARKET IS TO BLAME, SAYS PWC

productivity levels sink to new lows

uropean companies’ employee productivity levels are at a five year low, according to new research by PwC. The firm’s Key Trends in Human Capital 2012 report reveals that productivity levels saw a sharp drop in 2011 following a period of relative stability between 2006 and 2010. The report suggests that this drop is driven by an increase in employee costs, which have jumped by 16% from 2009 to around $55,000 in 2011. The report, which is based on data from over 2,400 organisations in more than 50 countries, suggests that this increase in employee costs is largely down to companies cutting back on their recruitment of lower grade employees during the downturn. This

Richard Phelps

has left companies with a higher proportion of experienced workers who command greater pay, compared to younger, less experienced workers, whose pay bills will be lower. This comes at a time when companies are seeing little, or no, revenue growth. This means that Western European companies are getting a much lower return from their investment in their workforce. The report reveals that human capital return on investment (HC ROI), an analysis of the pre-tax profit produced for every pound, euro or dollar paid out in remuneration, has fallen to 1.11 in Western Europe. This means that employers are now only getting the equivalent of $1.11 back for every $1 they invest in someone. Richard Phelps, human resource services partner at PwC, said, “Our analysis reveals that the percentage of employees with less than two years’ service has fallen sharply to 22%. Many organisations across Europe have chosen experience over youth to see

them through the recession, but cutting the recruitment of younger workers means they are paying out much more for their workforce for less return. The difficult job market means that many experienced workers are staying longer in jobs, leaving companies struggling with top heavy structures, little staff turnover and rising wage bills.” PwC suggests that many companies need to go back to basics and improve their performance management processes to ensure that people at all levels are delivering value. For many companies, this will mean implementing more vigorous performance management which really differentiates between higher and weaker performers and rewards them accordingly. This is where better use and interpretation of people data can make a huge difference to employee productivity; companies need to really understand what their employees want, what matters to them and what motivates them. “The current low growth environment means companies must get the most value from their investment in people,” said Richard Phelps. “This means flexing their HR policies for different parts of the workforce. Companies could find new ways of motivating people who are staying longer in their roles and offering

MANY ORGANISATIONS ACROSS EUROPE HAVE CHOSEN EXPERIENCE OVER YOUTH TO SEE THEM THROUGH THE RECESSION greater options to people nearing retirement. Companies need to ensure they get the best out of their younger workers by setting out clear development paths and offering flexible compensation packages.” The report highlights that UK and European companies still lag behind their US and Asian counterparts when it comes to maximising profit from their investment in people. It also shows that the US, despite seeing a drop in its return on investment, for every dollar paid out in remuneration, US employers typically get 20% more pre-tax profit in return compared to UK companies.

THE INTERNATIONAL INVESTMENT, FINANCE & PROFESSIONAL SERVICES MAGAZINE OF CYPRUS

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risk management

{ECONOMY}

wC’s Risk Assurance Consulting (RAC) unit draws on the firm’s auditing heritage as well as its consulting expertise and commercial experience to rigorously evaluate its clients’ governance procedures, business processes, information systems, regulatory matters, risks and controls and to provide trusted advice and solutions to fix or enhance them. The RAC Unit, co-headed by Partners Christos Tsolakis and George Lambrou, numbers some thirty colleagues – each with specific specialist knowledge on regulatory compliance, licensing of investment firms/funds, governance procedures, corporate fraud investigations, internal audit, internal control evaluations, data assurance, SAP, Oracle and Navision evaluations and IT audit. Christos Tsolakis and George Lambrou gave us their perspective on risk and the operations of their unit. Gold: What in your view are the four key areas of risk that organisations face in today’s business environment? Christos Tsolakis: Over our long years of practical experience we have adopted the view that, as Warren Buffett once said, risk comes from not knowing what you are doing. Our firm’s RAC unit provides solutions in four key areas of risk where organisations may not actually know what they are meant to be doing. In particular, solutions are provided addressing: • Financial Risk, risks to the effective financial operations of an organisation •C ommercial risk, risks to the commercial success of an organisation • Organisational/Operational Risk, risks to the tangible and intangible assets of an organisation and • Compliance/Regulatory Risk, risks that expose an organisation to regulatory compliance issues or external litigation.

George Lambrou (left), Christos Tsolakis

From Compliance to Competitive Edge PWC’S RISK ASSURANCE CONSULTING SERVICES Photograph by Jo Michaelides

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Gold: What do you suggest that management should do to resolve these issues? George Lambrou: We suggest that decision makers (management) in business and elsewhere should see themselves as captains of a ship out sea – a sea that possesses many hidden dangers (risks), in particular when the ship is sailing in uncharted waters – and accordingly seek solutions that will ensure the ship’s safety. The current and prospective business environment is characterised by everchanging risks in terms of their nature, their likelihood of happening and their impact in the event that they crystallise. The ongoing economic crisis has undoubtedly caused businesses to face a number of new challenges

THE ONGOING ECONOMIC CRISIS HAS UNDOUBTEDLY CAUSED BUSINESSES TO FACE A NUMBER OF NEW CHALLENGES and beyond the direct financial consequences affecting them, it has also caused a large and sudden increase in the attention paid to risk by regulators, boards, credit agencies, other key stakeholders and businesses in general. Christos Tsolakis: Moreover, technology is evolving at an accelerating rate. Making

the right technology choices, obtaining the necessary funding and optimizing the investment value of IT is a very challenging process. All these factors cause organisations to seek more efficient internal controls, data and systems implementation assurance, internal audits, regulatory compliance as well as greater IT security and governance over a broad range of activities. Today more than ever, businesses need to become proactive and aim at gaining a competitive advantage in an increasingly challenging environment. Gold: Where does Risk Assurance Consulting unit fit in all this?

