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Diamonds are for… Cyprus? With a Diamond Exchange the island could rival Dubai, say experts

BANKING

Five Lessons for Europe

INTERVIEWS

Plus:

MONEY / BUSINESS ECONOMY TAX & LEGAL LIFESTYLE / OPINION

Jose Barrionuevo Morten Fon Guillermo Nielsen

OUTSIDE LOOKING IN

How Foreigners view Cyprus today


6 EDITORIAL 8 up front 14 FIVE MINUTES WITH…

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issue 26 may 14 - june 13 2013

A Diamond Exchange could raise state revenues, boost the economy, encourage tourism and make the most of the country’s strategic location.

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THE VIEW FROM BUSINESS

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Diamonds Are For… RICHARD BUITEMAN

T, THE EMEN ERE. H T AGRE BANK FOREIGNERS’ V IEW OF HE CYPRUS BAILOU GOES FROM ING RE D STRICTIONS ANDTW HERE THE ISLAN

22 T

here has been a great deal of talk about how the deal struck with the Troika to bailout the Cyprus economy and restructure its banking sector will affect foreign investors and companies on the island. Most of the talk has been by Cypriots – lawyers, accountants, advisors. In this issue we present the views of the foreigners themselves and while they partly echo local optimism about

the future, they are also quite critical of the Troika’s approach to the island’s problems and to how previous governments have ignored them. The Russian view comes direct from Moscow from accountant Igor Makarov but also from closer to home: Natalia Kardash, Editor-in-Chief of several Russian-language publications in Cyprus, is Vice-President of the Association of Russianspeaking residents and she has

We have a holding company for our online gaming business and we have been here for two years. The things that attracted me and my fellowdirectors to Cyprus are still in place: the high standard of living, the climate, a more relaxed lifestyle and laid-back way of doing business. I love Cyprus and I am not considering moving my business anywhere else but what has happened will certainly have made some people reconsider their plans to come to Cyprus and take advantage of what the country has to offer as an international business centre. They may start looking at

Malta or Honduras instead. The Government now needs to do two very important things: It must make sure that there will be no further change to the corporate tax rate – 12.5% is still attractive but any further increase will make companies start looking elsewhere – and it must take steps to revive the banking sector and give investors a reason to regain their confidence in Cyprus. I think a key issue on which it should work is transparency. This is incredibly important and if the country wants to regain investor confidence, it needs to make

everyone realize that the present measures have been taken out of necessity, they will soon be lifted and they won’t happen again. We all know that Iceland imposed similar restrictions on the movement of capital and they are still in place five years later. The restrictions in Cyprus are being described as ‘temporary’ but no-one knows how long they will stay in place. The Government and the Central Bank need to take the risk and lift them, otherwise the uncertainty surrounding the issue will have a negative impact on the country’s efforts to regain its reputation.

What has happened will certainly have made some people reconsider their plans to come to Cyprus

ANIL KUMAR CHAIRMAN, RANSAT GROUP, UK

By John Vickers

her finger on the pulse of the Russian community here. She proposes some simple steps that will make her compatriots feel more comfortable about the idea of staying. We also hear from a variety of foreign businessmen and international media, and we recall what Members of the European Parliament had to say last month when they debated the Eurogroup’s treatment of Cyprus.

RESTORING CONFIDENCE IS THE KEY

The local and international media have made a disaster out of the situation and right now the island has a very bad name. People think that it’s an offshore tax haven, etc., forgetting that it’s an EU country and held the Presidency less than 12 months ago. The first thing that the Government needs to do

is regain people’s trust and restore confidence. This is the key. I met the President briefly he told me that he is already working very hard to restore confidence. If he manages this, the country will be fine. Cyprus hasn’t lost as much as other countries. Both Ireland and Greece were much worse off. Here,

the shipping model is good and tourism is on the rise again. Of course, if you depend entirely on tourism and outside money you cannot consider your economy to be sustainable. The Government has to take initiatives but the private sector should also take responsibility too. To this end it needs to bring in

a new model. The business community needs to come together and create a new structure to help the country get back on its feet. I fail to understand why Cyprus wants to depend on Russia. The Russians need Cyprus more than Cyprus needs them. This is the only country in Europe that

“SHIPPING REMAINS IN CYPRUS AND SUPPORTS THE ECONOMY” At the 24th Annual General Meeting of the Cyprus Shipping Chamber last month, the President of the Chamber, Capt. Eugen Adami, emphasised that, irrespective of the effects of the recent banking problem on a number of shipping companies, the shipping industry remains faithful to Cyprus and its Registry and continues to support the island’s economy. He also stated

that “Only through the restoration of its economy, image and credibility will Cyprus be able to restore its position as a reliable investment centre.” He appealed to all the country’s political parties to join forces with the Government and support all efforts in this direction, including the immediate approval of the Financial Assistance Package by the House of Representatives.

JOHAN LUNDREN

The Russians need Cyprus more than Cyprus needs them is a friend of Russia so you should be equal partners, not a subor-

dinate and a superior. They have nowhere else to go.

WORSTALL | CONTRIBUTING WRITER TO FORBES ON BUSINESS ISSUES or more, of grinding austerity. When faced with that, the Iceland alternative seems a much better one: Default, leave the currency, bring back the Cypriot pound and take the hit

on the exchange rate rather than the real economy. In the book “This Time Is Different” by Carmen M. Reinhart & Kenneth S. Rogoff, the authors list the sovereign defaults

over the centuries – all 800 of them. The real takeaway point from the book is that defaulting can be painful, yes, but it’s almost always less painful than not defaulting.”

THE INTERNATIONAL INVESTMENT, FINANCE & PROFESSIONAL SERVICES MAGAZINE OF CYPRUS

Gold 23

34

22 | Outside Looking In The foreigners’ view of the Cyprus bailout agreement, banking restrictions and where the island goes from here.

30 | 5 Lessons For Europe

Memorandum Of (Mis) understanding By Costas Markides 57 A victim of its own success By Peter Economides 82

48 | Do You Speak Sustainablish? Can we make not only our lifestyles but our businesses more sustainable by taking all three pillars of sustainability into account?

50 | “Nismo Cyprus!” Slovenia’s severe financial and banking problems might look solvable at the moment, but they may not be for long.

58 | Positive and Motivated Interview with Emilios Ayiomamitis, newly-appointed member of the Board of Directors of Horwath DSP Ltd.

62

FEATURES

62 | Don’t Cry For Me, Nicosia A decade ago, Guillermo Nielsen and Jose M. Barrionuevo were on opposite sides of the negotiations to restructure Argentina’s $104bn sovereign debt.

38 | A iming to Become the Insurer of Choice 2012 was another year of achievement for Trust International Insurance Company (Cyprus) Ltd.

The Eurogroup’s decision on Cyprus has changed the rules of the banking game in Europe.

40 | Insupportable

34 | Restart and Rebrand!

44 | Learning from Qatar

The bailout should be seen as an opportunity to change Cyprus for the better, says Cypriot business consultant Markos Shiapanis.

Qatar, which boasts the highest per capita income in the world, can teach Cyprus a great deal.

A Cypriot exit from the eurozone would be “catastrophic”, says George J. Prokopakis.

4 Gold the international investment, finance & professional services magazine of cyprus

37

Kyriakos Onisiforou believes that now is the time to make an even greater effort to keep ourselves healthy.

54 54

Problem Solved? By George Mountis

54 | Healthy Body + Healthy Mind = Healthy Economy

DEPUTY CHIEF EXECUTIVE,TUI TRAVEL

Our message is that TUI Travel will continue to support Cyprus in its reform process and we look forward to continuing our investments on the island. Our relationship with Cyprus, which we consider a very important destination, goes back almost 50 years. We will need the support and assistance of various stakeholders – the Government, the authorities for tourism and our partners here – to seize the opportunity that we believe exists and ensure we can continue our development plan in Cyprus, but also expand this activity within the European markets.

TH E VIEW FROM THE MEDIA TH TIM “Cyprus is going to go through a great deal of pain economically. If Cyprus stays in the euro then there’s no easy way out of that pain. Just years, possibly a decade

50

CAPT. EUGEN ADAMI PRESIDENT, CYPRUS SHIPPING CHAMBER

CEO OF THE MYMOBIBET GROUP

LIFT BANKING RESTRICTIONS We were banking with Hellenic Bank so we have not been affected by the haircut. The only problems have been caused by the banking restrictions which are quite frustrating but we have other accounts outside Cyprus so the difficulties are manageable. The overall situation has affected us but far less than it might have done if we had been focused entirely on Cyprus. That said, we are not taking any risks right now until the situation returns to normal. I can understand why the Government and the Central Bank imposed restrictions but while they wanted to prevent a serious flight of capital, they have simultaneously halted money that was coming into Cyprus.

Cyprus?

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{money} {business} {economy} {tax& legal} {lifestyle}


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EDITORIAL ISSUE 26 MAY 14 - JUNE 13, 2013 PRICE €4.95

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Change We Must

DIAMONDS ARE FOR… CYPRUS? With a Diamond Exchange the island could rival Dubai, say experts

N

ow that the anti-bailout voices have had their say and the Troika-Cyprus agreement on a financial assistance package has nonetheless been approved by local and EU parliamentarians, it is finally time to move ahead with measures that will counteract the negative effects of many of the deal’s painful provisions. In this issue of Gold, we take a look at what has happened to the island through a variety of lenses and come up with some interesting proposals on how to “restart and rebrand” Cyprus, as Moscowbased Cypriot business consultant Markos Shiapanis aptly describes the process (page 34). One of the most fascinating ideas is the subject of this month’s cover story: the setting up of a Diamond Exchange/Bourse which, according to the CEO of one of the world’s biggest diamond companies, could make perfect use of the country’s location to attract Israeli and Arab dealers as well as Russian, Chinese and Indian traders in both rough and cut gems (page 16). The idea of a Diamond Exchange to rival that of Dubai is not a new one but it is certainly one that deserves the attention of the new government, which has promised to look into new areas of economic activity. One only needs to consider the annual turnover of $56 billion for the Antwerp Diamond Exchange to realise that this is seriously big business. This fact was mentioned by Greek-American jewellery designer Yianni Melas at the recent Global Russia Business Meeting in Limassol which was also the venue for some constructive ideas – and criticism – concerning the professional services sector in Cyprus. One of the moderators at the meeting was Natalia Kardash, Vice-President of the Association of Russian-speaking residents, who spoke to Gold about how many Russian business people feel after the Laiki Bank/Bank of Cyprus resolution/restructuring (page 25). In our broader “Outside Looking In” feature (page 22), we also hear the views of Russian and non-Russian businessmen and consider how the foreign media and Members of the European Parliament see the agreement reached between Cyprus and its eurozone partners. There is no doubt that the country and its leaders now need to take a much closer look at what others are doing in terms of attracting investment and becoming more competitive and to learn from their experience. Qatar, for example, boasts one of the fastest-growing economies and highest per capita incomes in the world and, says Abdul Rahman al Attiya, Chargé d’Affaires of Qatar in Cyprus, it can teach Cyprus a great deal (page 44). And if all of this is new to people in Cyprus, Argentina has seen it all before, and much worse. Two of the key figures in the restructuring of the South American country’s sovereign debt, Jose Barrionuevo and Guillermo Nielsen, gave exclusive interviews to Gold this month (page 62) in which they discuss how Argentina succeeded and how they view the Troika’s way of resolving debt problems in Europe. After what has happened in Cyprus, the country is now being seen as a model for what may follow in other countries such as Slovenia (page 50) and in the eurozone’s banking system (page 30), while throughout this issue people in various sectors express their views on how they and others should deal with the new post-bailout situation. Add to the mix an intriguing piece on investing in vintage and antique timepieces (page 78) and our usual collection of more specialist articles on money, business, economic, tax and legal issues, and I believe that this issue of Gold will keep you interested, fascinated and busy for some time. Please keep sending us your feedback and ideas for future articles that you want to see in your magazine.

John Vickers, Chief Editor john@imhbusiness.com

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6 Gold the international investment, finance & professional services magazine of cyprus

BANKING

Five Lessons for Europe

INTERVIEWS

Jose Barrionuevo Morten Fon Guillermo Nielsen

PLUS:

MONEY / BUSINESS ECONOMY TAX & LEGAL LIFESTYLE / OPINION

OUTSIDE LOOKING IN How Foreigners view Cyprus today

cover final.indd 1

08/05/2013 13:34

Published by IMH ISSN 1986 - 3543

Managing Director:

George Michail General Manager:

Daphne Roditou Tang

Media Manager: Elena Leontiou Editor-In-Chief:

John Vickers senior Editor:

Kyproula Papachristodoulou Contributors to this issue:

Rakis Christoforou, Peter Economides, Costas Markides, George Mountis, Chloe Panayides, Christos Tsolakis, Artemis Yiordamli Art DirectION:

Anna Theodosiou Senior designer:

Alexia Petrou Photography:

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up front

ForexTime Tax Law launches Amendments new currency approved pairs and CFDs by Parliament

F

orexTime Ltd (FXTM) has announced the launch of 7 new currency pairs and 13 new CFD instruments for trading, thereby giving traders more options and variety. The new currency pairs include crosses with the Swiss Franc and the Australian Dollar, a major commodity currency. Olga Rybalkina, CEO of ForexTime, said: “The new currency pairs include exotic currencies such as the Turkish Lira, the Danish Krone, Norwegian Krone and Swedish Krone. These currencies tend to make quicker and larger movements than major currency pairs and it is this volatility that makes these pairs popular with experienced traders.”

The new currency pairs are: ✶ USD/TRY (US dollar vs Turkish Lira) ✶ EUR/TRY (Euro vs Turkish Lira) ✶ AUD/DKK (Australian Dollar vs Danish Krone) ✶ AUD/NOK (Australian Dollar vs Norwegian Krone)

✶ AUD/SEK (Australian Dollar vs Swedish Krone) ✶ AUD/SGD (Australian Dollar vs Singapore Dollar) ✶ CHF/SGD (Swiss Franc vs Singapore Dollar) ForexTime CFD Shares, Commodity Futures and Index Fund Future instruments now include: ✶ #AIG - American International Group, Inc. ✶ #AAPL- Apple Inc. ✶ #AMZN- Amazon.com, Inc. ✶ #EBAY- eBay Inc. ✶ #FCX- Freeport-McMoRan Copper & Gold Inc. ✶ #FDX- FedEx Corp. ✶ #GOOG- Google Inc. ✶ #HAL- Halliburton Company ✶ #GS- The Goldman Sachs Group, Inc. All of these currency pairs and CFDs are available for trading via Standard MT4 accounts. Additionally, the USD/TRY and EUR/TRY currency pairs are available for trading with ForexTime’s unique Shariah compliant Amanah accounts. ForexTime gives its clients access to the global currency market and offers trading in forex, precious metals, commodities, shares and indices.

Austria and Luxembourg to disclose tax details

A

ustria and Luxembourg are preparing to ease longstanding and controversial bank secrecy rules, amid mounting pressure to crack down on tax evasion in Europe. Austrian chancellor Werner Faymann said, “We are prepared to negotiate about automatic data-exchange concerning the accounts of foreigners in Austria that has been requested by the EU.” Meanwhile, Luc Frieden, Luxembourg’s finance minister, said “Luxembourg does not rely on clients who want to save tax.” Austria and Luxembourg are the only countries among the 27 member states to have refused automatic exchange of information about depositors.

8 Gold the international investment, finance & professional services magazine of cyprus

In accordance with the provisions of the agreement on a financial assistance package to Cyprus, the House of Representatives has approved the following amendments to various tax laws:

Income Tax Law

From 1 January 2013, the corporate income tax rate is increased from

10% to 12.5%. Excise Duty Law

The rates of excise duty will be revised on a frequent basis so as to meet the real economic value. The reviewed rates will require approval from the Council of Ministers and a subsequent law will be passed by the House of Representatives.

Special Levy on Credit Institution Law

From 1 January 2013, the special levy rate for institutions operating in Cyprus is increased from

0.11% to 0.15%.

