Why dependence on Ankara makes Northern Cyprus vulnerable
How the country of Turkish Cypriots was attracting investors and tourists
On 20 July, Northern Cyprus celebrated Peace and Freedom Day — on this day 45 years ago Turkey occupied 37 per cent of the island, eventually dividing the Turkish Cypriots and Greek Cypriots with the “green line”. Thus was born the Turkish Republic of Northern Cyprus, which is recognized only by Turkey and no one else. The country is heavily dependent on Ankara financially, and tourism remains the main branch of its economy. The country has legalized casinos, liberalized the economy and is trying to attract foreign investors — from Americans to Israelis. Realnoe Vremya has studied the “economic issue” of Northern Cyprus, remembering how the country has lived all these years virtually in world isolation, but managed to compete with its neighbour — the Republic of Cyprus.
What holiday it is and why only a third of the islanders celebrate it
July 20 was Peace and Freedom Day in Cyprus, but it is celebrated by only part of the islanders living in 37 per cent of its territory. It is Northern Cyprus, or the Turkish Republic of Northern Cyprus, whose inhabitants speak Turkish. Officially, Northern Cyprus is recognized by only one state in the world. Of course, it is Turkey.
The division of the island into the territories inhabited by Turkish Cypriots and Greek Cypriots was caused by the phenomenon called “enosis”. Enosis is the movement that existed in the 19th-20th centuries, for reunification with the historical Greek homeland in regions with a predominant Greek-Christian population under the control of other states.
Enosis helped in the revival and preservation of the Greek language and Orthodox culture in a large area, but also led to a number of still unresolved conflicts in the region. Cyprus as an independent state was established in 1960 after the declaration of independence from the UK. The Greek and Turkish communities were given equal rights and opportunities to participate in the governance of the new state. The guarantors were the UK, Greece and Turkey.
Why two peoples of the former British colony quarrelled with each other
But even then, the relations between the two peoples were tense — in the mid-1950s, a wave of Greek pogroms swept Istanbul and Izmir. The relations between the two guarantors, Turkey and Greece, which were constantly on the verge of war, left much to be desired. By 1963, the Turkish Cypriots had lost their government posts, and the rural Turks were blocked by the Greeks in the areas of compact residence — until the partition of the island in 1974. In 1967, the Greeks attacked Turkish areas in southern Cyprus, and the Turkish Cypriots responded by forming the official Turkish Cypriot Provisional Administration, declaring the non-recognition of all laws issued in the Republic of Cyprus since late 1963.
At the same time, the military junta came to power in Greece (known as the Regime of the Colonels), whom the Greek nationalists in Cyprus sympathized with. As a result, in July 1974 on the island there was a military coup, in the course of which the party advocating the accession of Cyprus to Greece came to power. In response, taking advantage of the provisions of the 1960 Treaty and under the pretext of restoring constitutional authority, the Turkish troops invaded Cyprus, which led to the partition of the island.
The Turkish Republic of Northern Cyprus (TRNC) is separated from the Republic of Cyprus by a buffer zone, the line dividing the island into two sectors (Green Line), protects the contingent of the United Nations Peacekeeping Force in Cyprus (UNFICYP). The Green Line runs through the historical centre of the island capital of Nicosia — the tourist and shopping street Ledra.
About how independence has ceased to please the Turkish Cypriots
In 1975, the Turkish Federal State of Northern Cyprus was self-proclaimed. Neither the Republic of Cyprus nor the international community supported this idea. In the same year, there was an exchange of population: 190,000 Greeks went from the north to the south of the island, leaving everything, and 40,000-45,000Turks left everything in the southern part and moved to the north. In 1983, the Turkish Federal State of Northern Cyprus declared independence from Cyprus and became known as the Turkish Republic of Northern Cyprus (TRNC). The declaration of independence was rejected by the UN. Despite this, the Constitution of the Turkish Republic of Northern Cyprus was adopted by a majority of 70,2 per cent in the referendum on 5 May 1985. At the same time, the TRNC is an observer in the Organization of Islamic Cooperation.
Interestingly, the Turks themselves quickly disliked the idea of independence, who in 2004, for example, voted by a majority vote in the referendum for the unification of the island on the basis of the plan proposed by the UN Secretary-General, while the Greek Cypriots — 75% — opposed. In part, perhaps, because the plan “limited the rights of the Greeks to property transactions in the northern part of the island until the standard of living of the two communities is equal.”
The last time the parties were close to an agreement was in 2014 when the TRNC and the Republic of Cyprus stated that they would seek to create a united Cyprus that would look like a single state — federal, bi-zonal and bi-communal, which was unwelcome for Turkey. In October 2014, the negotiations were broken down after the Turkish research vessel accompanied by warships began the seismic exploration of minerals in the exclusive economic zone and on the shelf of Cyprus.