THE INTERNATIONAL INVESTMENT, FINANCE & PROFESSIONAL SERVICES MAGAZINE OF CYPRUS

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risk management

WE SHARE PLATO’S VIEW THAT “EACH MAN IS CAPABLE OF DOING ONE THING WELL. IF HE ATTEMPTS SEVERAL, HE WILL FAIL TO ACHIEVE DISTINCTION IN ANY” George Lambrou: Our guiding principle is never to provide services for the sake of selling. We devote a great amount of time to providing and explaining relevant information/data to management. This allows management to know what it can and cannot do. In particular, we engage with management in a constructive dialogue about what is required to better identify and manage significant risks in the four key areas of risk, i.e. financial, commercial, organisational/ operational and compliance/regulatory. Our long practical experience has shown us that this process brings ‘hidden’ risks to the surface. Risk Assurance Consulting helps management to deal with what it can’t see and provides such support that allows organisations to put in place the necessary policies and processes for an effective risk management framework. Gold: Tell us more about your unit’s solution sets and propositions. Christos Tsolakis: We share Plato’s view that “Each man is capable of doing one thing well. If he attempts several, he will fail to achieve distinction in any. So each of our thirty colleagues has a primary field of specialisation. Our solution sets and propositions relate to Internal Audit, licensing for regulated activities, regulatory compliance, IT governance and security, data assurance, internal controls optimisation, SAP, Oracle and Navision assessments and systems implementation assurance. More specifically, Internal Audit (IA) has much to do with outsourcing or co-sourcing the IA function, training and internal audit effectiveness reviews – in other words, establishing whether the IA function complies with professional standards, if it has the right reporting structure and if its processes and practices are aligned effectively with stakeholder expectations.

George Lambrou: Licensing for regulated activities relates to making an application to obtain a license to incorporate in Cyprus an investment firm, a private fund or an Undertaking in Collective Investment in Transferable Securities (UCITS) as efficiently and effectively as possible. Regulatory compliance relates to organisations that come under the supervision of a regulator in Cyprus. Our specialist knowledge of the regulatory framework has established a proactive approach in identifying ‘hidden’ regulatory risks and accordingly recommending remedial action. IT governance and security has to do with helping our clients understand the importance of IT for their business and, accordingly, we draw up a road map for handling disaster recovery plans that will support business continuity plans, threats and vulnerabilities to the security of data, the effectiveness of the IT function and the improvement of general controls of Information Technology. Data assurance relates to the review of data to establish that it is fit for purpose and analysing data in the most efficient and effective manner. Christos Tsolakis: Internal Controls Optimisation addresses management concerns of how to be in control of the organisation’s processes and results. We promote the notion that controls are no longer ‘add-on costs’ in an organisation and that they can lead to cost reduction. SAP, Oracle and Navision and ERP systems are widely used by organisations and their use creates many hidden risks. Our specialised tools help bring these hidden risks to the forefront, in particular risks arising from a lack of segregation of duties. Finally, systems implementation assurance has to do with avoiding dangers when adopting new software. We see many organisations deciding to purchase software without really knowing what they need or they start using new software without really understanding what to do. The result is often increased costs and inefficiencies. George Lambrou: To put it simply, I would say that PwC’s Risk Assurance Consulting solutions help management take well-informed decisions. The insight and independent assurance they bring provides an invaluable safeguard in today’s complex operating environment. The RAC unit works with clients from

their boardrooms to their back offices, helping them to protect and strengthen every aspect of their business from people to performance, from systems to strategy, from business plans to business resilience. For further information, visit www. pwc.com.cy/risk-assurance-consulting Any feedback or enquires may be send to george.lambrou@cy.pwc.com or christos.tsolakis@cy.pwc.com

BOOK REVIEW POCKET WORLD IN FIGURES 2013 BY THE ECONOMIST (ECONOMIST BOOKS, 2012) RRP: £10.99 (£6.59 FROM AMAZON.CO.UK)

he latest edition of this annual bestseller is full of facts and figures on subjects as diverse as geography, population and demographics, business, finance and the economy, transport, tourism and the environment, society, culture and crime. Where else would you discover that: the G7 economies account for nearly 40% of the world’s GDP but only 11% of its population? Or the fact that national income per head in Luxembourg is over $105,000 whereas in Burundi it is $160? Did you know that, between them, overseas Indians and Chinese send close to $100 billion home a year? Or that while life expectancy in Japan is nearly 84, in Afghanistan it is under 46? Or that there are 150 million Facebook users in the US? Yes, it’s trivia dressed up as serious statistics but it’s fascinating and with rankings on more than 200 topics, data on more than 180 countries, detailed profiles of more than 65 of the world’s major economies and special profiles on the eurozone and the world, it will keep you wellinformed as well as entertained.