Special Contribution for Defence Law

The Special Defence Contribution rate applicable on interest income received by or deemed to be received by or credited to Cyprus Tax Residents increases from 15% to 30%. This amendment will come into effect upon publication in the Official Gazette of the Republic.

Unaffected provisions of the Laws mentioned above: ➲ In the case that the total annual income of an individual including interest income does not exceed the amount of €12,000 per annum, it is subject to a refund of any withholding tax suffered on interest income in excess of 3%. ➲ The reduced Special Defence Contribution rate of 3% which is applicable to income from deposits certificates issued by the Government of Cyprus and Cyprus Government Bonds and on the interest received by or credited on provident funds and Social Insurance Fund.

1st D woman elected to CFC Board

espina Panayiotou Theodosiou, Founder and President of WISTA Cyprus (the local branch of the Women’s International Shipping & Trading Association) has just become the first woman to be elected to the Board of Directors of the Cyprus Shipping Chamber (CFC). Despina is the Chief Financial and Operations Officer of Tototheo Group of Companies. Despina’s election took place during the CFC’s AGM last month.


Jean Gachassin, President of the French Tennis Federation (left) and Tim Clark, President of Emirates Airline, signing the agreement for Emirates’ five year sponsorship of Roland Garros Tournament in Paris.

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

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mirates Airline has been appointed an Official Partner of the Roland Garros Tennis Tournament for five years, starting with this year’s which runs from 21 May to 9 June. “Appropriately named after the famed French aviation pioneer and tennis supporter, Roland Garros, this tournament is a natural extension of our existing tennis sponsorship portfolio. Watched by millions around the globe this acclaimed clay court championship is the perfect platform with which to align our brand,” said Tim

3

Clark, President of Emirates Airline. “The global following for tennis is extensive. You don’t have to play tennis to be a fan of and appreciate the dedication needed to be one of the world’s best players,” he added. “We are particularly delighted and also proud to welcome an international brand such as Emirates amongst our official partners,” said Jean Gachassin, President of the Fédération Française de Tennis. “The arrival of Emirates fits in perfectly with our development and partnership strategy of aiming to expand our global reach.” As part of the partnership,

new members for CIPA Board

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Emirates will benefit from significant branding of the Philippe Chatrier Centre Court, as well as panels on competition courts. The sponsorship of Roland Garros is the airline’s third tennis sponsorship in Europe after the Italian Open announced last year and the Barcelona Open revealed in March 2013. Other major tennis competitions sponsored by Emirates around the world include the US Open, the Rogers Cup, BNP Paribas Open and the Dubai Duty Free Tennis Championship. Emirates is also the Official Airline of the ATP World Tour and sponsor of Emirates ATP rankings..

he Cyprus Investment Promotion Agency (CIPA) has three new members, following the resignation of Andreas Sophocleous, Nikos Rotos and Michalis Avraam. The first two had been appointed during the final hours of the Christofias government in February. President Anastasiades has replaced them with lawyer Elias Neocleous, Michael Pilikos, Director-General of the Cyprus Employers and Industrialists Federation, and Energy Consultant George Demetriou. Christodoulos Angastiniotis remains as Chairman. The other members are Christos Mavrellis, Marios Klitou, Charis Papacharalambous (Director-General of CIPA), Charis Anastasiou, Christis Christoforou, Evegnios Evgeniou, Angelos Grigoriades, Kyriakos Kakouris, Thomas Kazakos, Kyriakos Kokkinos, Nelly Koulia and Nicholas Theocharides.

©Corbis ©Corbis ©Corbis ©Corbis ©Corbis

Emirates sponsors Roland Garros

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


up front

24th AGM of the Cyprus Shipping Council

More EU expansion by Banc De Binary

B

President Nicos Anastasiades

CSC President Capt. Eugen Adami.

Nicos Nicolaides, MP

T

he 24th Annual General Meeting of the Cyprus Shipping Chamber (CSC) attended by government officials, MPs, diplomats and representatives of political parties and various professional organisations was held in Limassol on Friday, 26 April 2013. The meeting was addressed by President Anastasiades, by Nicos Nicolaides, on behalf of Yiannakis Omirou, Speaker of the House of Representatives, and

CSC President Capt. Eugen Adami. In his address, the President of the Republic praised and congratulated the CSC for its continuous contribution to and active involvement in the further development of Cyprus shipping, describing the shipping sector as the “backbone” of the Cyprus economy, upon which it will depend on the road to recovery. He also recalled his pre-election promise to create the post of Under-Secretary for Shipping which, he said, will provide the necessary impetus to be in a position to contribute practically to the recovery of the

economy through the faster and more accurate development of government policy on shipping. On behalf of the Speaker of the House of Representatives, Nicos Nicolaides said that MPs are ready to support measures that aim to maintain and further strengthen Cyprus shipping, such as the Bill for the creation of the post of UnderSecretary for shipping and the promotion of the Tonnage Tax system abroad. CSC President Capt. Eugen Adami emphasised that, irrespective of the effects of the recent banking problem on a number of shipping companies, the ship-

10 Gold the international investment, finance & professional services magazine of cyprus

ping Industry remains faithful to Cyprus and its Registry and continues to support the Cyprus economy. He also stated that only through the restoration of its economy, image and credibility will Cyprus be able to restore its position as a reliable investment centre. He therefore appealed to all the political parties to join forces with the government and support efforts in this direction, including the immediate approval of the Financial Assistance Package by the House of Representatives. Elections were also held for a new Board of Directors of the Chamber for the period 20132015.

anc De Binary, one of the world’s fastest-growing online binary options trading brokerages with over 200,000 client accounts and trading activity in over 80 countries, is in the process of opening bank accounts in the UK, Germany and eight other EU countries. As the first EU-regulated standalone binary options company, Banc De Binary is growing rapidly on a global basis, despite the current economic crisis in the EU. “The EU may be suffering a downturn now, the crisis has impacted Cyprus, Slovenia, Italy, France, Spain, the UK. But if I’ve learned anything from business, it is that a downturn is always followed by an upturn, and we are ready for this when it happens,“ said company CEO Oren Laurent. Banc De Binary plans to increase the numbers of its employees “when the time is right” and is aware of the opportunity offered by new banking and compliance talent on the market, following the financial crisis in Cyprus’ banking system. “We are always on the lookout for talented professionals in the financial services sector, who are interested in entering the Binary Options industry, which we expect to see challenging the Forex industry within the next three to four years,” said Laurent. “While we sincerely hope that the banking sector in Cyprus and the rest of the EU recovers quickly, we believe that Binary Options offers an incredible alternative opportunity for proactive, experienced financial services professionals,” he said. Banc de Binary was established in 2009 in the United States and it is the first EU-licensed binary options brokerage in the world. It was the first company in this booming industry to meet the strict regulatory requirements of the Cyprus Securities and Exchange Commission (CySEC), which follows Markets in Financial Instrument Directive (MIFID) laws in the European Union.


www.pwc.com.cy

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up front

10

Liliane Bettencourt

8

Li Ka-shing

(Hong Kong) Age: 84. Net Worth: $31 billion. Source of Wealth: Diversified Asia’s richest person Li Ka-shing added $5.5 billion to his fortune as shares of his biggest holdings, Cheung Kong, Hutchison Whampoa and Husky Energy, all jumped 10% or more. He scooped up another $860 million in dividends in 2012. At age 84, Li still oversees one of the world’s most far-reaching empires with 260,000 employees in 52 countries. Li-controlled companies bought British gas supplier Wales & West Utilities for $1 billion in October.

(France) Age: 90. Net Worth: $30 billion. Source of Wealth: L’Oreal The world’s richest woman and her family own more than 30% of L’Oreal, which her father founded. She had her fortune placed under the guardianship of her daughter Francoise in 2011 following a very public three-year legal battle. Bettencourt, who suffers from dementia, was replaced on the company’s board by her 25-year-old grandson JeanVictor Meyers in February 2012. Family members have waged numerous legal battles against one another over Liliane’s generous gifts to friends.

David Koch

Bernard Arnault

(France) Age: 64. Net Worth: $29 billion. Source of Wealth: LVMH Shares in Arnault’s luxury goods powerhouse LVMH, which owns Givenchy, Marc Jacobs and Louis Vuitton rose by 6% but his fortune is mostly held in Christian Dior, which has a 41% stake in LVMH. Arnault’s request for Belgian citizenship last year sparked a debate about France’s taxes on the rich. It was announced in October that he would receive an honorary knighthood for his services in the UK.

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(USA) Age: 72. Net Worth: $34 billion.  Source of Wealth: Diversified David Koch runs the chemical equipment side of Koch Industries from his home in New York. His wealth climbed $9 billion last year, mostly on surging refining and chemical profits. More active than Charles in politics, he is dedicated to cutting government spending and increasing economic freedom. He has given away more than $1 billion over his lifetime, including $395 million for medical research since 1998.

Charles Koch

(USA) Age: 77. Net Worth: $34 billion. Source of Wealth: Diversified The world’s sixth-richest person (tied with brother David) built his fortune around refining and chemicals. Koch Industries, with an estimated $115 billion in sales, climbed more than $20 billion in value, mostly on surging refining profits but also improving operations at Koch’s large Georgia-Pacific unit. Things didn’t go so well on the political front, however. Charles Koch failed in his attempt to unseat President Barack Obama as president.

=6

Larry Ellison

5

(USA) Age: 68. Net Worth: $43 billion. Source of Wealth: Oracle In the past year, Ellison, America’s third richest man, has been on a real estate buying spree. In June, he bought 98% of the Hawaiian island of Lanai for a reported $500 million and in October and January two Malibu homes in for a combined $55 million. Ellison has donated $445 million to his (USA) Ellison Medical Foundation, which Age: 57. Net Worth: $67 billion. supports research on aging and Source of Wealth: Microsoft age-related diseases. Gates’ net worth increased to $67 billion in the past year with no help from the company he co-founded, Microsoft, in which he still has a 5% stock. Most of his fortune these days is spread across private equity, bonds, and stocks. Gates says that if he can help eradicate diseases like polio and malaria, he doesn’t care if he’s forgotten after his death. He has already given away more than $28 billion.

2

Bill Gates

Carlos Slim Helu

(Mexico) Age: 73. Net Worth: $73 billion. Source of Wealth: Telecoms The world’s richest man for the fourth year in a row owns $4 billion more than a year ago, thanks to surging stock prices at Grupo Financiero Inbursa and at his Grupo Carso industrial and retail giant. Pan-Latin American mobile telecom outfit America Movil remains his most valuable holding at $36.3 billion. In February Slim and Bill Gates announced that they are jointly funding research to improve farmers’ yields and reduce hunger.

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12 Gold the international investment, finance & professional services magazine of cyprus

Amancio Ortega

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(Spain) Age: 77. Net Worth: $57 billion. Source of Wealth: Zara Ortega’s wealth rose by $19.5 billion in the past 12 months. He stepped down as chairman of Inditex, best known for its Zara brand, in 2011, but still owns nearly 60% of its shares, which soared 50% year-over-year on record profits. Ortega also has a real estate portfolio, estimated to be worth more than $4 billion. He owns buildings in Madrid, London, Chicago, San Francisco and New York.

Warren Buffett

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(USA) Age: 82. Net Worth: $53.5 billion. Source of Wealth: Berkshire Hathaway In 1962 Buffett began buying up shares of a struggling textile company called Berkshire Hathaway. The firm has long since shed its textile assets and today serves as Buffett’s famed investment vehicle. In February, Buffett announced a deal with 3G Capital to snap up H.J. Heinz Co. for $23.2 billion. He gave $1.5 billion to the Gates Foundation in July 2012, bringing his lifetime giving to nearly $17.3 billion.

The World’s Richest

Business People

The ranks of the world’s billionaires have reached an all-time high according to Forbes which features no fewer than 1,426 names, with an aggregate net worth of $5.4 trillion, on its 2013 list of the world’s wealthiest individuals. The Forbes list does not include royal family members or politicians who derive their fortunes entirely as a result of their position of power, as they do not truly reflect individual, entrepreneurial wealth.


interview

five minutes with...

Theodoros A. Costeas CFA, Portfolio Manager, Byron Capital Partners (Cyprus) Ltd

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hat was your reaction to Byron Capital Partners (Cyprus) winning the award of Best Performing Relative Value - Fixed Income (inc Credit) Fund for 2012 with the Byron Fixed Income Alpha Fund UCITS IV at the UCITS Hedge Awards 2013? We were extremely pleased to receive such recognition, especially as this was a panEuropean award. One of the aims of the business has been to be able to compete with the best funds internationally and this recognition partly validates this ambition. Byron Fixed Income Alpha Fund ranked among some of the best names in the UCITS hedge fund space. Winning a spot along Odey Asset Management, Brevan Howard, and GAM is not a trivial achievement. Is the success of this particular Fund judged solely in terms of return or does it stand out among the others that you manage for other reasons? The criterion for selecting the winner of this award is purely quantitative. Funds are selected from a database of 500 funds based on risk-adjusted returns. In simple terms, this means the number generated by the division of the annual performance return by the volatility of returns. Low volatility of returns means low risk, translating into a higher risk-adjusted returns measure. We generated 7.43% of annual returns net of fees in 2013 with an annual volatility of 1.83%.

What was it about the Byron Fixed Income Alpha Fund UCITS IV that earned it the judges’ approval and the accompanying award? The success of the fund is a result of a whole investment decision-making process with four risk management pillars central to its methodology: market risk, credit risk, liquidity risk management and high diversification are strictly employed to result in a portfolio that can perform well under any market conditions. The strict risk management methodology reduced the maximum drawdown of the fund, which measures how much it lost from peak-to-trough, to 0.43% in 2012. The Fund invests predominantly in a globally diversified portfolio of sovereign and corporate bonds, overlaid with some parallel strategies. This portfolio currently provides an interest income through bond coupons of 4.50% but this is only one component of returns and should not be seen as a prediction of annualized returns. Last year, most of the profits came from trading strategies, with 72 out of 76 positions being profitable. Given that the Fund industry in Cyprus is still in its infancy, how much more significant is such an award? Taking into account recent events in Cyprus, this award is all the more significant as it promotes the country’s financial services industry and Cyprus itself in a positive light against a difficult current backdrop. As the only representatives from Cyprus at the awards dinner in London, it was a great op-

14 Gold the international investment, finance & professional services magazine of cyprus

portunity to discuss Cyprus with other fund managers and project a positive image of the country. The fact that the award was in the area of UCITS, which is rapidly becoming the investment vehicle of choice for both institutional and retail investors in Europe and globally, highlighted the fact that Cyprus-based asset managers can compete with the best in providing highly-regulated investment fund solutions.   What needs to be done if the island is to become a thriving Fund centre, something that Malta has managed to achieve so spectacularly? There is a lot of competition from other Fund centres, not only from Malta but from Ireland and Luxembourg. The Irish Fund Management Industry, which has had tremendous support from the Irish government, employs around 12,500 people providing a range of value-added services, including fund administration, transfer agency, custody, legal, tax and audit services. This serves as a good benchmark of what can be possible in Cyprus in the future and the job opportunities that the industry can create. Other financial centres, particularly in the Middle East, are offering innovative solutions to encourage funds and fund/asset managers to set up a presence in their respective financial centres. In comparison with other financial centres, Cyprus is cost-competitive and can provide high quality human capital but, as in any industry, innovation is required.