Despite the unrecognised status of the TRNC, a number of states still have official or unofficial representations in Northern Nicosia, including the United States, Germany, Australia, UK, France, and the EU as a whole.
The currency in Northern Cyprus is Turkish, phone code and the Internet — too
The EU in the 2000s was the second largest trading partner of Northern Cyprus, with a share of 25% of total imports and 28% of total exports. Imports from the US reached $7,1 million in 2004. Besides, in the TRNC there operates the major American financial consulting company, Bearing Point.
The TRNC, however, cannot be called an economically independent and self-sufficient state, since it largely depends on the military and economic assistance of Turkey. In 2013-2015 alone, North Cyprus received 30 billion Turkish lire. In total, from 1974 to 2011, according to a report of the Chamber of Commerce of Northern Cyprus, the Turks allocated 3 billion dollars to this entity: 1,3 billion went to the defence, 1,6 billion — to infrastructure loans. In the same period, the TRNC received $3,2 billion in credit loans from Ankara.
The Turkish lira remains the currency of Northern Cyprus. The telephone code of the island is “+90 392”, where the figures of the international telephone code of Turkey “+90” and the Turkish city code are used. The North Cyprus domain is a second level domain — “.nc.tr”.
Main branch of economy is service industry, i.e. tourism
The main branch of Northern Cyprus is the service sector, i.e. tourism (from 60% to 70% of the economy according to various estimates). Light industry accounts for up to 20%, agriculture — up to 10%. As the only example of heavy industry, the economists name the cement plant in Bogaz.
The AIC employs 25% of the workforce of the Turkish part of Cyprus. After the large fire in 1995, agriculture lost 10% of all forests. It was also struck by the European Court of Justice, which ruled that agricultural products must be phytosanitary (confirming that plants do not have diseases) and have certificates from officially recognized authorities of the Republic of Cyprus. As a result, many agricultural products from Northern Cyprus must be exported to Turkey before they can reach European markets. The main products are citrus, grapes and grape products, potatoes and other vegetables. The economy is limited by the lack of international recognition and because all foreign trade operations of the TRNC can go only through Turkey.
The Republic of Cyprus is more fortunate — there are minerals, a third of the value of industrial products is created in the mining industry, two-thirds — in manufacturing. Copper ore, iron pyrites, chromite, asbestos are mined there. There are even refineries, although oil is imported.
In the northern part of Cyprus there operates Turkish Petroleum, which upon reaching an agreement with the TRNC on the delimitation of the continental shelf began geological exploration near the shores of Northern Cyprus. In July 2019, it has become known about the increasing activity of Turkey in the exclusive economic zone of Cyprus: gas was found on the shelf, and Ankara considered that it has the right to natural resources in the region.
At the same time, the Turkish Cypriots are following with interest the Israeli project on the Leviathan gas field, the development of which is to begin this year. After establishing relations with Turkey, it will be possible to transport gas through Northern Cyprus, which stimulates investment.
Economic liberalization, IT development, free visas and low prices
The TRNC’s income from tourism is around half a billion dollars. According to the information portal Our Northern Cyprus (Nash Severny Kipr), in 2014-2015 the country received up to 600,000 tourists annually, 80% of them were residents of Turkey. In 2017, the flow of tourists amounted to 1,5 million people. It is argued that, despite international non-recognition, the economy of Northern Cyprus, “unlike Greece and southern Cyprus”, “has been experiencing a steady rise” in the last decade.
This is influenced by two factors, the first — aid from Turkey — written above. The second is liberal economic policy. First of all, we are talking about a low tax base (VAT — 5%, real estate tax — 0,5 euros per square metre). Second, low prices due to the targeted pricing policy of the state. Third, the attraction of private investors in the business and real estate sector. And fourth, about the obvious “active attraction of tourists” with free visas and low prices in the areas of retail trade and service. They even assure that the prices of Northern Cyprus “are much lower than in Russia”.
Third-party observers agree with the portal, noting that the TRNC government gives priority to the development of high-tech industries, not only tourism. The Turkish Cypriot investment Agency YAGA is engaged in attracting investors to the technology and innovation sector, its latest project “Power recovery from solid waste” even seems to have attracted the attention of four foreign investors.
Why dependence on Ankara has made the TRNC vulnerable
The attempts to pull the TRNC out of economic isolation in 2003, in the run-up to the expected reunification of the island, gave a major economic impetus to it. Thus, in anticipation of a tourism boom in 2004, the EU invested €259 million in the economy of Northern Cyprus to develop infrastructure and attract more investors. The Turkish government invested another $550 million between 2003 and 2006 in infrastructure and tourism development in the northern part of the island. In the same 2004 year, the United States invested $30 million in the economy of Northern Cyprus.