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

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tax practice

{TAX&LEGAL}

ADIT: A Global Standard in International Taxation By Stacey Fink

n the age of globalisation, crossto study how they wish. This is ideal for busy Stacey Fink border transactions have become professionals looking to balance the demands an everyday occurrence on a huge of career development with their work/life scale which has wide implications responsibilities. for tax matters. As traditional tax Svetlana Stroykova of PwC Russia says, “I roles evolve, international tax prachave practised transfer pricing for a number of titioners now require a means of years in Russia. My decision to sit for ADIT gaining and benchmarking their inwas driven by a number of factors. Primarily, I ternational tax expertise with other wanted to systemise and test my knowledge of practitioners around the world. international tax principles, keep up to speed The Advanced Diploma in International with recent developments, particularly with Taxation (ADIT) is a professional qualification transfer pricing, as well as obtain a certificate for international tax practitioners working in the which is recognised globally. I believe ADIT procorporate arena. It has been developed and suvides an opportunity to achieve this for people all pervised by leading international tax practitioners over the globe practising international tax.” and academics. It provides the global benchmark ADIT provides benefits to a holder’s profesfor international corporate taxation, regardless of sional profile and is also beneficial to employers industry or location. ADIT is administered and and clients. Katarina Petovska, International awarded by the Chartered Institute of Taxation TP Manager at a multinational IT Company (CIOT), the premier professional body in the in Slovakia, and the ADIT CCH Transfer THEORY, COUPLED UK concerned solely with taxation. As a rigorous Pricing Prize winner for 2012 says, “Theory, WITH PRACTICAL and challenging qualification, holders of ADIT coupled with practical aspects, makes ADIT in ASPECTS, MAKES demonstrate a high calibre of knowledge in intermy opinion an invaluable qualification for tax ADIT AN INVALUABLE national taxation. professionals in big multinationals.” QUALIFICATION FOR TAX ADIT is a global qualification currently purEmployers can have the satisfaction that sued by students in over 90 countries around PROFESSIONALS IN BIG their team members are qualified international the world on every continent and in every matax specialists and encouraging employees to MULTINATIONALS jor market and industry sector. The qualificaundertake ADIT adds a competitive advantage tion is modular in structure, with exams availto their recruitment efforts. Clients are assured able annually, and students around the world that they are dealing with qualified professionsit the same exact exam at the same time. This means that clients, als who have been benchmarked against the best international tax employers and ADIT holders can all be certain that someone who practitioners around the globe. To find out more about registering sits ADIT in one country is of the same standard of expertise as as an ADIT student or to view full Syllabus details, please visit www. someone who sits ADIT in another country or anywhere else in adit.org.uk or contact a member of the Education Team at the the world. Our global network of exam centres, including one in CIOT by emailing info@adit.org.uk. Cyprus, allows students to sit exams locally, minimising costs and valuable time out of the office. Pantelis Stylianides Institute ADIT SPECIFIC COURSES Preparing for ADIT is straightforward and transparent – the full of Accountancy IN CYPRUS: Syllabus is available online at www.adit.org.uk. Also available are Eleni Stylianidou 22871287 essential and recommended reading lists and details about the level of KDC Limited knowledge required. In addition, past exam papers as well as real canChristos Theophilou 22875730 OTHER ADIT COURSE didate answers are published as a guide for preparing for coming exam PROVIDER OPTIONS CAN BE ctheophilou@kdc.com.cy, sessions. Because the CIOT does not provide course provision or FOUND AT: www.adit.org.uk www.kdc.com.cy training, students and their employers have the flexibility and choice

info: Stacey Fink is an ADIT Business Development Officer THE INTERNATIONAL INVESTMENT, FINANCE & PROFESSIONAL SERVICES MAGAZINE OF CYPRUS

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russia

{TAX&LEGAL}

BENEFITS OF THE PROTOCOL AMENDMENTS TO THE CYPRUSRUSSIA DOUBLE TAX TREATY PROMISE TO HELP INVESTORS By Chris Damianou and Andrey Tereschenko

n February 2012, the Russian Duma ratified the Protocol to the agreement for the avoidance of double taxation between Cyprus and Russia and, in March 2012, the Protocol was signed by the Russian President. As a result, the protocol is expected to come into effect on 1 January 2013 while certain provisions will come into force as of 1 January 2017. The Treaty is significantly amended by the Protocol. Many of the Protocol’s provisions clearly aim to combat aggressive tax planning. At the same time, the Protocol should create a better playing field and Russian businesses incorporated in Cyprus will not be viewed with a suspicious eye. It has been reported that as soon as Protocol comes into force, Cyprus will be removed from the Russian blacklist.

ARTICLE 26 (EXCHANGE OF INFORMATION) One of the most important and widely discussed amendments is the new Article 26 on exchange of information. It is worth noting that the new Article utilises the identical wording to that of the Organisation for Economic Cooperation and Development’s (OECD) Model Tax Convention on Income and Capital. The new Article 26 allows the competent authorities of the contracting states to exchange

information which is deemed relevant for the administration or enforcement of domestic laws concerning all types of taxes, insofar as these taxation laws are not contrary to the DTT. Any information received by a contracting state shall be treated as confidential and may be disclosed by the competent authorities in court proceedings. The latter change has led to widespread criticism since it is feared that it might be used by the Russian Tax Authorities to obtain information about the Russian beneficial owners of many Cypriot Companies. Nevertheless, the new Article 26 provides certain safeguards for the application of the general rule of exchange of information. The contracting states will need to follow procedures of collecting and supplying information in accordance with their domestic laws (or the laws of the other contracting state). In the case of Cyprus authorities, Cypriot Law 72(I)/2008 on the Collection of Taxes, provides that the Director of the Inland Revenue Dept. will only supply foreign tax authorities (signatories of a DTT) with information if he has received substantial details about the concerned person and the reason for the request for information. This provision seems to have been put in place to ensure that the foreign tax authorities do not engage in “fishing expeditions” without having any real evidence against the person under investigation. As a further control mechanism,