A Diamond Exchange could raise state revenues, boost the economy, encourage tourism and make the most of the country’s strategic location. By John Vickers Photograph by Jo Michaelides

Diamonds Are For‌

Cyprus? 16 Gold the international investment, finance & professional services magazine of cyprus


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opular culture has made entire generations believe that “Diamonds are forever” and “Diamonds are a girl’s best friend”, while the belief that a diamond ring is the ultimate expression of a man’s love for a woman has long been fixed in societies around the world. However, there is a growing number of people who believe that diamonds could also be the answer to the enormous economic and financial problems facing Cyprus these days and efforts are under way – and not for the first time – to persuade the Government that the establishment of a Diamond Exchange on the island could have lucrative and wide-ranging effects. The most recent reference to the idea was made during last month’s Global Russia Business Meeting when GreekAmerican jewellery designer Yianni Melas casually mentioned that the Antwerp Diamond Exchange has an annual turnover of $56 billion and suggested that, with vision and planning, Cyprus could help itself to a sparkling slice of the thriving market in precious stones. The idea has been foremost in Melas’ mind for some time now and despite some setbacks (“Before the elections I spent four months trying to meet with Mr Anastasiades but he was too busy with the campaign to become President and, of course, now it’s even more difficult”), he refuses to give up on what he believes is a massive project that could cre-

ate enormous revenues and publicity for Cyprus at a time when it is in desperate need of new sectors in which to become active. Melas speaks with great passion about his concept for the Cyprus Diamond Exchange to anyone willing to listen. Ironically, the experts, the millionaire dealers and even some of those directly involved in competing exchanges are already convinced about the viability of the idea. It is the Cypriot authorities who are proving to be somewhat more immune to his enthusiasm, though there is at last some interest from within the Ministry of Commerce, Industry & Tourism in the potential of such an Exchange. Unlike other attempts to put Cyprus on the map for reasons other than tourism and professional services, the creation of a Diamond Exchange is based firmly on the country’s key advantages, not least its location which, as we all know, has become a favourite long- and short-stay destination for Russians. “The Russians are among the largest miners of diamonds in the world,”

explains Melas, “and they send them to Israel and Dubai and Belgium to be sold but the truth is that they don’t feel comfortable in any of these places. In contrast, they have already shown that they like it here and the miners of rough diamonds will be happy to trade them from Cyprus. So when the Exchange is built, the Government will first need to look to the producers – the Russians and the African nations – and lobby for them to have Cyprus as the centre for their trade in diamonds. Initially, Cyprus will be about trading rough diamonds but eventually there could be cutting factories here too. The possibilities are limitless.” The oft-quoted phrases about Cyprus being “at the crossroads of three continents” and “a bridge between Europe and the Middle East” finally start to make practical sense in the context of the diamond trade. Arabs cannot go to Israel, the Israelis cannot visit in Dubai, Jewish dealers in Antwerp would be much happier of they were closer to Israel so as to make weekend trips home, those from China and the Far East like the idea of operating from a European country, and the Russians already have a wellestablished community on the island. Yianni Melas also sees the project as a major opportunity for Nicos Anastasiades to leave a truly lasting mark on his presidency: “The Cyprus Diamond Exchange is ideal for him to have something specific on which to engage in foreign relations,” he says. “For example, in June there is a conference in Angola. It would be very interesting if the Cypriot

The experts, the millionaire dealers and even some of those directly involved in competing exchanges are already convinced about the viability of the idea


President were to go there, talk to the Patriarch of Alexandria and all Africa, and start relationships with the African nations, informing them that they will be able to use Cyprus as a place to sell their rough diamonds in the future.” He acknowledges that it is somewhat premature at this point but, he notes, “it would be a good chance to make contacts and make friends with the African heads of state so that they are all there when he makes his second visit.” It should come as no surprise that somewhere in this story there is a strong Cypriot connection. It comes in the shape of 74-year-old billionaire Loucas Pouroulis (see box) who is one of the world’s biggest producers of diamonds and precious metals and, says Melas, “is super-connected to all the African Presidents.” His son Adonis runs Petra Diamonds whose Kimberly Mine produces some of the biggest diamonds in the world. Last month Petra made headlines around the world when it reported that it had recovered a high-quality 25.5-carat blue diamond at its Cullinan mine in South Africa, an event that saw its shares shoot up by 5% overnight. “Loucas still has a strong Cyprus connection,” says Melas. “He visits his birthplace [Paphos] regularly and he would be the perfect person to get involved with such a project. Adonis is of a younger generation, he lives in London and Spain so his connections with Cyprus are not so strong.”

Think Cypriot “Diamonds”

More than 400 years ago, travellers to Cyprus were claiming that, in addition to gold, silver and copper, the island was also a source of diamonds and other precious stones. William Lithgow, who first visited in 1609, later wrote that “There are divers precious stones found in the isle, as emeralds, diamonds, crystal, coral red and white and the admirable stone amiante…” However, it would appear that Lithgow was fooled by the beautiful crystals that were popularly known as Baffo (Paphos) diamonds. According to one Seigneur de Villamont in 1598, “Some of them indeed are beautiful enough to deceive many a lapidary” and a full century before him, in 1487, Nicole Le Huen, referring to Nicosia, wrote how “In this city they cut the stones called Baffa diamonds.” Yianni Melas

Big

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f the Cyprus Diamond Exchange is to do all the things that supporters of the idea believe it can achieve, it will need to be something very special. Yianni Melas has very specific ideas about how it should be. “You can’t have a building that is just offices,” he says. “It needs to be a landmark, and, in many ways, a ‘city within a city’. A good analogy would be with a shopping mall which doesn’t have a cinema or a skating rink, for example. Having these brings people for things other than shopping. The Diamond Exchange in Cyprus should lack the weaknesses that exist in other exchanges, while possessing all their strengths.” One key strength, Melas believes, would be a museum of diamonds, gemstones and pearls. And while


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The Cyprus Connection Loucas Christos Pouroulis, whose first job was that of Assistant manager at the Kalavasos copper mine in 1962, went to South Africa with a degree in metallurgy and engineering from the National Technical University of Greece and worked as an underground manager at Anglo American’s Western Deep Levels between 1965 and 1971. By 1977 he had founded the Salene Group of Companies, which has throughout its life produced gold, platinum, diamonds, titanium and emeralds. He later founded Kameni Limited and is a director of the company, he serves as a Non Executive Director of Tharisa Minerals (Pty) Ltd and as a director of Eland Platinum Holdings Limited. Adonis Loucas Pouroulis founded Petra Diamonds in

that may sound like a fairly logical addition, this one comes with an interesting additional Greek connection. “Loucas Pouroulis is one of the world leaders in the diamond business so there could be a huge display of diamonds from all his mines in South Africa and elsewhere. It would be like a vault or a huge safe into which visitors go and see the gems. It would be a tremendous collection of diamonds and diamond history. Secondly, I have 25 years of photographs, some 200,000 slides and videos of going into the mine shafts, etc., and mining rubies, sapphires and all the coloured gemstones. So Pouroulis is a leader when it comes to diamonds and he’s a Cypriot. I am a leader in the coloured stones business and I’m Greek American. The leader in the pearls industry is Nick Paspaley who happens to be Greek as well, the son of Nicholas Paspaley MBE who founded Paspaley Pearls. Nick is considered the father of the modern pearling industry and he’s built his company into a $200 million export business. He’s a multimillionaire himself and I know he’d be delighted to be a part of the museum and to have somewhere to sell his pearls too.” A world-class museum would certainly be a great tourist attraction that visitors would go to see thanks to the Diamond Exchange but it is only one part of Melas’ vision. He spent four years working at the Gemological Institute of America (GIA) which is considered to be the “Harvard” of diamonds, gemstones and jewellery. He also worked for Swarovski who gave the GIA $4 million and created the “Tower of Brilliance” on its campus, which comprises the world’s largest crystal octahedron, resembling the shape of a natural diamond crystal. The octahedron is composed of an outer

1997 which was first listed on London’s Alternative Investment Market later that year. It transferred to the main market in December 2011 and is listed on the FTSE250. He has been its Non-Executive Chairman since November 28, 2011. He was influential in the founding, development and listing of a number of other natural resources companies. In October 2008, Petra recovered a 26 carat blue stone at its Cullinan mine. This important diamond yielded a cushion-shaped cut stone of just over 7 carats which was sold for US$9.49 million, which at the time was the world record price per carat achieved for any gemstone at auction. This exceptional blue is now known as The Star of Josephine.

glass structure resembling the diamond crystal shape, with a metallic replica of a round brilliant-cut diamond inside. Motorized, it rotates slowly to reflect light—natural sunlight during the day and spotlights at night—much the way a diamond reflects light through its facets. The octahedron was designed by Swarovski’s lighting division, which also created “The Cross of Light” on display at the Basilica di Santa Maria degli Angeli e dei Martiri in the Vatican. What does this have to do with Cyprus? Melas explains: “The centre for the diamond trade in Europe is Antwerp but it is controlled – gemologically speaking – by HRD Laboratories, a Belgium-based laboratory for diamonds, and HRD Education. Because Antwerp is home to HRD, it’s been very difficult for GIA to find a place in Belgium, even though it is the leading laboratory in the world. So why not have a GIA lab (which grades the diamonds for those who are cutting them and trading them) and school for the Middle East in Cyprus? The students would have access to the gems in the museum and, in particular, it would expose the African students to Cyprus and its culture so that later on, when they have rough diamonds to put on the market they will use Cyprus. This kind of thing creates great relations. And, of course, you can then go to people like Swarovski and offer them a section in the museum in return for helping build an iconic tower.” The Exchange building would also have a helipad on the roof (“You need a direct path from Larnaca for the diamonds and a passenger helicopter that works only for the Exchange”) and apartments for those working there, plus branches of the major international banks the diamond dealers use, specialist Kosher, Arabic, Indian

and Chinese restaurants and, above all security. “A project such as this needs the highest level of security in the world,” says Yianni Melas. And once all the details are worked out, the only problem is one of working out a tax regime which needs to be viewed in the long term rather than for possible short-term gain. Basically, he believes that Cyprus should copy the operations of the world’s most successful Diamond Exchange (Antwerp) but when it comes to tax, Dubai’s zero tax model is the one to emulate. “If we don’t copy the tax structure of Dubai, it won’t work,” he says. “The Indians, who make up 50% of the traders and are the biggest jewellery producers in the world, will ask why they should come to Cyprus when there is zero tax in Dubai. The money that the Government makes will not come in taxes on the diamonds but from everything else. Millions of euros will be made on property sales, on tourism. The government will make money from everything but the wholesale

The Diamond Exchange in Cyprus should lack the weaknesses that exist in other exchanges, while possessing all their strengths

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Cyprus can become a centre for jewellery sales and offer all the advantages of Dubai while being in Europe part. Cyprus can become a centre for jewellery sales and offer all the advantages of Dubai while being in Europe.” Switzerland is currently taking advantage of what appears to be something of an exodus from Antwerp by offering the same tax status as Dubai but, says Melas, “most of the Jewish diamond dealers working in Belgium would rather be in Cyprus where they can take weekend trips to Israel.” Surprisingly, the Executive Chairman of the Dubai Diamond Exchange is very relaxed about the possibility of competition from Cyprus. “When I have spoken to key figures in Antwerp and Ramat Gan [near Tel Aviv] about the Cyprus project, they have become very tense,” Melas recalls. “In contrast, Ahmed Bin Sulayem of the Dubai Exchange is OK with the idea. ‘Rather than Antwerp, I prefer a place like Cyprus that is nearer to us so we both do business,’ he says. I don’t know if he is interested in investing in the Cyprus Diamond Exchange or in having a relationship between the two. And he is not the only one in the business who is keeping an eye on Cyprus. The Vice Chairman of the Shanghai Diamond Exchange is also extremely interested.” The government needs to put its tax specialists together with the tax advisors of the diamond traders so that they come up with a framework that everyone is happy with, and of course, one that complies with EU rules and regulations. “The tax structure will be the key to kickstarting everything else,” Melas believes. “If Russians can buy diamonds at low prices they will buy them instead of putting their money in the bank. Moreover, Cyprus needs to create closer relationships with India and Africa. I am shocked at how ignorant we are about India as a source of tourism. The biggest buyers in Dubai are the Indians and the Russians. Who has the most money in Switzerland? The Indians and the British,

most of them of Indian origin! India is presently one of the top 12 tourism traffic sources for Switzerland. And don’t forget that the British, the Russians, the Germans all come to Cyprus in the summer because they want to sit and bake in the sun. Indians like it cold, they like the cool hillside resorts and they tend to travel in the winter months. If Cyprus promotes itself as a winter destination in India, you can be sure that Indian jewellers will want to be part of the retail set-up in the Diamond Exchange.” The facts and figures speak for themselves. Diamond prices have increased by about 15% each year since 1949 and worldwide demand for polished and rough diamonds continues to rise. In 2001, Dubai’s diamond trade was virtually non-existent. In the space of a decade it had grown to be worth almost $40 billion and Dubai has successfully positioned itself as one of the world’s leading diamond centres alongside the likes of Antwerp, New York and Mumbai. Located in the iconic Almas Tower, at the crossroads of producing and consuming countries, the Dubai Diamond Exchange provides services to over 500 regional and international diamond companies including renowned brands such as DeBeers, the International Gemological Institute and Dhamani Jewels amongst others. The Chinese and Indian markets for diamonds continue to grow strongly, following a 10% rise in 2012. It is unlikely that the predicted surge in global demand for diamond jewellery will struggle to be matched by the supply of diamonds, which means higher prices and greater competition among the exchanges where rough diamonds are traded. Will Cyprus have the necessary vision, daring and professionalism to join the elite club? Over to you, Mr President.

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Yianni Melas

Yianni Melas’ interest in – and obsession with – gems and jewellery began at the age of four when he was told that Napoleon Bonaparte had given his great-great-grandfather a jewelstudded sword. Not only that, it was apparently buried in his backyard. Thereafter, Melas’ garden on the Greek island of Rhodes became filled with holes as he embarked on what evolved into a lifetime’s search for treasure. Melas’ love of gems also grew from visits to his godfather’s jewellery store. He was sent to school in the United States in 1974 and he eventually found his way to the Gemological Institute of America. After graduating, he became an instructor at the GIA where he earned a reputation for his dynamic teaching style. While at the GIA, Melas met Helmut Swarovski, CEO of the renowned optics and glass empire, based in Austria. Soon thereafter, he began working for Swarovski, acquiring rough gems from several remote locations around the world. He focused on making connections with local people everywhere he went, and through this work began to see the positive effects that the gem trade could have on developing nations. In 2001, he joined the Lev Leviev Group, a leading Israeli diamond manufacturer. Through his work he sought to develop Botswana’s gem industry, in the belief that supporting an industry with business opportunities would help create jobs and would allow self-empowerment to thrive. After completing a series of goals in Botswana on behalf of Leviev, Melas met the well-known American designer, David Yurman and was his personal gemstone adviser for several years. In 2010, Melas decided to embark on his own jewellery design collection and he launched his trademarked brand, Philippe Alexander, the following year, when he was asked to be Master of Ceremonies at the prestigious, Indian government-sponsored international event, “Mines To Market” in Jaipur. Today, Melas is based in Limassol, Cyprus, designing and creating jewellery that is inspired by his world travels. He is married to Ekaterina Vitebskaya-Melas, formerly the President of Fashion TV Russia, a criminal lawyer, author and well-known Russian celebrity.


