The recent post by Paul Krugman on “round tripping” in Cyprus reflects a fear shared by many commentators on Cyprus’ role as a “tax, regulation and law enforcement haven”. As a Cypriot I do feel a certain obligation to point out that there are, of course, other significant reasons attracting investors and business to Cyprus, but let’s not go there. The country faces significant problems in its regulatory infrastructure, a point that this blog has made with (I think) quite some force in Greek, which is obviously addressed to a Cypriot readership.
And, yes, an economy about the size of Nebraska (and probably smaller since the crisis) reinvesting more than any other in Russia, makes little sense -even given that services are cheaper and better in Cyprus than most other jurisdictions (and yes, the quality of lawyers and accountants is quite high).
But there is a point to be made, even for those of us who would like to see the country make the best of the crisis to open up the markets, boost competitiveness and reform its institutions.
Krugman ends his post making a simple point: “My guess is that in the end Cyprus can’t reclaim the round-tripping business — and once it decides that it can’t, a resolution (to the crisis) will become much easier. But they’re not there yet.”
Perhaps we are closer than Krugman thinks –even if not as close as this blog would hope.
Yesterday’s EU Summit on the Ukraine crisis may have revealed something important. Cyprus was caught in a difficult position. As an EU member state aligned with the Western, older members of the EU, it wanted to stand against Russian actions in Ukraine, even though this desire didn’t go as far as it did for some Eastern Europeans.
On the other hand, as a round-trip hub, as a center for much Russian economic activity, and beyond that, as a close historical ally of Russia, it was always uneasy with siding against Russia.
It did just that. As quietly as possible, yes, but it did just that nonetheless.
Perhaps more importantly, Cyprus’ Foreign Minister commented clearly that Cyprus, for its own historical reasons, could not possibly side with a country that is “invading and occupying” another country, thus clearly signaling that the dilemma between western Europeans and Russia is not as impossible as many of us feared.
So perhaps we are almost there. People –including the higher ends of government- are clearly seeing that, although the country’s role as a money-spinning, banking hub is gone, its role as a service provider is not. After all, while deposits have declined by 33% since the beginning of 2013, “Legal and Accounting Services’” turnover declined by only 1,5%.
This shows the sort of resilience that none of us expected –and perhaps justifies a certain sense of hope that this role will supplant the round-tripping that justifiably worries Krugman.