Cypriot Law provides that the Director of the Inland Revenue Dept. will only supply information if he has obtained the written consent of the Attorney-General. The Protocol makes the further provision that a contracting state authority cannot refuse to supply information merely on the grounds that it has no domestic interest in that information. A further ground of nonrefusal is for information held by a bank or in a nominee, agency or fiduciary capacity. In addition, according to the Protocol, information which could qualify as trade, business or industrial secrets does not come within the ambit of the Protocol, so such information will not be exchanged. The business community fears a possible abuse of power by the tax authorities which might proceed to obtain more information than that authorised by the Article. Therefore it is expected that the Attorney-General will exercise his powers with great care before giving his consent to any request. Below are the other main areas of interest for Russian investors, the amendments in the Protocol and some comments thereon.

DIVIDENDS

Current version of the Treaty: 5% withholding tax applies to direct investment of at

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least USD 100,000, subject to all necessary requirements. Amended version of the Treaty: 5% tax rate applies to direct investment into share capital of at least €100,000. Distributions from mutual funds regarded as dividends and taxed at source. Comments: Where direct investment is less than €100,000, the 5% tax rate may be kept if investment is brought up to that level. As there is no share capital in mutual funds, it may be that distributions therefrom will be always taxed at source at 10%.

INTEREST TREATED AS DIVIDENDS UNDER ARTICLE 269 OF THE RUSSIAN TAX CODE

Current version of the Treaty: Treated as interest. Amended version of the Treaty: Treated as dividends for the purposes of the Treaty. Comments: For the purposes of this provision of the Treaty, interest in excess of allowable limits under Article 269 of the Russian Tax Code (thin capitalisation) will be treated as dividends, and such interest being subject to Russian withholding tax will not be in conflict with the Treaty.

into force, income received by corporate and individual non-residents from mutual funds will be taxed in Russia at 20% and 30%, respectively. In many cases, such structures will have to be modified.

INCOME ON SALE OF PARTICIPATIONS IN RUSSIAN COMPANIES WHICH HAVE OVER 50% OF THEIR ASSETS IN REAL ESTATE

Current version of the Treaty: Exempt from Russian tax. Amended version of the Treaty: Will be taxed at 20% in Russia. Alienation of shares in the context of reorganisation as well as shares in companies listed in a recognised stock exchange are excluded from this provision. Comments: This provision is designed to combat the widespread method of selling property under the guise of selling equity interests. The provision will become effective in 4 years after the Protocol itself comes into force.

ASSISTANCE IN COLLECTION OF TAXES

Current version of the Treaty: The article existed but did not specify any rights or obligations.

RENDERING SERVICES WITH RESPECT TO ONE OR SEVERAL RELATED PROJECTS THROUGH ONE OR SEVERAL AUTHORISED PERSONS WHO IS PRESENT IN CONTRACTING STATE OVER 183 DAYS DURING A 12-MONTH PERIOD.

THE PROTOCOL IS EXPECTED TO MAKE CYPRUS MORE TRANSPARENT FOR THE RUSSIAN TAX AUTHORITIES

Current version of the Treaty: No special provisions. Amended version of the Treaty: Comments: Granting powers of attorney for conducting activities on behalf of a Cyprus company leads to increased permanent establishment exposure, especially in the case of management or advisory activities where the authorised person is a beneficiary and works actively in Russia on behalf of such a company. It must be noted that 183 days test refers only to presence and not provision of service, i.e. much shorter timing of provision of service may suffice to create a PE.

Amended version of the Treaty: The article sets forth a more detailed procedure for tax collection assistance and applies to all types of tax. It also defines what can amount to a revenue claim and provides for “an amount owed in respect of taxes of every kind” but also any “penalties and costs of collection” related to such an amount. Comments: This article will allow the Russian tax authorities to send tax collection requests to the Cyprus tax authorities, which, subject to the applicable requirements, will have to comply with such requests without going through any further administrative or judicial procedures. The article will come into effect once Cyprus adopts the relevant legislation.

INCOME FROM A MUTUAL FUND ESTABLISHED PRIMARILY FOR PROPERTY INVESTMENTS Current version of the Treaty: No special provisions. Amended version of the Treaty: Such income is treated as property income and may be subject to withholding tax in Russia. Comments: Tax structuring has often involved using mutual funds for property investments. Once the amendments come

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LIMITATION OF BENEFITS

Current version of the Treaty: The article is not included in the current version of the Treaty. Amended version of the Treaty: Under the article, benefits available under the Treaty may not be granted if obtaining benefits under the

Treaty is the primary purpose or one of the primary purposes for which the company was established. Comments: The provision does not apply to companies registered in Cyprus or in Russia. However, the provisions do apply, inter alia, to UK or BVI companies that have chosen to be tax residents of Cyprus. Income received by such companies may be taxed in Russia at rates specified by the domestic tax law, regardless of any benefits that may available under the Treaty.