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Cyprus could become bigger than Dubai Moshe Leviev, CEO of one of the world’s biggest diamond companies, sees the potential of a diamond exchange here

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illionaire diamond dealer Lev Leviev co-founded Lev Leviev Diamonds (LLD) Ltd with his brother Moshe Leviev, who oversees the company’s everyday business. LLD is a diamond-manufacturing company and cuts, polishes and markets gemstone diamonds for jewellery all over the world. The company has six branches worldwide, with its main offices in Israel, Belgium, Hong Kong, Italy, Japan, the Philippines and the US, and sells its product in 50 countries. Its head office is at the world-famous Ramat-Gan Diamond Exchange in Israel. In an exclusive interview with Gold, Moshe Leviev expressed the view that a Cyprus Diamond Exchange could be very successful, not least because it would be open to both Israelis and Arabs who are excluded from each other’s countries: “Cyprus can attract all of these people. They have already convinced the Russians that Cyprus is a good place to be and they are among the biggest players when it comes to rough diamonds. It’s a great location for Europe and beyond. The international diamond market is mainly made up of Jews and Indians. Cyprus can cater for everyone: Europeans, Arabs, Israelis, Indians, Russians, Americans, Chinese. It won’t be easy at first but I believe that

Cyprus could become bigger than Dubai.” The longstanding and still unresolved problems between Israel and its Arab neighbours make Cyprus an ideal location for diamond trade in the region. “The Arab market is huge but I can’t go there,” says Leviev. “The Israel Diamond Exchange is one of the biggest and best in the world but the Arabs can’t use it. But none of us have a problem with Cyprus.” Asked about what kind of tax structure Cyprus should impose, Leviev believes that the Dubai model makes sense: “Start with no taxes for the first few years and later there could be a small tax on profits when people want to take their money out. The government will make millions from all the other related things that a diamond exchange will bring, like tourism.” While Yianni Melas believes in thinking big, Moshe Leviev says that such a project need not be too expensive to get underway. “A small complex with a few buildings is enough. A few thousand square metres would suffice, though I agree that it would be good to think ahead. When they started building the Dubai Diamond Exchange, they offered people office space. The entire building was sold out in a single day.” Once it is up and running, the Cyprus Diamond Exchange would have few operational expenses apart from security, which is essential. “After what has happened in Cyprus recently, the main problem may be to convince people that they will not lose their money!” he says with a smile. “But seriously, they will forget this. A whole industry could operate in Cyprus – even manufacturing and diamond cutting if the government is interested. Your politicians need to have vision and show a willingness to do everything right. Cyprus does not have the problems of Israel so I would say that, once everything is properly planned, it is doable within a year. This is not pie in the sky; it’s a real and viable proposition.”

This is not pie in the sky; it’s a real and viable proposition

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O

g In kin

L e d i s o t o u

t, The n e m . e e f e o r r g r e a e h t bank ig u ing re ners’ view of the Cyprus bailod goes from strictions and where the islan By John Vickers

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here has been a great deal of talk about how the deal struck with the Troika to bail out the Cyprus economy and restructure its banking sector will affect foreign investors and companies on the island. Most of the talk has been by Cypriots – lawyers, accountants, advisors. In this issue we present the views of the foreigners themselves and while they partly echo local optimism about

the future, they are also quite critical of the Troika’s approach to the island’s problems and to how previous governments have ignored them. The Russian view comes direct from Moscow from accountant Igor Makarov but also from closer to home: Natalia Kardash, Editor-in-Chief of several Russian-language publications in Cyprus, is Vice-President of the Association of Russianspeaking residents and she has

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her finger on the pulse of the Russian community here. She proposes some simple steps that will make her compatriots feel more comfortable about the idea of staying. We also hear from a variety of foreign businessmen and international media, and we recall what Members of the European Parliament had to say last month when they debated the Eurogroup’s treatment of Cyprus.


outside looking in

THE VIEW FROM BUSINESS

RICHARD BUITEMAN

President, Cyprus Shipping Chamber

CEO of the Mymobibet Group

“Lift Banking Restrictions” “We were banking with Hellenic Bank so we have not been affected by the haircut. The only problems have been caused by the banking restrictions which are quite frustrating but we have other accounts outside Cyprus so the difficulties are manageable. The overall situation has affected us but far less than it might have done if we had been focused entirely on Cyprus. That said, we are not taking any risks right now until the situation returns to normal. I can understand why the Government and the Central Bank imposed restrictions but while they wanted to prevent a serious flight of capital, they have simultaneously halted money that was coming into Cyprus.

We have a holding company for our online gaming business and we have been here for two years. The things that attracted me and my fellowdirectors to Cyprus are still in place: the high standard of living, the climate, a more relaxed lifestyle and laid-back way of doing business. I love Cyprus and I am not considering moving my business anywhere else but what has happened will certainly have made some people reconsider their plans to come to Cyprus and take advantage of what the country has to offer as an international business centre. They may start looking at

Malta or Honduras instead. The Government now needs to do two very important things: It must make sure that there will be no further change to the corporate tax rate – 12.5% is still attractive but any further increase will make companies start looking elsewhere – and it must take steps to revive the banking sector and give investors a reason to regain their confidence in Cyprus. I think a key issue on which it should work is transparency. This is incredibly important and if the country wants to regain investor confidence, it needs to make

everyone realize that the present measures have been taken out of necessity, they will soon be lifted and they won’t happen again. We all know that Iceland imposed similar restrictions on the movement of capital and they are still in place five years later. The restrictions in Cyprus are being described as ‘temporary’ but no-one knows how long they will stay in place. The Government and the Central Bank need to take the risk and lift them, otherwise the uncertainty surrounding the issue will have a negative impact on the country’s efforts to regain its reputation.”

What has happened will certainly have made some people reconsider their plans to come to Cyprus

ANIL KUMAR Chairman, Ransat Group, UK “Restoring Confidence is the Key”

“The local and international media have made a disaster out of the situation and right now the island has a very bad name. People think that it’s an offshore tax haven, etc., forgetting that it’s an EU country and held the Presidency less than 12 months ago. The first thing that the Government needs to do

is regain people’s trust and restore confidence. This is the key. I met the President briefly he told me that he is already working very hard to restore confidence. If he manages this, the country will be fine. Cyprus hasn’t lost as much as other countries. Both Ireland and Greece were much worse off. Here,

the shipping model is good and tourism is on the rise again. Of course, if you depend entirely on tourism and outside money you cannot consider your economy to be sustainable. The Government has to take initiatives but the private sector should also take responsibility too. To this end it needs to bring in

Capt. Eugen Adami

a new model. The business community needs to come together and create a new structure to help the country get back on its feet. I fail to understand why Cyprus wants to depend on Russia. The Russians need Cyprus more than Cyprus needs them. This is the only country in Europe that

“Shipping remains in Cyprus and supports the Economy” At the 24th Annual General Meeting of the Cyprus Shipping Chamber last month, the President of the Chamber, Capt. Eugen Adami, emphasised that, irrespective of the effects of the recent banking problem on a number of shipping companies, the shipping industry remains faithful to Cyprus and its Registry and continues to support the island’s economy. He also stated

that “Only through the restoration of its economy, image and credibility will Cyprus be able to restore its position as a reliable investment centre.” He appealed to all the country’s political parties to join forces with the Government and support all efforts in this direction, including the immediate approval of the Financial Assistance Package by the House of Representatives.

JOHAN LUNDREN

Deputy Chief Executive,TUI Travel

“Our message is that TUI Travel will continue to support Cyprus in its reform process and we look forward to continuing our investments on the island. Our relationship with Cyprus, which we consider a very important destination, goes back almost 50 years. We will need the support and assistance of various stakeholders – the Government, the authorities for tourism and our partners here – to seize the opportunity that we believe exists and ensure we can continue our development plan in Cyprus, but also expand this activity within the European markets.”

The Russians need Cyprus more than Cyprus needs them is a friend of Russia so you should be equal partners, not a subor-

dinate and a superior. They have nowhere else to go.”

TH E VIEW FROM THE MEDIA TH TIM

WORSTALL | Contributing writer to Forbes on business issues

“Cyprus is going to go through a great deal of pain economically. If Cyprus stays in the euro then there’s no easy way out of that pain. Just years, possibly a decade

or more, of grinding austerity. When faced with that, the Iceland alternative seems a much better one: Default, leave the currency, bring back the Cypriot pound and take the hit

on the exchange rate rather than the real economy. In the book “This Time Is Different” by Carmen M. Reinhart & Kenneth S. Rogoff, the authors list the sovereign defaults

over the centuries – all 800 of them. The real takeaway point from the book is that defaulting can be painful, yes, but it’s almost always less painful than not defaulting.”

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THE VIEW FROM MOSCOW IGOR MAKAROV

Partner at Baker & McKenzie, Moscow

“A New Strategy is Needed”

“In my opinion, the recent decision by the Troika with respect to Cyprus was a total failure since it failed (or maybe never meant) to address outstanding economic problems in Cyprus and actually triggered further problems and resulted in a non-functioning banking system throughout the entire country (beyond the two problematic banks). In Russia, business prefers to “wait and see”, although some major banks have started questioning the acceptability of Cyprus holding structures in various Russian contexts, such as loans or the internal restructuring of various assets (even in view of a potential “entry” of an international investor). And this is something that Cyprus must take into account and address as well. The Troika’s decision revealed the true face of contemporary Europe (i.e. its addiction to double standards and ignorance of the rule of law). And a few simple questions still remain unanswered: Why should Greece’s sovereign debt problem be settled at the expense of private investors of other pre-selected countries? Is it because of Russian business, which is structured via Cyprus holdings and now it is time for Russia to pay for its “EU ticket”? What was the real intention of the Troika’s decision: to help or to destroy? But let’s be honest and look back into history. Did Ancient Rome ever receive a friendly or at least diplomatic Barbarian mission? This is a real situation in which the allegedly united Europe recently found

itself. Small countries in the EU should realize that the “metropolis vs. colony” philosophy is still alive and therefore they need to urgently re-think their strategies.   Cyprus must also devise its own longterm strategy, based on a new sustainable local economy supplemented with strong international economic and political connections. Cyprus should realize that it has several crucial and “Barbarian-proof” fundamentals: • Its geostrategic position in EMEA. • 3-4 hours flying time to any business or financial centre in Europe. • The same or almost the same time zone as the EU and Russia. • An effective and attractive tax system, as well as the best network of international double tax treaties. • A flexible and investor-friendly legal system. • An effective and affordable infrastructure to administer international holdings and trusts. • Friendly and tolerant people. 360 days of sunshine a year. The key now is how quickly and effectively the Cyprus authorities respond to the challenges of the current situation.”

The Troika’s decision revealed the true face of contemporary Europe

 STANISLAV SAZHIN

Head of “Doctors at Work”, an award-winning Moscowbased start-up which enables medical professionals to publish their research articles for free. “About one million dollars of our money is blocked in accounts in Cyprus. Cyprus is attractive for Russian companies, not because of its banks’ profitable interest rates and warm climate but because Cyprus practices English law. English law is the main protector for both start-ups and investors.”

THE VIEW FROM THE MEDIA TH “Cyprus, it is said, never misses an opportunity to miss an opportunity. After its euro bail-out, that needs to change, not least for the sake of its battered economy.” The Economist, Apr 27th 2013

“As David Graeber put it in The Guardian this week, austerity is no longer an economic policy but a moral one in which someone must be found to pay for past profligacy. It is “a politics of crime and punishment, sin

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and atonement”. It seems almost to appeal to Protestant countries. They regard Greeks and Cypriots as singular sinners, but are all guilty.” Simon Jenkins, The Guardian, 24 April 2013

”A eurozone that compromises countries as diverse as Germany and Cyprus is not sustainable, even if the EU and Cyprus manage to find a lastminute compromise…” Wolfgang Münchau, Financial Times, March 24 2013


outside looking in

Time to Talk to the World

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atalia Kardash, Editor-inChief of several Russian-language publications in Cyprus, is Vice-President of the Association of Russian-speaking residents, founder of the Cyprus-Russian Festival and one of the founders of the European Russian Alliance, an organisation affiliated to the European Parliament. As someone with her finger on the pulse of the Russian community here, she spoke to Gold about how she sees the way forward if Cyprus is to maintain/ regain the confidence of her compatriots living in and visiting the island. Gold: Let’s get straight to the point. Will it be possible to restore the trust of Russian business people in Cyprus? Natalia Kardash: After all the events that have taken place and are still taking place in Cyprus, it will be very difficult to restore the trust that Russian businessmen had in the island. But while the pessimists might say that it is “impossible”, I would say that it is possible…but extremely difficult. We can look at Russia itself. The last banking crisis (1998) affected the economy greatly and it is only now, 15 years on, that the Russian president can confidently announce that “Our banks are strong and can be trusted”. I hope that the Cypriot president will be able to make such a statement much sooner. Gold: So what can Cyprus do to improve its image in Russia? N.K.: I believe that the authorities need to monitor all the foreign press to see what is being written about Cyprus and to respond po-

When the Cypriots are positive, they will transfer this

feeling

to others on the island and abroad.

Russians and others need to see progress and a positive attitude to put things right in Cyprus.

litely, presenting the facts. Where major serious media outlets are concerned, online or TV/ radio interviews with the responsible minister or a high-ranking official are essential. For the smaller media, it is still important to provide them with articles or comments by lawyers, auditors, advisers, economists or politicians. But they should not be complaining or aggressive in their reaction.

in the Republic of Cyprus?” There will not be any trust in the banking system if there is no trust in the country and Cyprus has lost a great deal of trust. People need to be confident that the “haircut” won’t be repeated if money is required in the future. My Russian friends often ask me things, thinking that I have all the answers but there are some questions that I find it very hard to answer.

Gold: There is a great deal of bitterness around. N.K.: This is understandable but Cyprus is complaining all the time, searching for guilty individuals and countries, seeking to find everyone and anyone who may have contributed to “destroying” the economy of the island. This is a position of weakness. You need to be strong, admit your mistakes, accept the facts, stop blaming others and start working to improve. I think it is time to stop complaining about something we cannot change and start changing whatever depends on us. Little by little, every day, every hour.

Gold: What sort of questions? N.K.: People are trying to make sense of the numbers and they don’t understand how the figure of €17 billion or €23 billion (depending on who is talking) was arrived at. No-one seems to be able to give a clear explanation. Then there is the question of how Cyprus will pay its debts if it receives less in tax revenue because many companies will be posting losses, and stemming from this, many Russians are wondering if it will be necessary for Cyprus to accept another “haircut” when more money is needed.

Gold: The government has begun to announce measures to deal with the current problems. N.K.: Yes, and it is good to hear about big plans. We all know that gas revenues will start to flow in 2020, for example. But it’s not enough to be told that the economy will start to grow “in a few years”. To create a positive business climate and to make people believe in the country, you need to give more precise dates and facts. People need to hear good news every day. Let it be a very small news story – it doesn’t matter. What matters is that people see that day by day, week by week, the situation is improving. People cannot live without hope and few of them have grounds for hoping that Cyprus will recover soon. If they see positive steps on a daily basis they will be more confident in their future. And when the Cypriots are positive, they will transfer this feeling to others on the island and abroad. Eventually, the tone of international press will also change. Gold: How can trust in the banking system be restored? N.K.: I do not think this is the question to ask. It should be “How can trust be regained

Gold: Let’s come back to the question of what can be done to improve the image of Cyprus among Russians. Do you have concrete suggestions? N.K.: Yes I do! There are several simple steps that can be implemented at once which will help improve the island’s image abroad and will make life better for the many Russians who are already in Cyprus. Don’t forget that there are thousands of tourists from Russia who have never been to Cyprus. If we treat them properly, they will love the country and come back year after year, with their relatives, friends and business partners. They will tell everyone about the wonderful holidays they spent here. On the other hand, if we do things wrong and we give them cause to complain about service, prices, behaviour, etc., they will choose another destination for their next holiday. I would suggest that the authorities look at the following: • More officers on passport control at the airports. It is easy to see when there are more flights from Russia and Ukraine: Just check the length of the queues. If every officer spends at least one minute per passenger, and 3-4 are dealing with a flight of 200-250 passengers, it