At the same time, dependence on Turkey directly means dependence on the Turkish lira, to some extent — when the lira is stable — positive, to some extent — when the lira drops, not so much. Thus, the rate of economic growth in 2003-2004 was 9,6%-11,4%, per capita income increased almost twofold from 2002 to 2004, from $4,409 to $7,350. But this growth was primarily due to the relative stability of the Turkish lira and the employment of 5,000 Turkish Cypriots in jobs in the southern Cyprus, where, by the way, wages were higher and there was a boom in the education and construction sectors.
Despite Islam: Northern Cyprus decided to legalize the casino, the project paid off
In recent years, the real estate sector has been growing strongly, “willingly acquired not only by local residents but also by an increasing number of immigrants, among whom Russians are not in the last ranks”. However, not all Turkish Cypriots are happy with the “invasion of foreigners”, in particular, they are concerned about the interest of the Israelis who have bought, allegedly, already 15% of real estate in Northern Cyprus. A number of Azerbaijani companies are also interested in investing in the construction of hotels in the northern part of Cyprus, while there are student exchange programmes with Azerbaijan.
By the way, the sector of general and higher education is also developing, which, according to economists and sociologists, “will soon take the second place by the contribution to GDP after tourism”. From the curious — the Internet development level of the younger generation of Turkish Cypriots. In 2017, an EU special study showed that the island of Cyprus is one of the leaders in the use of social networks in Europe — 79%, it is second only to Hungary (83%), Malta (82%) and Belgium (80%). A number of researchers claim that 10% of the inhabitants of Northern Cyprus — programmers.
A separate line of income is the gambling business, which North Cyprus is legalized in 2015. In the first 2 years, the casino brought into the government's coffers from €600 million to €800 million. Today, in North Cyprus there are about 25 casinos in the three major cities — Lefkosia (Nicosia), Famagusta and Girne (Kyrenia). The appearance of the casino could not but please Turkey itself, of course.
While Northern Cyprus is luring investors...
Today, Northern Cyprus is developing dynamically, some say, exerting even a noticeable impact on international relations in the region, actively participating in international trade and attracting the attention of foreign investors. For example, in the period from 1977 to 2003, GNP of the TRNC grew to 37,5%, and inflation growth was only 1%. Being inferior for many decades in economic terms to southern Cyprus, Northern Cyprus in recent years has begun to catch up with it by a number of indicators.
According to the Turkish Cypriot Chamber of Commerce, based on the global competitiveness report of the World Economic Forum for 2016-2017, the global competitiveness index of the Republic of Cyprus stopped at the level of 4.0, while the TRNC index reached 3.8. The TRNC is already ahead of the Republic of Cyprus in macroeconomic conditions and even the development of the financial market. In 2017, the total investment in the economy of Northern Cyprus amounted to $477,2 million, excluding Turkish aid in the amount of $134,2 million. Northern Cyprus is attractive for investors also because if the liberalization of the economy: for example, the district of Famagusta is a free economic zone, and Famagusta itself is a free-trade zone. The local authorities offer foreign companies the tax rate on profits the same as local — 25%.
In addition, foreign investors receive a tax incentive of 200% of the initial capital — for investments in priority development areas and sectors of the special purpose economy, and of 100% of the initial capital — for other regions and sectors of the economy. Besides, the imported equipment is exempt from customs duties, as well as the construction license is exempt from taxes and fees. The zero VAT rate applies to the export of all goods and services from the TRNC to foreign states and from a foreign state to another foreign state through the TRNC. Interestingly, among the main importers of the TRNC today there are not only Turkey, the UK, Israel or China, but also Russia. Among the exporters, there dominate Turkey, the Middle East and... the Republic of Cyprus.
...Turkey can blackmail it financially
Sceptics do not really trust the current boom, pointing to the strong dependence of Northern Cyprus on his older brother. And this “Turkish dependence” made itself felt in 2018-2019 when it turned out that the TRNC had not received funding from Ankara for already a year (!). Northern Cyprus links it with political pressure, allegedly Turkey is not very happy with the current administration: “Ankara has two main expectations: respect for its authority and compliance with the policy of Sunni Islam. The Turkish government is trying to make us comply through resorting to financial pressure.”
In the absence of investments from Ankara, the economy may face stagnation in the coming months. Moreover, the domestic debt of Northern Cyprus today is about 6 billion Turkish lire (about 980 million euros).