TAXAND’S TAKE The entry into force of the Protocol is expected to make Cyprus more transparent for the Russian tax authorities as well. As a result, not all of the solutions currently used owing to the nontransparent nature of Cyprus will work going forward. Russian companies having Cyprus structures need to assess the implications of the amended Treaty for their existing structures and, where necessary, take steps to bring them up to date. The issue which needs to be addressed in the first place is the issue of substance. Substance refers essentially to how ‘legitimate-looking’ a company is (either holding or trading). In order to add substance to such an offshore holding, providing a registered address and a local director will no longer suffice. What needs to be demonstrated is that the Company in Cyprus has employees, busy offices, assets, real job execution, decision-making and economic value for its Cyprus operations. Once it can be proved that the business is solid, it will be difficult for the structure to be interpreted as designed solely for the avoidance of taxation. There is no clear guidance on which minimum level of substance would suffice. This is a crucial issue will, of course, somehow be clarified in practice down the road. However, it needs to be looked at now rather than in 3 or 5 years’ time. All current Russian-Cypriot structures will need to be revised and possibly restructured immediately and the substance requirement assessed on a case-by-case basis. Russian and foreign companies should be aware that if they undertake any type of restructuring in the wake of the signing of the Protocol and also continue to use structures that involve Cyprus companies, they should pay special attention to whether such steps have a business purpose. Chris Damianou (Eurofast Taxand, Taxand Cyprus), www.eurofast.eu Andrey Tereschenko (Pepeliaev Group, Taxand Russia), www.pgplaw.ru

28/09/2012 13:42

russia

{TAX&LEGAL}

n 2011, Russia took a step forward in the global competition to attract FDI, according to Ernst & Young’s recently published second Russia Attractiveness Survey. A boost in consumption, a strong labour market and an increase in investments are the prime drivers of this growth. Foreign investors confirm that Russia is attractive by nature. Its world-class features, such as natural resources and a huge domestic market, support Russia’s leading role in the global economy. Since 2006, Russia’s investor appeal has increased nearly fourfold. Its profile for investors has been improved by its growing consumer market, expanding industrial base and recent government efforts to tackle corruption, reduce bureaucracy and decrease the country’s over-reliance on oil and gas. In 2011 particularly, there was a boost in investors’ confidence in the country as a result of the agreement to join the WTO in mid-2012. Some 62% of investors believe Russia’s accession to the WTO will increase the country’s attractiveness for investment.

SINCE 2006, RUSSIA’S INVESTOR APPEAL HAS INCREASED NEARLY FOURFOLD Strengths that make Russia a magnet for investors

National resources. 43% of survey respondents named an abundance of natural resources as Russia’s most globally competitive feature. Over half of respondents (56%) expect Russia to still be an energy sector leader in 2020. Market opportunities. Three-quarters of all respondents, and 85% of those already present in Russia, continue to be impressed with Russia’s domestic market. According to industry estimates, the country is poised to become Europe’s largest consumer market by 2018. Higher education advantage. Two-thirds of the respondents cited education as one of Russia’s competitive advantages.

POSITIONED FOR GROWTH RUSSIA INVESTMENT ATTRACTIVENESS: A STEP FORWARD

Balanced labour costs and skills. Nearly 56% of respondents described the availability of skilled labor as a positive factor for investing in Russia. Low labour costs were mentioned by 61% of investors. Solid telecommunications infrastructure. 64% of respondents list Russia’s telecommunications infrastructure as an attractive feature. Russia has the fourth-largest number of operational landlines and cellular phones in the world. In 2011, Russia also surpassed Germany to become the largest Internet user in Europe.

Russia’s areas for improvement

Political, legislative and administrative environment. 62% of investors highlighted this area as needing improvement. Transport and logistics infrastructure. Respondents have mixed views on the current state of Russian infrastructure – while 45% do not find Russia’s infrastructure attractive, 44% consider the transport and logistics infrastructure to be an advantage. However, government spending on road and railway infrastructure is growing. The need to renew transport and logistics infrastructure has now become a political priority at the highest levels.

Innovation and a culture of entrepreneurship. Innovation in the country suffers because of very low levels of R&D and relevant activities in corporations, weak framework conditions for innovation and inadequate infrastructure. Ernst & Young’s G20 Entrepreneurship Barometer report highlights that access to funding continues to be one of the most significant challenges for the creation, growth and survival of small and medium enterprises (SMEs), particularly innovative ones. Entrepreneurs also complain about the lack of tax incentives to start a business.

2013: Plans for Investment

Investors already present in Russia continue to demonstrate their confidence in the Russian market. Nearly 80% of these investors plan to increase or maintain their operations in the country. There is a wide gap in plans between the companies that already have operations in Russia and those that are not yet established. 70% of the companies that are not established in Russia have no plans to invest in the country in the next year. In 2011, Russia led Central and Eastern Europe (CEE) in attracting FDI. Despite

info: To download the full report, go to http://www.ey.com/GL/en/Issues/Business-environment/Positioned-for-growth---2012-Russia-attractiveness-survey 84 Gold THE INTERNATIONAL INVESTMENT, FINANCE & PROFESSIONAL SERVICES MAGAZINE OF CYPRUS

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tivity into Russia by emerging economies remained low between 2007 and 2011. India and China each accounted for less than 2% of FDI projects in Russia. Brazil established just two projects in the country.