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outside looking in

means queuing for at least 60 minutes. Sometimes there are 2-3 flights leaving at the same… Work it out! • More signs in Russian. Why not make life easier for Russian-speaking visitors? Is there any shame in a tourist country being multilingual? Limassol did this many years ago and it really helps. Today, if a Russian tourist enters any store on the seafront, he will find at least one Russian-speaking assistant. Most of the hotels and restaurants have special Russian menus. You’ll see Russian signs everywhere in town. It is not a matter of fashion. It is matter of practicality. If you want to sell more to your visitors, speak their language. Agia Napa, Nicosia, and other places that are visited by thousands of Russian tourists should follow Limassol’s example. • Clean beaches. Russians come here for the sun and the beach. This is the most important element of their holidays. The Cypriot authorities would be horrified if they saw how many complaints there are on the Internet! People upload pictures of dirty streets and beaches, offensive signs, mountains of rubbish in the middle of tourist areas... This is very negative PR for the country and people believe what they see because it comes from ordinary travellers who have seen the world and can compare Cyprus with other countries. • More tour guides. The Cyprus Tourism Organisation has long had a policy according to which official licences for tour guides are only given to people who have completed a 2-year course of study – in Greek. So Cyprus “produces” maybe 15 guides every two years. How many licensed Russian-speaking guides are there? I have been told that there are “only six good guides” for the whole of Cyprus when we need at least 100 guides a day for the biggest Russian tour operators. If we want Russians to fall in love with Cyprus, we need to speak to them in a way they understand. This means allowing the tour operators to employ as many professionals as they need. Gold: These are things that can be done to improve the tourist experience but we all know that there are thousands of Russians

who have chosen to live permanently in Cyprus. What can be done to persuade them to stay at this difficult time? N.K.: In spite of everything that it is happening, the Russian community is still here but Russians face many problems in Cyprus. Today, everyone is asking Russian businessmen to stay here but has anyone made an effort to see how their life might be improved and implement some small but useful changes? Here are just a few items: • Residence permits. Before, every director of an international company was given a 5-year residence permit. Now, they need to apply every two years. Why? What happened? Instead of facilitating Russian business, we are actually making it more complicated. • Minimum salary. There is a regulation governing the minimum salary that an employee or a director of an international company must earn in order to obtain a residence permit and it is much higher that local salaries. If Cyprus wants to encourage more business people to stay here, to bring their families, to spend money on property, schools, shops, restaurants, etc. it should stop imposing more rules and increasing the cost of doing business (particularly in this crisis period) or it will have the opposite effect. • Residence permits for family members. Do you know how difficult it is for a Russian to obtain a residence permit for his/her mother in Cyprus? It’s a nightmare! She can stay for a month or two but if you want her to live with you for longer, you are in trouble. Why should this be so? If Cyprus wants as many Russians as possible to stay here and spend money, why restrict the family members of business people

want

If you to sell more to your visitors, speak their language

if there are enough funds for each newcomer? These people do not work (so they pose no danger to the labour market), their money comes from abroad and they are not entitled to social benefits, so Cyprus does not “risk” spending any money on them). • Social insurance. My Russian friends call this an “additional tax” because they pay at least €5,000 a year (high minimum salaries, remember?) as a social insurance contribution but they will never benefit from this money. They do not attend state hospitals (all have private insurance) or make use of state-paid education or maternity leave. Moreover, this money will be never transferred to Russia to be paid as part of their pension since no agreement exists on this between Russia and Cyprus. The only logical reason to impose the social insurance payment on the directors and employees of international companies is to get more money from them. No-one, whether of Russian, Cypriot or any other nationality, likes to feel that they are being taken advantage of. Gold: There are clearly things to be done. N.K.: There are many things and they are simple to do. In my opinion, and I speak for many members of the Russian business community in Cyprus, the most important thing is to make even small progress visible. We hear too many words and we don’t see enough action. The situation is extremely difficult. Not many countries experience economic and financial disasters of this kind. Many people are saying that Cyprus is so small that it was easy to destroy it but there is another side to this: Cyprus is so small that it will be much easier to restore the economy, confidence and trust than it would in a much bigger country. If there is a good plan, if it is properly implemented, if daily progress is seen to be made, if the local and foreign media notice this progress, if people care about the island’s reputation… Yes, I know that there are too many “ifs” but we need to start somewhere. I believe that it is time to start thinking about what we want to say to the world and say it loud.

THE VIEW FROM THE MEDIA TH “Dijsselbloem’s contributions to the contentious Cyprus bailout negotiations last week bear out his lack of experience and may yet do real damage to the euro area by sowing ever more doubt in the minds of investors and depositors about the intentions of the currency zone’s top policy makers.” Bloomberg, Melyvn Krauss, April 2 2013

”…German newspapers screamed that ‘poor Germans are bailing out rich Cypriots’. This interpretation is wrong but the truth behind these counter-intuitive findings is even more disturbing...” Wolfgang Münchau, Financial Times, April 14, 2013 “…The EU leaders who had spent all night in talks to produce Cyprus’s

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ill-fated bailout plan – a plan that would have been paid for in part by a levy on ordinary citizens’ bank deposits – had seen much worse. In Athens, there had been riots and tear gas. Yet despite three years of battling one crisis after another, the officials had still managed to misread the situation. They were wrong about Cyprus and its brand of politics. They thought the island had elected another Antonis Sa-

maras, the centre-right prime minister of Greece who became a champion of his country’s tough austerity-laden bailout when he was elected last June. But this was no Greece. Instead, they were dealing with Nicos Anastasiades, a lawyer and career politician who had assumed the country’s presidency just two weeks earlier…” Peter Spiegel, Financial Times, March 22 2013


There are several simple steps that will help improve the island’s image abroad and make life better for the many Russians who are already in Cyprus

Natalia Kardash

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outside looking in

THE VIEW FROM STRASBOURG The Troika Under Fire

During the Plenary Session of the European Parliament in Strasbourg on 18 April, MEPs roundly condemned the handling of the Cyprus bailout programme, blaming the Eurogroup for its appalling communication, the Commission for not defending insured depositors, some member states for their ‘colonial’ approach when addressing eurozone troubles and politicians for using double standards. Taking the floor to open the debate, Commissioner Olli Rehn said that the Commission would have preferred a more gradual adjustment for Cyprus but since member states were only committing €10 billion this was not possible.  He went on to say that it was ”time to stop the blame game”. Jean-Paul Gauzes (EPP, France) said that the Eurogroup’s appalling communication was central to the fiasco. He also blamed the EU insti-

tutions for not being vigilant enough and Cypriot banks for having built up too much risk. Hannes Swoboda (S&D, Austria) criticized the Council and more particularly Germany for behaving in a “near colonial way”.  He also called on the Commission to disband the Troika. Guy Verhofstadt (ALDE, Belgium) said that it was essential to find out exactly what went wrong, adding that the ECB, the Troika and the

Limassol, Cyprus

There is no place in the world for Russians to come to where they can feel as safe as they do here. They can have their children here, the children can go to school and they can live in a Russian community. No wealthy guy is going to send his wife somewhere she doesn’t have other Russians to talk to. This place, no matter what, is here to stay.

THE VIEW FROM THE MEDIA TH “Cypriots may bemoan the inequities of their rough treatment, as might a bunch of wealthy Russians who mistook the island for a reliable financial center and failed to yank their money when they could. For the rest of Europe, the implications should be obvious. Anyone who leaves un-

Cyprus. Cyprus was being used as an excuse to attack national fiscal sovereignty he said. Nigel Farage (EFD, UK) accused the Commission of criminal behaviour, robbing people to prop up the euro project. No one has confidence in the euro, he concluded. Laurence Stassen (NI, Netherlands) said that the only solution for Cyprus was for it to leave the Eurozone, adding that the Netherlands should not be paying out further for the country.

THE VIEW FROM LIMASSOL ANONYMOUS RUSSIAN WOMAN

Eurogroup president, Jeroen Dijsselbloem, had difficult questions to answer.  If these answers were not forthcoming then the EP should set up a committee of inquiry he said. Daniel Cohn-Bendit (Greens/EFA, France) said that the real solution for Cyprus was to reunite the island in order to unleash growth potential and investment. Jan Zahradil (ECR, Czech Republic) said the real problem was much wider than what was happening in

insured deposits in a euro-area bank is on notice that their money can and will be taken from them, if that is what’s demanded by the troika of the IMF, the European Commission and the European Central Bank.” Bloomberg, Jonathan Weil, March 29 2013

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“If the eurozone refuses to offer any further help, there must surely be a greater temptation to withdraw from the euro and default on sovereign debt in a classic restructuring deal with the IMF... It is traumatic, but countries usually recover after a couple of years. The crucial point for the

Cypriot people is that the cost-benefit calculus is moving in that direction. Whether they have understood this is another matter. They may in due course as the ghastly reality of Troika policy hits them.” Ambrose Evans-Pritchard, The Telegraph, April 12, 2013


2013


s n o s s e L 5 Europe r o F

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BANKING

HOW CYPRUS HAS CHANGED THE RULES OF THE BANKING GAME AT HOME AND IN EUROPE By Kyproula Papachristodoulou

D

espite the fact that European officials have been trying extremely hard to isolate the storm caused by the financial prescription given in the case of Cyprus, there can be no denying that the Eurogroup’s decision of 25 March 2013 has changed the rules of the banking game in Europe. And that’s not all: it has also significantly altered the way EU sovereign creditors value EU commitments; it has overcome various obstacles preventing the exchange of information for tax purposes, not only among the eurozone countries but also those of the EEA. And it seems to have altered the speed at which decisions are taken regarding the infamous “banking union”. As Lee Buchheit, one of the world’s leading experts on sovereign debt restructurings told Gold, “I don’t think there can be much doubt that the bail-in of uninsured depositors in Cyprus opens a new chapter in the management of the eurozone debt crisis.” Buchheit, a partner based in the New York office of Cleary Gottlieb Steen & Hamilton LLP and one of those who helped mastermind the Greek haircut, told Gold that until that point (i.e. the Eurogroup summit on 16 March) “the eurozone official sector had made a point of insisting that the senior creditors of eurozone banks

(senior bondholders and depositors) would be fully protected.” That is why Irish taxpayers, for example, were forced to shoulder the senior obligations of insolvent Irish banks in 2010. But not any more. Buchheit was one of the few who dared speak publicly about the possibility of a Cyprus haircut even on deposits, well before the Eurogroup decision. The diminishing credibility of European policy makers is an issue that will hurt Europe in the years to come. Alexander Michaelides, Professor of Finance at the School of Economics and Management of the University of Cyprus, told Gold that “EU policy makers are suffering now from the problem of time inconsistency or lack of credibility.” Their efforts, he stresses, to convince the public that the decisions being taken are always “one-off” events, are unsuccessful. “The public does not believe that policymakers are always coming up with new ‘one-off’ events (Repeated ‘one-off’ events cannot, by definition, be ‘one-off’). As a result, it will be progressively harder for them to credibly commit to policies that the public will believe in and, over time, this will make policymaking in Europe a lot harder.” Indeed, imposing losses on uninsured depositors in Cyprus “is certainly a precedent, and even-though it is not anticipated to be used widely, it carries a number of short term risks”, economist Yiannis Tirkides told Gold.

Tirkides believes that “pressures on the weakest banks and the likelihood of bank runs will increase, which might be a problem. Where there are many weak banks in one troubled country, it might aggravate that country’s credit crunch in the short run”. He identifies two problems that need to be addressed in a European context: “One to offset the risks emanating from implementing the precedent and two, making sure credit conditions are comfortable in countries, particularly those in distress.” While some features of the Cypriot economy and banking sector are rather unusual among euro area countries, most analysts agree that some general lessons apply: • Insured depositors should in general be safe if certain conditions (admittedly easy to find in Europe) are met. • If circumstances similar to those that applied in the Cypriot case are applied again elsewhere in the euro area, depositors will likely be bailed in again. • The bail-in of bank creditors, including senior unsecured bank bondholders, is likely in future bank bailouts throughout the euro area. • A complete package of what will form a real banking union in the EU is ideal but many obstacles lie ahead. • The Cypriot case has stepped up the European war against tax evasion.

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Lesson 1: Unsecured Depositors unsecured creditors, other than depositors, to fill the solvency gap of systemically important banks, then depositors will be bailed in again.” It is City Research’s view that, after Cyprus, political constraints will no longer prevent unsecured senior bond holders and other unsecured senior creditors from being bailed in. “Should insolvency hit a bank where, as in Cyprus, the overwhelming majority of the unsecured creditors are depositors, we think it is possible that large, noninsured depositors will be bailed in.” On the other hand, based on ECB data, the liability structure of the Cypriot banks was extraordinary and unlike anything seen elsewhere thus far in the Eurozone (see Figure 1).

liability will be carried out.” In other words, if future bank insolvencies are resolved starting by wiping out existing shareholders and bailing in the unsecured creditors, starting from the most junior and progressing as high up the seniority ladder as is necessary to ensure that the diminished value of the assets is at least as large as the restructured liabilities, then the bail-in of unsecured depositors might be repeated in the euro area. But for that to happen another factor comes in, as City Research, the research division of Citigroup Global Markets, has highlighted in one of its recent reports on Cyprus: It needs to be politically feasible. “If there are other banks in other countries where there are too few

FIGURE 1. EURO AREA – COMPOSITION OF MFI LIABILITIES (% OF GDP), JANUARY 2013 800

% of GDP

Other liabilities Securities other than shares External liabilities Deposits of EA residents

700 600 500 400 300 200 100

Therefore, it will be possible either to liquidate (if they are not deemed systemically important) or to recapitalise (if they are deemed systemically important) euro area banks, without bailing in any depositors, even the noninsured ones. For depositors to be at risk, three conditions have to be satisfied: • There have to be systemically important banks. • Depositors have to be a large share of total bank funding. • The banks must have very poor asset quality and are insolvent, with the insolvency gap exceeding the value of the banks’ unse-

cured liabilities other than depositors. It is conceivable that in a country with a large banking sector and a large share of deposits in total bank liabilities, losses could be so large that depositors (or at any rate noninsured depositors) would have to be bailed in, in the absence of non-bank sources of loss absorption. It should be noted that it looks much easier to absorb senior unsecured bond holders into the bail-in process since the Cyprus case, following the earlier bailing in of owners of hybrid instruments and subordinated bond holders in Ireland, Spain and the Netherlands (in the case of SNS Reaal).

ov en ia Sl

ec e Gr e

y Ita l

Be lgi

um

y Ge rm an

ia Au str

Po rtu ga l

Sp ain

Ne the rla nd s

Fr an ce

Ire lan

d

0 Cy pr us

Note: MFI – Monetary Financial Institutions, excluding Eurosystem. Note: external liabilities category includes deposits by non-EA residents. Source: ECB and Citi Research

Cyprus could serve as a new template – the unsecured creditor bail-in template. Besides, this is what Jeroen Dijsselbloem told Reuters and the Financial Times a few days after the Cyprus bail-in (and subsequently tried to deny only a few hours after the interview was published). But Oli Rehn, the European Economic and Monetary Affairs Commissioner simplified things. Speaking in a TV interview with Finland’s national broadcaster YLE, Rehn confirmed that Dijsselbloem was saying that “Cyprus was a special case” but he went on to note that “the upcoming directive assumes that investor and depositor liability will be carried out in case of a bank restructuring or a wind-down”. So there we are: “Depositor

“The public does not believe policy makers are always coming up with new “one-off” events”

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BANKING

Lesson 2: Secured depositors

Secured depositors – that is depositors with €100,000 and less – seem to be secured. That was proven by the second Eurogroup decision on Cyprus (25 March) since the first decision imposed haircuts on all depositors in all Cyprus banks. The security of small depositors continues to be an imperative demand on behalf of European citizens and the European Parliament. It now seems that everything possible will be done by the EU countries to keep insured deposits intact. But as German Finance Minister Wolfgang Schäuble pointed out, a deposit guarantee is only as credible as the financial resources that stand behind it. Financial resources can include national or European resources. Analysts expect that considerable efforts will be devoted by the Eurogroup as a whole to stop small, insured depositors from being bailed in everywhere. But it should not be forgotten that deposit insurance in the EU is a classic example of the European Commission mandating without funding. We know from Iceland’s experience since 2008, that there are – or were – national deposit guarantee schemes in the European Economic Area that did not have the resources to make good on even a deposit guarantee up to a €20,000 limit.

Lesson 3: Debt restructuring Statements from Eurogroup finance ministers, heads of state and heads of government, from European Commission officials and from central bankers that there will be no more PSI for sovereign debt are no longer considered credible by analysts around the world. In the case of Cyprus, City Research comments, “The risk of sovereign debt restructuring must be substantial”. Prior to the crisis, the EC expected the Cypriot general government gross debt/GDP ratio to reach 97% of GDP in 2014 when the fiscal deficit would still run at 3.8% of GDP. But the Eurogroup’s statement on March 16, 2013 envisaged that under the Cypriot Troika programme, Cypriot general government debt would be 100% of GDP in 2020. Analysts now estimate that the very poor macroeconomic outlook will imply higher deficits, lower real GDP growth and lower inflation and thus a much worse public debt burden trajectory than forecast. Even though an upside remains from the possibility of large increases in gas production, given the fact

that the actual timing or size of any eventual government revenues from the exploitation of the country’s natural gas resourses is unknown, no concrete estimates can be made for the near future. City Research concludes that “While the possibility of anticipating future gas revenues is an upside risk to sovereign solvency, the downside risks, from much weaker than officially projected economic activity to the risk of a potential ‘Cyprexit’, dominate, and a restructuring of Cypriot sovereign debt, both through PSI and through OSI (the €2.5bn Russian loan and the €10bn ESM-IMF loan) during the next year or two is very likely.” Euro area countries have already mandated the inclusion of an aggregated collective action clause (CAC) in every eurozone sovereign bond issued after January 1, 2013. Collective action clauses are a supportive tool to debt restructuring. Euro area officials have clearly sent the message to creditors that if there is a future debt problem in any of the euro area country they will restructure its debt.

Banking will have to re-invent itself By Yiannis Tirkides

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he resolution of Laiki Bank and the restructuring of Bank of Cyprus will have far-reaching implications for Cyprus banking. The banking model of the previous ten years or so has come to an end; ownership structure has changed drastically and the imposition of capital controls is hampering the normal functioning of the banking system and the economy at large. At the same time, the Eurogroup’s decision to impose losses on insured depositors in Cyprus also has serious implications for European banking. There are short-term risks but also opportunities in a Europe-wide context. Admittedly, the banking model of the previous ten years or so was unsustainable, not least because of the risk it entailed for the broader economy. The Cyprus banking system was too big, undercapitalised, with a thin bondholding buffer, concentrated, and too reliant on non-resident deposits. Yet supervision was seriously lacking. Following the recent resolution and restructuring decisions, capital controls have become necessary to prevent massive outflows from the banking system. The problem

with capital controls, however, is that once imposed, they tend to stick. And once they stick, they can be particularly damaging. Turning to the European context, imposing losses on uninsured depositors in Cyprus is certainly a precedent and even though it is not anticipated to be used widely, it carries a number of short-term risks. Insured depositors will not be affected very much but uninsured large depositors will become more wary of bank risk. Thus competition amongst banks for this type of large deposit will increase – which is not a bad thing. However, pressures on the weakest banks and the likelihood of bank runs will increase, which might be a problem. Where there are many weak banks in one troubled country, it might aggravate that country’s credit crunch in the short run. There are thus two problems that need to be addressed in a European context. One is to offset the risks emanating from implementing the precedent, and two, to make sure that credit conditions are comfortable in countries, particularly those in distress. To offset risks, it now becomes more important than ever to complete the banking union. This would require in

addition to the single regulatory framework that has been agreed upon, a single resolution authority for banks, and a deposit guarantee scheme. Maintaining adequate credit lines in distressed countries, particularly for small and medium sized enterprises, would be a challenge for the European Central Bank and the Commission. This might even lead to the revival of the market for Asset Backed Securities of small and medium sized enterprise loans to provide liquidity. In summary, the Cyprus banking model of the previous ten years or so has come to an end and banking will have to re-invent itself in the medium term. Capital controls, whilst necessary in the short term, can be very damaging if maintained for too long. Their removal, however, can lead to large capital outflows, which will require the uninterrupted liquidity support of the European Central Bank for the normal functioning of the banking system. In a European context, Cyprus is a precedent. This creates shortterm risks but, at the same time, it becomes a catalyst for continued progress in completing the banking union. Not a bad thing in itself!

Info: Yiannis Tirkides is an economist.

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Lesson 4: Banking Union Banking union has three dimensions. • A single supervisory mechanism (SSM) headed by the ECB enforcing a single regulatory framework/rulebook. • A single bank resolution, restructuring and recapitalisation mechanism. • A deposit insurance mechanism, with ultimately jointly and severally guaranteed financial backing. It seems that there will be a single supervisory mechanism, probably early in the second quarter of 2014, headed by the ECB, immediately covering the most important 150 euro area banks and ultimately covering all banks in the eurozone. Analysts say that one of the good things to come out of the Cypriot situation is that it may bring forward this phase of banking union. It is not yet clear when the deposit insurance mechanism will be put in place but it seems

that it is also likely to be implemented earlier than previously estimated because of the outrage created by the prospect of a haircut on insured depositors according to the March 16 Eurogroup decision for Cyprus. German Finance Minister Wolfgang Schäuble declared last week that banking union was a “priority project” and promised to press ahead with it “quickly”. Banking union could move ahead for now by harmonising national resolution schemes, he said. According to Reuters, a German finance ministry official said Schäuble’s “ideal scenario” was to secure agreement on banking resolution before the European summer recess, adding that without a new EU treaty providing legal backing for a common resolution authority, “you can work with a network of national authorities”. The most important dimension of banking union is a single resolution, restructuring and

Lesson 5: Tax compliance

The pressure for action against tax evasion has grown in the wake of the Cyprus bailout. Finance ministers who met in Washington in April have decided to throw their weight behind the automatic exchange of tax information, in a sign of the intensifying crackdown on tax evasion and banking secrecy. The drive for automatic information exchange was given by the US, which warned of a 30% withholding tax on foreign banks that did not inform the authorities about the US client information under its 2010 Foreign Account Tax Compliance Act (FATCA). European governments have agreed to adopt an EU version of FATCA, and the UK has secured similar agreements with its crown dependencies and overseas territories. Under pressure amid a renewed global crackdown on tax evasion and avoidance, Luc Frieden, finance minister of Luxembourg, said that his country was willing to expand the number of accounts covered by new information-sharing agreements with the US and the EU to include global companies. Britain’s Overseas Territories, on the other hand, have bowed to pressure for greater tax transparency, in a move the British government has hailed as “a turning point in the fight against tax evasion and illicit finance”. The UK Treasury announced that Anguilla, Bermuda, the British Virgin Islands, Montserrat and the Turks and Caicos Islands had followed the Cayman Islands by agreeing to share information automatically with Britain, France, Germany, Italy and Spain.

recapitalisation mechanism which, European leaders statements have made clear after the case of Cyprus, will not be as people might have imagined at the beginning of the process. Jeroen Dijsselbloem, the Dutch Minister of Finance and President of the Eurogroup, expressed the hope and expectation that there would never be any need for the European Support Mechanism to recapitalise banks directly. So what seems to be dead is the specific model of banking union that would have the eurozone-wide taxpayer bailed in before either the national taxpayer or the unsecured creditors of the bank. What remains very much alive is banking union in the sense of a mutualised back-up for systemically important banks, after both unsecured creditors and national taxpayers have been bailed in to the fullest possible extent.

Lessons from the US By Alexander Michaelides

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he idea of large depositors losing their money when a bank is resolved (especially when that bank is actually state-owned, meaning that it should have been even safer than other banks) is having negative effects on banking stability in the rest of Europe. Even in countries outside the eurozone (like the UK), households are looking into alternative ways to save their deposits above the state-guaranteed threshold. This will eventually affect the rates of return of alternative assets in different countries, depending on the assets that households decide to turn to. The attempts by EU policymakers to contain the panic that is spreading to Italy and Spain is unlikely to be very successful. EU policymakers are suffering now from the problem of time inconsistency or lack of credibility. They keep trying to convince the public that decisions being taken are always “one-off” events (for instance the Greek “voluntary” PSI or the recent Cypriot “bail-in”). But the public does not believe that policymakers are always coming up with new “one-off” events (Repeated “one-off” events cannot, by definition, be “oneoff”). As a result, it will be progressively harder for them to credibly commit to policies that the public will believe in and, over time, this will make policymaking in Europe a lot harder. More locally, it would have been very useful to have a better picture of the data. What proportion of deposits being bailed in makes up the working capital of local and international companies? That could help us understand the effect on the real economy. If most of the money belongs to rich depositors, then the effect on the real economy might not be that great as the marginal propensity to consume out of large savings in the bank is close to zero. If, on the other hand, most deposits are the working capital of companies, that can have a greater effect on the real economy. The truth lies somewhere in between but it would be useful to have some aggregate statistics given to the public and even statistical agencies. I do not see, for example, how the forecasts about the economy next year can be made without this information. Another issue that is under-appreciated at both the EU and local level is the speed at which decisions should be implemented. Here, the comparison and the lessons from the US can prove useful. When the US decided to fold Bear Stearns and merge it with JP Morgan, they did so over the weekend. On Monday, when markets opened, people knew this had been done. In Europe, and more specifically in Cyprus, decisions get made on night and many weeks later we are still discussing the details of implementation. This increases uncertainty and reduces confidence that decisions are being implemented professionally, adding to the general feeling of uncertainty in the economy and lack of trust in the policymaking process. Info: Alexander Michaelides is Professor of Finance at the School of Economics and Management, and Director, Centre of Banking and Finance, University of Cyprus. THE INTERNATIONAL INVESTMENT, FINANCE & PROFESSIONAL SERVICES MAGAZINE OF CYPRUS

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Gold 33

08/05/2013 17:06


PROFILE

The bailout should be seen as an opportunity to change Cyprus for the better, says Moscow-based Cypriot business consultant Markos Shiapanis. By John Vickers. Photograph by Jo Michaelides.

arkos Shiapanis is a fascinating character. A Cypriot from Famagusta, he studied theatre and film direction in Moscow but today, 44 years later, he spends much of his time advising Europeans wishing to invest in Russia to do so through Cyprus. How he got to this point is, he says, a long story. “I was studying drama but, to help pay for my studies, I was also helping various Cypriot businessmen who had dealings with the Soviet Union, as well as working as a translator for groups of Greek and Cypriot tourists to the Soviet Union. It was at this time that I became interested in tourism and I was planning to return to Cyprus and work in the tourism business but things didn’t go according to plan due to the 1974 coup and invasion.” Instead of Cyprus, Shiapanis went to Greece and, with two others, made his first documentary film, Cyprus ’74. In 1975 he began promoting student travel between Greece and the Soviet Union: “Thousands of people wanted to see what was going on there since it had been closed for years to the outside world. There were also 150,000 Greeks who had emigrated to the USSR and they started traveling in the opposite direction so it was a very good business.” Despite devoting time to his first – and last – major theatre production (of Sophocles’ Electra, starring Aspasia Papathanasiou) in 1975, Markos Shiapanis has been involved in business with the Soviet Union and later Russia ever since. “With the advent of Perestroika, I began holding management seminars for Russian businessmen and when the USSR was replaced by the Russian

34 Gold the international investment, finance & professional services magazine of cyprus

Federation, I established the MIBS (Moscow International Business Services) Group and started the first movement of Russians to Cyprus.” For 20 years Shiapanis’ main business was real estate. “From 1992-96, Russians were buying properties in Limassol mainly and later in Paphos,” he recalls. “But after the first and second Russian crises in 1996 and 1998 I decided to change direction, again spending more time on tourism and consultancy, which is now my main business: advising companies – in Europe mainly – to bring their money through Cyprus to invest in Russia.” In the past few years, the Russian community in Cyprus has grown enormously. Shiapanis thinks he knows why: “Russians feel that Cyprus is very close to them. Russian and Greek are similar languages in many ways, we have a similar culture and we share the same religion. The Russians and Ukrainians like us and trust us, and this is extremely important. The number of Russian tourists to Cyprus is going to keep growing. Don’t look at the present situation. It’s not going to stop tourism. Since 2010, when the Government finally scrapped the visa regime, the numbers have soared. This year there will be half a million and, by the end of the decade, over a million Russian tourists a year will be visiting the island.”


The majority of Russians – maybe 95% – than €100,000 in their accounts which tendS to be for living expenses credit card payments, etc.

Markos Shiapanis


PROFILE

Sometimes people in order to react Shiapanis does not agree with those who say that, if more of the country’s tourism product is geared towards Russian visitors, there is a risk of alienating those from what is still the main market for Cyprus – the UK. “I have had discussions with hotel owners about this and whether the influx of Russians will cause the British to go elsewhere,” he says. “Our conclusion is that British and Russian holidaymakers will find a common language. The British see the Russians as something different but I don’t think that this is going to drive them away. And when there are a million Russians here, there should be over three million tourists in total, so we need to improve what we offer all our visitors. Many hotels in Cyprus are of a very high standard but there are still lots that are not good enough.” As someone with many Russian and Ukrainian friends, clients and associates, Markos Shiapanis is in an excellent position to have an insider’s view of how the banking crisis in Cyprus has already affected and will affect foreign residents and business people here in the future. He admits that many of them are worried: “Even those who haven’t lost money are worried because they never expected such a situation to arise in Cyprus,” he says. “I am pleased to say that, so far, there has been no change on the part of the people I work with. None of the Russians and Ukrainians who have businesses and residences here has indicated an intention to leave Cyprus. Some even see this as an opportunity but they are starting to question things and to wonder if their associates here are capable of continuing in the same way as before and of taking good care of their money. I can’t estimate the damage that has been done so far but there is no doubt that damage has been done. It’s good that deposits under €100,000 have been protected because the majority of Russians – maybe 95% – have less than €100,000 in their accounts which tends to be for living expenses, credit card payments, etc. So perhaps 5% are those with larger amounts and, of course, whether they have lost a sizeable amount of their funds depends on which bank they were using.” Shiapanis believes that one effect of the shake-up in the banking sector will be seen in the way Russians, in particular, will henceforth do business in Cyprus. Until now, they had a tendency to pay everything in advance and in full. “Some of the people who have lost money put the full amount of their property purchase in a deposit account,” he explains. “They paid 40% to the developer and took out a 5-year loan using the remaining 60% as cash collateral. They were paying their instalments and they still have to pay off the loan but they have lost their money due to the haircut. This is ridiculous!” Despite its apparent bad timing, the MIBS Group held a successful Business Forum in Kiev at the end of March, when most details of the bailout deal were already known. Had Shiapanis considered canceling the event?

36 Gold the international investment, finance & professional services magazine of cyprus

“No,” he says firmly. “I didn’t even think about it. A couple of people suggested that due to the crisis in Cyprus we should perhaps not go ahead but we stayed and, in fact, we had more people there than we expected, despite the extremely bad weather.” So what should Cyprus be doing in order to restore Cyprus’ reputation? “Restart and rebrand,” he says without hesitation. “And this is not an easy task. It takes time. Whether it takes one year or five years depends on us understanding how much damage has been done to the banking system and on the trust that we have built up over the years. And it is also time the Cypriots learned to abandon their traditional ‘slowly slowly’ approach to business. They all have to change the speed of their operations, from the biggest company to the smallest. They cannot work as Cypriots when they are being paid to work as Europeans. There’s a difference!” So the bailout and its consequences are going to bring about a change of mentality? Shiapanis believes they will. “Our mentality is a result of our circumstances. The Cypriots have never been in a hurry because they have always felt confident that they will be paid but it won’t last. Very few businesses, if any, closed on March 25 but some did on April 1 and by June there will be a lot more closures. And when people see businesses going bankrupt, when they see how many shops are closing, then they will soon realise that there is a crisis and that they need to cut their expenditure. Sometimes people need a shock in order to react.” Regarding foreign investors, Shiapanis says that it is now imperative to make even greater efforts to ensure that they stay on the island. “We need to make them feel welcome, we need to reduce bureaucracy…” He gives an example of what he means: “I have been waiting for a simple document for a registered Cyprus company which I need to take to Moscow for one month now! In another country I would have had it within a day. We have to change our speed of living and working. The whole system needs changing. We have to restart and rebrand the country. We need to become a place where things are done quickly and properly or we will be left behind. It may be tough to accept but what has happened here should be seen as an opportunity to put things right.”