How to meet investors’ expectations

Create an Investor-Friendly Environment. Russia offers investors a high-growth economy, a large domestic market and highly skilled labour at moderate cost. But its enduring reputation for difficult business conditions deters investors. Doing business in Russia is fraught with challenges associated with corruption, government bureaucracy, complex regulatory requirements and a lack of transparency. Investors highlight the following top three ways to enhance Russia’s investment appeal: Improve the effectiveness of the rule of law (53%), Reduce bureaucracy (47%), Improve transparency of business regulations (37%) Reduce Russia’s Dependence on Oil and Gas. Overdependence on the oil and gas sector is among of the biggest challenges that the Russian economy faces today. As a result of this focus on oil and gas, there is a large mismatch in Russia between the attention that other strategic industries receive from investors and their real potential. Among the most attractive sectors, investors highlight ICT (20%), agriculture (13%), consumer goods (13%) and transport and automotive (11%) as the keys for growth in the next couple of years. Create a Favourable Environment for R&D and innovation. Inadequate infrastructure and a lack of government incentives are two of the hindrances that are holding back innovation and R&D in Russia. According to the GE Global Innovation Barometer 2012 survey, more than 87% of the top Russian managers surveyed highlight weak government and private sector support for innovative companies, as well as the poor quality of the regulatory environment. Improve Russia’s education system. Although one of Russia’s strengths is its higher education and a larger proportion of Russian high school students go on to tertiary education than in any OECD economy, only 7% of respondents believe Russia will have one of the best education and higher learning systems in 2020.

that, the number of FDI projects declined by 36% in 2011, down to 128. However, 8,362 new jobs were created, a 4% increase over 2010. Labour-intensive industrial activities increased the average number of jobs created per project to 65 in 2011 from 40 in 2010. Manufacturing activity remains at the heart of Russia’s attractiveness. It accounted for 51% of investment projects and 92% of job creation between 2007 and 2011. The sales and marketing function attracted

62%

OF INVESTORS BELIEVE RUSSIA’S ACCESSION TO THE WTO WILL INCREASE THE COUNTRY’S ATTRACTIVENESS FOR INVESTMENT

259 projects, 33% of the total FDI projects in Russia. More than 80% of these sales and marketing projects were concentrated in Russia’s two largest cities – Moscow and St. Petersburg. Automotive has been the key sector attracting FDI in Russia over the last five years, with 90 projects and 16,787 jobs created. The food sector brought in the secondlargest number of FDI projects (86) in Russia. Over the past five years, the industry created employment for 9,958 people. Machinery and equipment emerged as the third-largest sector in Russia in terms of FDI projects (62) and the fourth-largest in job creation (3,682 jobs) between 2007 and 2011. Russia’s business services sector has seen a growth in FDI activity in recent years. It accounted for 9% of the total FDI projects in 2011. The United States remains Russia’s leading investor with 122 FDI projects between 2007 and 2011 (16% of the total). However, eight of the top 10 FDI source countries are from Europe. Over the past five years, European countries originated 343 FDI projects, 44% of the total in Russia. FDI ac-

THE INTERNATIONAL INVESTMENT, FINANCE & PROFESSIONAL SERVICES MAGAZINE OF CYPRUS

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{LIFESTYLE}

Good Vibrations WHEN IT COMES TO STRINGED INSTRUMENTS THAT MATURE WITH EVERY VIBRATION SENT THROUGH THEIR WOODEN BODIES, AGE MATTERS AND ANTIQUE MODELS HAVE BECOME MADDENINGLY DESIRABLE TO MUSICIANS AND NON-MUSICIANS ALIKE. BUT HOW GOOD AN INVESTMENT ARE THEY? By Chloe Panayides

Guarneri del Gesù violin

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investing in music

rare Stradivarius violin dating back to 1721 (affectionately named ‘Lady Blunt’ after its first owner, Lady Anne Blunt, granddaughter of the English poet Lord Byron) sold for $16 million at a charity auction last year. The very same instrument had been purchased 40 years earlier for the then record price of $200,000. Rest assured that this is not an isolated incident of phenomenal return. Born from their modest workshops in the northern Italian town of Cremona hundreds of years ago, instruments credited to luthiers Antonio Stradivari (1644-1737) and (1698-1744) are still prized and deeply coveted by aspiring and seasoned musicians as well as by collectors the world over. Whilst both men dedicated their lives to handcrafting stringed instruments with an originality and robustness that has yet to be matched, a ‘golden age’ in their later years further discerns within their production the unsurpassable from the merely remarkable. Today, there are scarcely more than 135 instruments (all violins except for one cello) from Guarneri del Gesù’s output still in existence. To Stradivari’s name (having lived for nearly twice as long), there are approximately 650 surviving instruments, comprising mostly violins, plus 50 cellos, about a dozen violas and three guitars. As Stewart Pollen, conservator of musical instruments at New York’s Metropolitan Museum of Art, puts it: musical instruments are not like gold, which can always be mined for more. So, anything that is rare and in high demand presents an opportunity to the investor. Musical instruments that are dwindling in supply yet

always wanted make a very sound choice indeed. Whilst instruments crafted by Stradivari or Guarneri del Gesù have commanded high prices in America and Europe as far back as the 18th century, it was the introduction of controversial pedagogue Shinichi Suzuki’s groundbreaking music education method in the 1970s that brought Asia into the mix and as millions of new musicians emerged, so did the now truly global market. Thus, whereas in the 1920s the purchase of a Stradivari or Guaneri del Gesù would have set you back $25,000 to $50,000, the price had risen to $100,000 in the 1960s and to $500,000 in the 1980s, finally breaching the $1 million mark in the 1990s. With competition intensifying year-onyear, due in part to the contemporary trend of institutions acquiring select pieces and retaining them for generations, the market has seen an additional threefold increase in the value of masterpiece stringed instruments since the 1990s. Most of the post-1700