What has happened here be seen as an oppor tunity to put things right


opinion

Problem Solved? The implications of the bailout agreement for Cyprus’ economy and banking sector

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urozone officials may be satisfied that Cyprus has been ‘saved’ following the agreement on a bailout package but it is now clear that the recession in Cyprus will be far deeper and longer than envisaged, requiring greater government spending on ‘benefits’ and tax increases. Troubled local banks might require further recapitalisation due to the knock-on increase in nonperforming loans and, consequently, loan provisions. That will ‘squeeze’ even further those large depositors who have already lost a great chunk of their funds above €100,000. Importantly, tough austerity and the current recessionary environment will lock Cyprus into a negative feedback loop with the possibility of requiring a second bailout. The imposition of heavy austerity measures on countries in the middle of an economic recession has proved more damaging for their economies than policymakers had anticipated. Cyprus is expected to carry out fiscal consolidation equivalent to circa 5%-7% of GDP which is likely to shrink its economy by 16%-18%. The island’s debt is still expected to increase to 140% of GDP, a level that many consider unsustainable. The immediate problem facing Cyprus is how to restore confidence in its banking sector. Commercial banks and Co-ops need to maintain the flow of money to the local economy. Disrupting that flow is similar to disrupting the blood flow to the heart. Capital controls and the suspension of lending prevent normal economic operations, with potentially disastrous consequences for individuals and businesses. The Central Bank needs to recognise the implications of keeping these measures in place for too long. For instance, when businesses are limited in their ability to pay suppliers (especially international ones) for an extended period of time, they may have to lay off staff (and consequently increase unemployment) or sell off valuable assets (as distressed assets) in order to survive since suppliers will be unwilling to maintain existing credit lines. Moreover, they may also default on existing loans, thus damaging the bank’s loan portfolio with possibly catastrophic implications for the local economy and banking sector. Even if confidence is restored and restrictions are lifted, the banks will be unable to perform their role as systemic lenders for years to come (especially Bank

Cyprus should promote itself as a transparent and professional financial centre

By George Mountis

of Cyprus which will have to bear the burden of Laiki Bank’s ELA funding and the administration of all Laiki’s problematic loans as well as its own). To restore confidence in the system, the ECB must provide unlimited liquidity to the Cypriot banks (especially to Bank of Cyprus) once they are restructured and recapitalised. Cyprus is only the smallest of many countries that find themselves trapped between heavy bank deleveraging and significant government austerity. Spain, Italy, Ireland, Greece and, increasingly, France are all experiencing the same tough consequences in their economies, so Germany may soon find itself in a minority over its demands for additional austerity. A long-term concern is whether Cyprus’ financial/ banking services sector has a future. German officials suggested as a condition of the bailout that ‘offshore depositors’ should bear losses as well as local depositors. Russian and Eastern European businessmen have undoubtedly lost a lot of money in Cyprus. However, it is unclear whether this will affect how such businesses use Cyprus as their financial hub. Choosing Cyprus as a tax jurisdiction does not necessarily require that investors hold all their funds in the country. Whether offshore/fiduciary businesses have a bright future ultimately depends on political decisions made in Moscow, Brussels and Berlin. Cyprus should promote itself as a transparent and professional financial centre with the aim of attracting Asian and other international investors, while retaining international businesses currently operating here. Nobody doubts that, after such a severe blow to Cyprus’ lucrative banking sector, the country will be pushed into deep recession. A key question is this: once the banks have been ‘cleaned up’, recapitalised and shrunk, where will Cyprus find real economic growth? The promise of offshore gas deposits is still too uncertain and tourism may well decline if the Russians suddenly find the island less hospitable (although early signs indicate that this is not the case). No matter how small Cyprus may be, its bailout is an embarrassing reminder that the euro remains vulnerable to banking and sovereign debt problems. The risk for the eurozone is that the cessation of the free movement of money across borders may be seen as a precedent, causing nervous investors and lenders to pull their money out of other economies and banking systems perceived to be weak, such as those of Italy and Spain.

info: Dr. George Mountis is a Partner at Leaf Research, a real estate, banking and investment consulting firm. the international investment, finance & professional services

Gold 37


Aiming to Become

insurance

the Insurer

of Choice 2012 was another year of achievement for Trust International Insurance Company (Cyprus) Ltd. Local Operations grew significantly by 35% and Reinsurance Operations by 33%. CEO Christos Christodoulou spoke to Gold about the company’s latest results and how it intends to deal with the situation that has arisen since April, following agreement on a financial assistance package with the Eurogroup.

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By John Vickers. Photograph by Jo Michaelides.

rust International Insurance Company (Cyprus) Ltd, established in 1990, is a member of Nest Investments Holdings Ltd (Nest Group). Since beginning its local opera-

tions in August 2009, it has been the fastest-growing Insurance and reinsurance entity in Cyprus. The Company operates from two locations: one is the Amman Regional Office, which provides support for Reinsurance and technical services for all the Direct Insurance Companies of the Nest Group, as well as training and educational assistance and other corporate services to the same group. Reinsurance activities come under the Cyprus company, which employs 60 dedicated staff and managers and a sales force composed of 121 experienced brokers. The company offers a wide range of insurance products, covering personal lines, commercial and industrial risks. “Direct Insurance operations registered 35% growth over 2011,“ CEO Christos Christodoulou told Gold. “The Company’s Gross Earned Premiums rose to $53,851,588, representing an increase of 14.9%, and net profit increased by 8.3% from last year. It is worth mentioning that this profit was generated from operating activities and not investment returns. The net profit after tax of $2,634,201 is a great achievement.” Christodoulou noted that Trust Insurance’s exposure to the financial crisis experienced in Cyprus was mitigated by its reinsurance activities 100% outside Cyprus. “Furthermore our local exposure is minimal, due to prudent risk management processes,” he said, noting that “We are, of

38 Gold the international investment, finance & professional services magazine of cyprus

course, vigilant and responsible towards the environment we operate in. We only began local operations in 2009 so the majority of our assets are abroad and were thus not affected by what has happened here. We have operational cash in Cyprus which we hold in different banks. However, Bank of Cyprus was our operating bank so we stand to have about €250,000 removed as part of the “haircut” which is a negligible amount in the broader context of our operations. Moreover, this money will be converted into shares so if the Superintendent of Insurance recognizes these shares as assets, it will be as if nothing happened and it won’t affect our operations. As a company we are in very good shape. The problem for our competitors will not be the “haircut” of deposits but rather where they made their investments.” Christodoulou expects to see changes and developments in the local insurance market, in the form or mergers and acquisitions and, possibly, closures but he is supremely confident that Trust has the financial robustness and the right strategy to become what he describes as “the insurer of choice”. “We expect that, for a variety of reasons, many people will switch companies so we intend to let them know that we here to stay and so is the Nest Group, which has consistently shown that it believes in Cyprus,” he said. “Don’t forget that 2009 was the start of the financial crisis here and that was precisely the time when the Group decided to enter the local market. The message to us from the very first day of this latest crisis has been that the Group not only supports Cyprus but intends to invest more.” Trust International Insurance Company’s goal of becoming the island’s leading insurance company will be achieved, Christodoulou believes, through innovation and customer service excellence. “We are planning to introduce some innovative new products in the coming months, while in terms of customer service, we have always taken pride in the speed at which we pay claims,” he explained. “In these present, more difficult times, we are doing everything we can to pay them even faster than before, in order to make things easier for our clients. Additionally, we have already introduced 4- and 6-month policies, which enables people to pay their premiums in three or two instalments respectively and thus keep their insurance in force.” Isn’t there a tendency for people to view insurance as something that they can live without at times like this? There is, Christo-


doulou acknowledges, but he believes that it is a mistaken view: “When the Government is not in a position to help people, they need to look to private insurance,” he explained. “Our advice is that this is precisely the time when we all need it. By providing short-period policies, we are giving people a means of keeping their insurance. This is a much more effective method for everyone than, for example, reducing the premium by 5% or 10%. As a company we need to maintain the efficiency of our resources to pay claims but this way makes it easier for people to pay. And it’s worth noting that the cost of insurance in Cyprus is such that everybody can afford it.” The CEO of Trust Insurance admitted that the company might face a problem with premium collection at some point (“For now people are paying but we don’t yet know the degree to which businesses have been affected. It’s too early to tell.”) but he is not expecting to face any “serious problems”. “I am confident that we have everything necessary to continue pursuing our ambitious goals, not only for 2013 but for

The Nest Group not only supports Cyprus but intends to invest more the subsequent years too,” Christodoulou said. “We have proved to people over the past 4 years that we are financially sound, we are professionals and we have gained their trust. We aim to become the insurer of choice in Cyprus. With the backing of the Nest Group, with its highly-diversified assets in 23 countries, we expect to become a company in which people place the same kind of trust that they used to have in banks. I believe that, thanks to our strong foundations, our clear objectives and our willingness to go further than the competition, we shall remain on course towards an even greater future.”

Christos Christodoulou

the international investment, finance & professional services magazine of cyprus

Gold 39


Insupp o T cyprus

A Cypriot exit from the eurozone would be “catastrophic”. By Kyproula Papachristodoulou

he future prosperity of Cyprus depends on the Cypriots themselves. This might sound simplistic coming from a man who used to teach Engineering Economics at Columbia University in New York and has written extensively on the Greek and Cypriot financial crises. Nevertheless, George J. Prokopakis believes that this view is realistic. In this exclusive interview with Gold, the former management consultant at the Athens Stock Exchange, who is now Vice President and Chief Operating Officer of SPEC Business Consultants S.A., argues that exiting the eurozone would be catastrophic and that the Government needs to implement the bailout agreement and be honest with the Cypriot people about the lack of “magic solutions” to the country’s problems. Gold: What were the alternatives that the Eurogroup could have considered regarding the Cypriot bail-out/bail-in? Were there alternative solutions and, if so, why were they not pursued? George Prokopakis: The previous Cypriot administration let the problem drag on for some 20 months. What was a manageable liquidity problem – I would characterize it as rather minor – in the summer/autumn of 2011 became an avalanche. The solution had to be drastic, because the problem

It is up to an “alliance of the willing” from within Cyprus to secure a better future for the country

had become enormous. The alternatives were limited to (a) a “Greek-style” package, which would cover all needs, would transfer the private debt (banks) to the Cypriot taxpayer and result in a Memorandum with devastating provisions for the Cypriots, since the debt would have been unsustainable; and (b) a package that would “send the bill” to the actual debtors, i.e., the banks.

Gold: Only two alternatives? G.P.: Any other alternative would have worsened the situation. For example, a debt write-off would have returned as a bigger problem, since over two thirds of the state debt was held by Cypriot banks and lenders. Any other solution would require the financing of the problem under unknown terms and conditions. Allow me to draw your attention to the fact that at the time of the Eurogroup decision, Cypriot banks had some €75 billion in deposits and only €1.7 billion in “loans”. Lenders and investors had had 20 months to get out of the growing mess. Any bank restructur-

40 Gold the international investment, finance & professional services magazine of cyprus

ing was bound to hit depositors – this was known to the Cypriot administration since November 2012 and to the entire world since late January 2013 (I am referring to an Economist article and leaked documents published in the Financial Times).

Gold: Cyprus’ economic growth over the past years has largely relied on the financial and professional services sector. Many analysts are of the opinion that the “medicine” administered by the Eurogroup, on the recommendation of the IMF and the ECB, was designed to finish off rather than cure the patient. What is your view? G.P.:. There is no question that the “medicine” administered by the Eurogroup and the ECB, will affect banking activities in Cyprus – with all the adverse consequences. However, the “financial hub” model is still up in the air. Cyprus has all the know-how, skill set, institutional and legal framework developed over a period of some 30 years, and it is second to none on this part of the planet. It is up to the Cypriot government to implement policies that will restore banking stability and support this industry. Even after the Eurogroup’s decision, the country’s corporate tax rate is still the lowest in the eurozone – there is an incentive for Greek entities, for example, to have a base in Cyprus (the difference in tax rates is enormous: 12.5% in Cyprus vs 26%36% in Greece). It is debatable whether the banking model (high interest on deposits and higher rates on lending) really helped the “real economy”. It pumped money into


p ortable the “real estate bubble” but left the Cypriot middle class over-exposed to lending. Don’t forget that the construction industry, one of the pillars of the economy, had already collapsed long before the Eurogroup’s decision and unemployment had already hit a threatening 14%. Gold: Taking the 25 March agreement as a given, what is the optimal action plan for the Cypriot government? G.P.: In my view, the highest priority is the restoration of trust in the banking system and the smooth lifting of capital movement restrictions. This is no easy task and the Government will need the support of all Cypriots – taxpayers, businessmen and, if possible, of people across the entire political spectrum. Measures to support the most severely hit must be taken swiftly. The Government’s funds are limited, so if society wishes to sail through the rough seas it must be understood that a transfer of funds among the various segments of society must take place. Subsidies must be directed to the unemployed and the really needy – and nobody else! The healthcare and education systems must be protected. Gold: What about privatisation? G.P.: The government must have a crystalclear policy on privatisation and defend it at any cost. If privatisations do not proceed as scheduled, more measures will be taken with severe consequences on employment and everyone’s income. The real challenge for the government is the development of a long-term plan for the restructuring of the economy. Many jobs that have already been lost (and quite a few of those that will be lost in the next few months) will not be there when Cyprus recovers. New activities need to replace the obsolete ones. The

The Government needs to be candid with the people and present the real alternatives and their consequences, regardless of the infamous “political cost”

George J. Prokopakis

Government’s limited funds must be directed, fairly and transparently, to activities that will allow people’s productive potential to surface and be part of the recovery process. Gold: The Boards and management of the three main state-owned organisations (Electricity Authority of Cyprus, Cyta and the Cyprus Port Authority) are strongly opposed to privatisation, claiming that there are other ways to generate income for the state. What is your view on the future of these organisations and the need for privatisation? G.P.: First things first: the Boards should

be fired immediately! They have failed to generate enough income for the state for many years. Pure incompetence! If this goldmine is there, they should be held accountable for not distributing this wealth over the past years. I bet they offer the familiar line of defence: it was partisan politics that forced us to have many more employees that are actually needed, to offer unheard of benefits, to give contracts to this or that company, to advertise in obscure publications, etc., etc. Let me state the obvious: if a company operates as it should, the only difference between public and private ownership is in the dividend. It is up to the state to establish the regulating

The Cypriot people must have realised all these years that morality and geopolitics are often mutually exclusive the international investment, finance & professional services magazine of cyprus

Gold 41


cyprus

A euro exit would be suicide unless the financing of such an exit is secured. mechanisms to ensure that these companies do not operate against the public interest, regardless of ownership. One thing must be made clear: unless the stateowned companies generate some €1.5 billion by 2018, over and above all state revenues from taxation, levies and social security, measures of an equal amount will be imposed on the Cypriots. This is the subject of the debate – not the prospects of these companies under their current management. Let us not forget that Cyprus was ready to trade most of the nation’s future gains from its hydrocarbons, it was ready to contribute the reserves of the pension funds and, at the same time, there is concern about the outlets through which partisan clientele politics pass! Where is the concern about the pensioners, the unemployed, the future generations? Gold: Some of the main political parties, as well as some local businessmen and international analysts, argue that Cyprus should abandon the Memorandum with the Troika and find a solution to its financial problems outside the context of the euro. What is your view? G.P.:. Leaving the euro before Cyprus has fully recovered and grown prosperous would, in my view, be catastrophic. Moreover, the stance of the international community during the critical two weeks of March, showed that, with the island still divided, the very existence of the nation is in jeopardy outside a supra-national organisation. The cost to the Cypriot people of a euro exit would be insupportable. I hope the champions of the euro exit have a plan for coping with the geopolitical issues, as well. I will refrain from getting into a discussion about how the new currency would perform (devaluation), how imports would be supported, where the values of all

assets would end up in the case of an exit from the eurozone. We only need to take a look at the books, as an accountant would. If Cyprus wishes to leave the association of which it is a member, its books need to be balanced. They contain €15.5 billion of public debt, €11.2 billion of ELA and €2 billion of state guarantees. A total of over €28 billion compared to a GDP of €17 billion. This figure is with no provision for the banks, which will be hit further. How on earth would this settlement be financed? In my view, a euro exit would be suicide unless the financing of such an exit is secured. Gold: What would the political cost be if Cyprus were to exit the eurozone? G.P.: I’m afraid that, any discussion about Cyprus leaving the eurozone brings with it a hasty and forced decision about the national problem of the divided island. Politically, I cannot see how the cost could be any less than catastrophic, as long as the 39-year old national problem remains unsolved. The Cypriot people must have realised all these years that morality and geopolitics are often mutually exclusive. Gold: Are there practical steps that can be followed in order for Cyprus to exit the Memorandum? Is it possible? G.P.: The Memorandum per se is a mutually agreed upon set of measures and actions that need to be implemented to ensure that Cyprus is in a position to finance its economy by itself by 2018 – either by its own means or by securing financing from lenders other than the Troika. In that sense, a roadmap that achieves the same goals with measures and actions that have a more bearable impact on society would be more than welcome. The key is not the Memorandum itself – it is the achieve-

42 Gold the international investment, finance & professional services magazine of cyprus

ment of the goals. The €10 billion loan agreement simply does not exist in the absence of a credible plan, no matter who the father of such a plan is. An alternative Memorandum is possible but I doubt whether it would be much different from the agreed one. Besides, Cyprus had nearly two years to develop such an alternative plan and came up with next to nothing when it was really needed. If your question means “with no Memorandum at all”, we come back to the underlying issue of who will finance Cyprus. Gold: What conditions need to be met before Cyprus can be optimistic about its future? G.P.: The major risk for Cyprus is not economic – it is moral and political. The Government needs to be candid with the people and present the real alternatives and their consequences, regardless of the infamous “political cost”. The widest possible consent needs to be gathered on the recovery policies for as long as the crisis lasts. The recession and austerity are unavoidable. The Eurogroup’s decision, no matter how harsh, has cleared the picture, along with the mess. It is up to an “alliance of the willing” from within Cyprus to secure a better future for the country. It is a crime against future generations to engage in populist debates about magic solutions and the white knight who will solve all the problems overnight. The next few weeks are critical – we can talk forever about all kinds of policies. However, the litmus test will be the moment of the “full return to the euro”, that is, when all capital movement restrictions are lifted. If this transition is made smoothly, we all can be optimistic about the future – the next day will be in the hands of the Cypriots.