A FAR DEPARTURE FROM THE STOCK MARKET WITH ITS NOTORIOUS BOOMS AND BUSTS, THE MUSICAL INSTRUMENT MARKET HAS NEVER, EVER DECREASED IN VALUE Stradivari violins and post-1730 Guarneri de Gesù violins – the ‘golden age’ era production – were selling in the range of $2 million to $6 million during the early 2000s depending on their condition and historical significance. As the decade concluded, the del Gesù ‘Kochanski’ – formerly owned by Aaron Rosand for 40 years – was sold for a very healthy $10 million in 2009. Research analysing the market between 1960 and 2008, released by The Stradivari Society of Chicago, reveals that not only have rare Italian instruments been subject to steady increases in value over the past 45 years, they have also demonstratively and consistently outperformed the Dow Jones Industrial Average (DJIA) and precious metals by

SOCIAL RESPONSIBILITY OR PRICELESS PHILANTHROPY?

usic has long served society as a force that brings together and binds people of all ages and experiences. Ensuring the perpetual existence of concerts and music education programmes in a particular locale may be considered an essential contribution to the healthy development of a community, city or even country. The Cyprus Symphony Orchestra Foundation was born in 2006 out of this very concern, with the self-professed aim of developing and promoting classical music, of improving musical life and education in Cyprus, as well as boosting the involvement of society in musical activities. Both the Cyprus Symphony Orchestra and Cyprus Youth Symphony Orchestra are under the administration of the nonprofit Foundation. Through collaborations with various organisations – schools, festivals or media channels – the Foundation hopes to raise the profile of its activities, which include 60 evening concerts and 15 ‘outreach’ concerts every year, coupled with educational projects spread throughout the whole of Cyprus bringing musical inspiration to more than 6,000 schoolchildren. The Foundation welcomes sponsorship and whether supporting overall concert programmes for a specific period or choosing to be associated with a particular community outreach programme, the value of investing in such philanthropic musical endeavours – and receiving publicity and hospitality benefits in return – can be priceless.

THE INTERNATIONAL INVESTMENT, FINANCE & PROFESSIONAL SERVICES MAGAZINE OF CYPRUS

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WHILE MY GUITAR GENTLY REAPS

ertain instruments, most notably guitars, have come to be almost deified, immortally fixed as constellations expressing music legend. Whether the prototype of a now favourite model or one previously owned and played by a prominent musician, the following guitars with so-called ‘rich provenance’ are the most expensive ever valued or sold.

“REACH OUT TO ASIA” FENDER STRATOCASTER (Pictured) Sold for $2.7 million In the wake of the tsunami that struck and devastated Asia in 2005, this guitar was sold at auction in Qatar to raise funds for the Reach Out to Asia charity. The instrument is signed by Mick Jagger, Keith Richards, Eric Clapton, Brian May, Jimmy Page, David Gilmour, Jeff Beck, Pete Townsend, Mark Knopfler, Ray Davis, Liam Gallagher, Ronnie Wood, Tony Iommi, Angus and Malcolm Young, Paul McCartney, Sting, Ritchie Blackmore, Def Leppard, and Bryan Adams.

JIMI HENDRIX’S 1968 ERIC CLAPTON’S 1964 STRATOCASTER GIBSON ES0335 TDC Estimated price $2m Sold for $847,500 Infamously played by Jimi Whilst particularly good use of Hendrix at Woodstock in 1969. this guitar was made by Eric Clapton in 1964, it is thought to have been rarely played BOB MARLEY’S thereafter; a point that did little CUSTOM-MADE to deter Clapton fan investors. WASHBURN 22 SERIES HAWK Estimated price $1.2m to ERIC CLAPTON’S CF $2m MARTIN & CO, CIRCA Classified as a national asset 1939 by the Jamaican government, Sold for $791,500 this instrument is one of This guitar belonging to Eric only seven guitars owned Clapton did massively well by the reggae icon, with its when put up for sale to raise estimated value now well money for his Crossroads abive the $1million mark. Rehabilitation Center.

“BLACKIE” – ERIC CLAPTON’S STRATOCASTER HYBRID Sold for $959,500 In 1970, Eric Clapton bought six vintage “Strats” from a guitar shop for $100 each, giving one to George Harrison, one to Pete Townshend, and one Steve Winwood, reserving the remaining three for himself. He subsequently took apart his three, piecing them together again to make one guitar: Blackie.

an enormous percentage: a 19,400% increase for violins versus up to 1,800% for precious metals and the DJIA. Crucially, and a far departure from the stock market with its notorious booms and busts, the musical instrument market displays comfortingly stable crescendos of growth and sustained plateaux of current worth; it has never, ever decreased in value. So how does one get involved? In truth, it is a tricky market to penetrate. Unlike the equity market for which a simple phone call may procure a purchase or sale, the low-level liquidity of the instrument market means that the choice to invest is a long-term commitment. There is, furthermore, the concern as to whether a prospective purchase is a genuine product and in first class condition. Value increases for an inauthentic or damaged instrument are sure to be severely stunted. An ideal way to invest money into a worldclass stringed instrument is to approach a syndicate that is committed to contributing

“LENNY” – STEVIE RAY VAUGHAN’S 1965 FENDER COMPOSITE STRATOCASTER Sold for $623,500 Blues guitarist Stevie Ray Vaughan was given this instrument by his wife Lenny as a 26th birthday present in 1980. One of his favourite guitars, it was used many times until his death in 1990.

GEORGE HARRISON AND JOHN LENNON’S 1964 GIBSON SG

Sold for $570,000 Between 1966 and 1969, this guitar was used by George Harrison on recordings for the album Revolver, whilst John Lennon made use of it during the sessions for The Beatles (‘The White Album’).

ERIC CLAPTON’S GOLD LEAF STRATOCASTER Sold for $455,550 Nearing the fiftieth anniversary of Fender, Eric Clapton ordered this guitar, reportedly with the intention of acquiring something that could be placed in a museum. The company obliged, making him a custom 23 carat gold plated Fender Stratocaster.

10.

1949 FENDER BROADCASTER PROTOTYPE Sold for $375,000 With its slab body shape and single cutaway to allow for easier access to the upper frets, this guitar was Leo Fender’s prototype for what is now considered the most popular guitar ever made: the Fender Telecaster.

to the classical music scene. As the affordability of prime instruments has become less attainable for working musicians – even those considered to be high-earners – individual benefactors, companies and syndicates have begun supporting the arts and expressing social responsibility by helping to acquire such instruments for use by worthy artists and providing for performance forums. This practice of patronage has come forcefully to the fore in the last decade or so, spreading to an international scale. In America, The Stradivari Society of Chicago holds more than 20 instruments on loan to outstanding artists with a total value in excess of $30 million; Asia is home to such institutions as the Chi Mei Foundation and the Nippon Music Foundation with loans spread throughout the world; and Australia’s Music Council has launched the National Instrument Bank initiative for the same purpose. Each organisation adheres to an individual process permitting involvement. The Stradivari

Society of Chicago, for example, accepts corporate sponsorships. In exchange for the society overseeing the administration of instrument loans and insurance, serving as a liaison between artists and patrons, and ensuring that the piece is kept in excellent condition until the decision is made to sell, corporate sponsors engage in the full purchase of an instrument. Another angle of advancement for individual benefactors, who may not be able to cover the total cost of an instrument, is to approach a syndicate with the proposition of contributing a proportion of the purchase; investors thereafter have the opportunity of selling their share at any time at an agreed market value. Until the time comes to sell, however, music lovers fill concert halls in anticipation of beholding a world-class musician performing with a first-class instrument, and investors feel satisfied at having made both a personal difference and at having accomplished a professional feat. That makes for good vibrations all round.

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Are the Greeks Europeans?

THE LAST WORD

Greek thought is at the heart of European civilization. So where did things go wrong? By Peter Economides

‘‘Are the Greeks Europeans?’’ It took me a while to answer this question. Not because it was a difficult question to which I did not have an answer. But simply because it had been asked. The person asking was a well-known journalist from Süddeutsche Zeitung, one of the most widely read and highly respected German newspapers. Isn’t Europe a Greek name? The woman abducted by Zeus in the form of a white bull? Isn’t Greek thought at the heart of European civilization? Perhaps we don’t have to go as far as claiming, as did Giscard d’Estaing that “Europe without Greece would be like a child without a birth certificate.” But where did we go wrong? Apart from the genesis of Europe – in name or in spirit – isn’t Europe a mosaic? A beautiful, multicoloured mosaic in which each piece plays a role and the whole is bigger than each of its individual pieces? It was a big question this journalist was asking me. Much, much bigger than I thought. Of course the Greeks are Europeans. Perhaps not, however, in a world dominated by productivity, efficiency, balanced books and the Protestant ethic. But is this all that Europe is about? The Greeks are under pressure to become “good Europeans.” And what it means to be a good European is dominated by the Northern European definition. This definition may move sometime towards

the all-encompassing idea for which the European Union was initially intended. But no matter what, it is up to the Greeks to carve out a meaningful role within Europe. And they can only do this by being in touch with their essential DNA.

It is up to the Greeks to carve out a meaningful role within Europe

If the Greeks lose this DNA, the the Greeks lose themselves. Full stop. Let me make one thing clear. I am not talking about physiological DNA. This page is not the place to attempt to trace Greek lineage back to the ancients. I am talking about the essential concept of Greece. The spirit in which the Greeks live their lives. The stuff that defines the “Greekness” of Greece. About what makes this nation tick. I think the world understands what this is. It’s called life. And the amazing love that the Greeks have for life was present in ancient Greece. The love of humanity that gave rise to democracy. The love of beauty that gave rise to sculpture. The love of peace that gave rise to the Olympic Truce. The love of knowledge that gave rise to science. The love of discovery that gave rise to philosophy. The love of wisdom that shines from the Acropolis in Athens. Life. This is Greek know-how. And when we harness its creative power we will reverse our image as a nation with a zest for life and an aversion to productivity. We need to utilize our “life know-how” and transform it into creative enterprise in a way that will be valued by the world. This is how we can reignite our economy. By doing things that Greeks can excel at. By creating sustainable competitive advantage based on the uniquely Greek knowledge – and love – of life.

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 advertising 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

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

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A new generation is driving the services sector

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MONEY / BUSINESS ECONOMY TAX & LEGAL LIFESTYLE

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