Abdul Rahman Al Attiya

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qatar

Learning

from Qatar Qatar, which boasts one of the fastest-growing economies and highest per capita incomes in the world, can teach Cyprus a great deal. The main lesson, according to Abdul Rahman al Attiya, ChargÊ d’Affaires of Qatar in Cyprus, concerns the liquefaction of natural gas but there are good prospects for collaboration between Qatari and Cypriot businesses in the tourism, education, real estate and agricultural sectors. By Kyproula Papachristodoulou. Photograph by Jo Michaelides.


qatar

The government strongly encourages international investment in certain sectors such as energy Gold: Could you elaborate on the objectives that Qatar has set out as its future economic goals? Abdul Rahman Al Attiya: In his foreword to the Qatar National Vision 2030, H.H. Sheikh Tamim bin Hamad Al Thani, Crown Prince of the State of Qatar, states that it builds a bridge between the present and the future. It envisages a vibrant and prosperous country in which there is economic and social justice for all, and in which nature and man are in harmony. “We need to galvanize our collective energies and direct them toward these aspirations,” he notes. “Strong Islamic and family values will provide our moral and ethical compass. The welfare of our children and of our children yet to be born demands that we use our resource-wealth wisely. Qatar must continue to invest in its people so that all can participate fully in economic, social and political life. Qatar must invest, too, in a world-class infrastructure to create a dynamic and more diversified economy in which the private sector plays a prominent role. This requires continuous improvements in the efficiency, transparency and accountability of government agencies.” Gold: The country has embarked on a journey of sustainable economic diversification that seeks a secure future for its people, built on human capital. What measures have been taken to achieve this? A.R.A.A.: Our national journey of human development and sustainable economic diversification rests on four pillars: Economic, Social, Environment and Human Development. Qatar cannot develop its economy and society without its human capital and resources: its people. Human development entails a holistic and modern healthcare infrastructure that caters to

all, and an educational system on a par with the highest international standards, preparing Qatar’s students to take on the world’s challenges and become tomorrow’s innovators, entrepreneurs, artists and professionals. Moreover, a world-class education system and equal opportunities will propel Qataris to increase their role in all sectors of their country’s economy. Such a system, which will equip citizens to achieve their aspirations and meet the needs of Qatar’s society, includes educational curricula and training programmes responding to the current and future needs of the labour market, high-quality educational and training opportunities appropriate to each individual’s aspirations and abilities, accessible  educational programmes for life-long learning, and an effective system for funding scientific research shared by the public and private sectors and conducted in cooperation with specialized international organisations and leading international research centres. Gold: And in terms of healthcare? A.R.A.A.: We want to have a comprehensive world-class healthcare system whose services are accessible to the whole population, including effective and affordable services in both preventive and curative healthcare, high-quality research directed at improving the effectiveness and quality of healthcare, an integrated system offering high-quality services through public and private institutions operating under the direction of a national health policy that sets and monitors standards for social, economic, administrative and technical aspects of healthcare. The state has a continuing commitment to provide sufficient funds for maintaining the health of Qatar’s population, in accordance with the principle of partnership in bearing the costs of healthcare.

46 Gold the international investment, finance & professional services magazine of cyprus

Qatar

•Q  atar is a peninsula bordering the

Persian Gulf and Saudi Arabia, strategically located near major petroleum deposits. • S ince 2007, oil and natural gas revenues have enabled it to attain the highest per capita income in the world. •O  il and gas account for more than 50% of GDP, roughly 85% of export earnings, and 70% of government revenues. • GDP is $189 billion. •O  il reserves in excess of 25 billion barrels should enable continued output at current levels for 57 years. •Q  atar’s reserves of natural gas exceed 25 trillion cubic meters, more than 13% of the world total and third largest in the world. • T he country has a total area of 11,586 sq. km. and a population of just over 2 million. •Q  atar has the lowest unemployment rate in the world. • Its main industries are liquefied natural gas, crude oil production and refining, ammonia, fertilizers, petrochemicals, steel, cement, and commercial ship repair. • It is home to the Al Jazeera news network. • T here are no political parties in the country. • In 2022, Qatar will host the World Cup.


Gold: What are the economic growth forecasts of Qatar for the coming years? A.R.A.A.: According to the SecretaryGeneral of the General Secretariat for Development Planning, real GDP growth in 2013 is expected to be spurred by construction activity and by continued vitality in services, non-oil and gas activity. By the end of the year, the services sector is expected to contribute more than 60% of the total growth in Qatar’s economy and its share in total real GDP will have risen to 32.5% from an expected 31.2% in 2012. Further expansion is anticipated in financial services, telecommunications and transport as well as other services segments. Gold: Qatar has been engaged in the exploitation of its hydrocarbon resources for a long time now. What are the lessons from the Qatari experience that could be of use to Cyprus which finds itself at the beginning of this process? A.R.A.A.: The main lesson concerns the liquefaction on natural gas. The largest GTL (Gas To Liquid) fuel plant was opened at Ras Laffan in Qatar in June 2011. Pearl GTL, operated by Shell, is the result of a strategic investment made by Qatar in the field of synthetic fuel and is the world’s largest plant to turn natural gas into cleaner-burning fuels. It produces about 140,000 barrels of GTL a day. This is enough to allow Qatar to diversify its production and strengthen its status as a major strategic resources supplier.   Gold: How attractive is Qatar for foreign investors in terms of ease of entry in to the market, setting up a business, access to financing? A.R.A.A.: The government strongly encourages international investment in certain sectors such as energy and Qatar’s investment liberalisation policies are proceeding on a gradual basis, based on a desire to protect local companies from rapid competition. The main economic stimuli are oil, gas and related industries. When approving majority foreign ownership in

a project, the law states that the project should fit into the country’s development plans. It adds that preference should be given to projects that use raw materials available in the local market, manufacture products for export, produce a new product or use advanced technology, facilitate the transfer of technology and know-how in Qatar, and promote the development of national human resources. Gold: Can anyone invest and reside in Qatar? A.R.A.A.: Foreign firms are required to use a local agent for matters related to sponsorship and residence of employees. Certain sectors are not open for domestic or foreign competition, including public transport, electricity and water, steel, cement, and fuel distribution and marketing. Foreign investors and nationals from the GCC countries may only own 25% of the shares in all companies listed on the Qatar Exchange (QE). Those rules of foreign ownership percentage restrictions can be waived with approval from the Cabinet, however. Non-Qataris may have the right of land use over real estate for a term of 99 years renewable upon government approval in Cabinet-designated “investment areas.” Foreigners can own residential property in select projects, including the Pearl, the West Bay Lagoon, Lusail, and the Al-Khor resort project. The law provides for foreigners being issued residency permits without local sponsors if they own residential or business property in Cabinet-designated “investment areas”. International law firms are permitted to operate in Qatar but import licenses are issued only to individuals with Qatari nationality, or companies owned or controlled by Qataris. In practice, exceptions are sometimes made for foreign companies, such as those with government contracts. Gold: Like Cyprus until last month, Qatar also has a 10% corporate tax rate. A.R.A.A.: Yes. The new tax law came into effect on 1 January 2010 and it imposes a 10% flat rate for all non-Qatari companies

Cyprus is the ideal bridge between Doha and the EU and vice-versa and foreign partners in Qatari companies, except for the energy sector where the tax is at least 35%, unless exempted. Moreover, the Ministry of Finance and Economy may grant a tax holiday of up to 10 years for new foreign investments in key sectors while other exemptions may be granted on a case-by-case basis for a period up to 6 years. Gold: There are a few successful examples of Cypriot companies that have undertaken projects in Qatar. Do you think that these could be a model for the future? A.R.A.A.: Of course. Good examples of projects undertaken by Cypriot companies such as J&P in Qatar are the Al Wakra Hospital for Hamad Medical Corporation and the Pearl-Qatar Design and Construction of the Qanat Quartier. Gold: How would you evaluate the business opportunities for Cypriot investors and businessmen in Qatar? A.R.A.A.: We believe that Cyprus is the ideal bridge between Doha and the EU and vice-versa. Cypriot investors have great opportunities to explore the market potential of Qatar and invest in it by capitalizing on their expertise and on the geographical factor that places their country closer to Qatar than any other European country. There are prospects for collaboration between Qatari and Cypriot businessmen in the fields of tourism, education, real estate and agriculture.

the international investment, finance & professional services magazine of cyprus

Gold 47


biodiversity

Do You Speak Sustainablish? By Dr. Artemis Yiordamli

Gone are the days when a sharp business executive would feel comfortable as long as he was conversant with the rate of return on capital employed, the By Artemis Yiordamli company’s IRR and dividend yield. The buzzword for at least a decade has been sustainability – not just the sustainability of your company (that of course being rather essential, even if frequently overlooked), but the sustainability of the planet.

48 Gold the international investment, finance & professional services magazine of cyprus

Will we recognise the disaster that hit us as a wake-up call?


?

T

Cyprus has by far the highest per capita rate of concreted land in Europe

he concept of sustainability, China increased the use of chemic al pestiwhether applied to business cides on pear orchards, thereby dev astating or the planet, is similar: are the bee population. Now, thousan ds of you taking out more than villagers go through the trees with bottles of you are able to put back poll en, brushing the millions of blos into your core business? Are you soms using up with a feather brush! more resources (such as ground wat er) than You could say that ecoservices (the the planet is able to provide on an goods ongoing and services provided by nature) are larg basis? One could say that our two ely maj the ‘business (or working) side’ of banks in Cyprus were not thinking or a more sustain- general concept, that of biodiversity. The ably when they allowed such eno rmous latter implies the biological diversity outflows in terms of bad investm of ents/bad living organisms on the planet: peo all debts, while the prospect of alternat ple, ive animals, plants and the ecosystems inflows was unlikely. But sustaina that Are we powerless to prevent this bilit support them. Biodiversity is, adm negative more than cash flow; it’s also a que y is ittedly, scen ario? No, each one can play a part stion of a nebulous concept and it may be on a knowing all your assets and valuing diff icul pers t onal or professional level. Starting them to see how the world of living thin with correctly. gs relates Elkington and Burke in the late ‘80s, the to you personally and why, for inst Whereas classical economics has ance, it literature is full of examples of how been matters if you protect the Cyprus business fixated on defining capital in narr tulip, a can make money and protect the ow ecowild flower found in Cyprus and env ironnomic terms (even the workforce nowhere ment. In fact, the new thinking is was once else in the world. Quite apart from that ecoseen as a disposable commodity), the bus iness is in itself big business, and few exec- fact that there are any only about 6,000 tulip utives today, when assessing thei business is more attractive to its cust r business, plan ts omers, to be found in two or three locations staff would disregard such less tangible and investors if it minimizes its ecoassets as and so it would be a pity not to see the skill, expertise and sense of secu them logical footprint. “Doing the righ rity of arou t thing” nd any more, there are other more their workforce, the company’s goo is a powerful motivator at work; d will/ com afte pell r all, ing reas ons for protecting biodiver- business peo good name in the market, etc. ple are not just money-making sity. The argument is that the mo Your financial capital plus your soci re diverse automatons; they are, or will be, al the genetic pool we possess, the mo parents capital (e.g. job satisfaction, image re and grandparents. They cannot be indi in soresilient the species, and the bett fciety) are two pillars of the sustaina er we are ferent about the world they will bility able to resist natural or man-made pass on to equation; there is also a third pilla destructheir children. Some Cypriot com r, and tion. It is the same principle, for panies, that is environmental protection. inst anc e, tho ugh not the majority, have adopted “Why that makes monocultures so vuln should such an externality come erable. So environmentally-friendly practice into the the Cyp s beyond rus tulip or other Cypriot endemic equation?’’ asks the classical econ the legal minimum, especially in omist, species, such as the moufflon or the hotel and the answer might be that ther the gras industry, although they don’t yet e is no snake, are worth preserving not only sadvertise such thing as an externality. Accord for it as well as they could. ing to their own sake but because they contemporary thinking, we are all form part There is no doubt, however, that part of a of an enormous gene pool that sup many system that includes you, me, you por ts life Cyp riots have lived unsustainably in r fact on earth as we know it. Remove the and also the birds and bees and the ory one piec last two decades. Too much con e nearby and you upset the balance. Pieces sum erism river. Although the notion of sust have, has led to too much debt, over-in ainability of course, been removed through vestment can be – and has been – applied out the in land with only one prospect (dev at various ages as elopsom e spec ies have become extinct levels, true sustainability (i.e. the ment), natural assets disregarded ability to and been replaced by others. But , and survive and thrive while using up the last wealth measured only in constru fewer hundred years have seen an unprece ction and resources) is, according to the WW dented mat erial assets. (According to the Bio F and number of species disappearing and diverothers, a systemic concept. It imp , acsity Strategy for Cyprus, we have lies an cording to Conservation Internat by far the entire system: in our case let us say iona l highest per capita rate of concret the (2013) they are currently disappe ed land global economy, including its natu aring at in Europe). Following the cold new ral the rate of one species every 20 minutes wor resource base. By this term we mea . into which we emerged on Saturday ld n not We don’t necessarily miss them; 16 only forests and fossil fuels, but man we may March, 2013, and the collective y sernot even know about them, sinc nigh tmare vices performed by nature that we e they we have lived through thereafter, take include bugs, unknown larvae in the Cypgranted. My earlier reference to bird for rive rs, or riots are now faced with an interest s and plants that only grow in Madagasca ing bees was not just a manner of spea r; but lenge. There will be calls to regenera chalking. onc e they go, they’ve gone forever, and te the Have you considered in money term economy fast, to rekindle the con s the our planet is poorer even though struction value of seed propagation perform we are industry, to go for mega-projects ed for us unaware of it. and, in doby birds, or of plant pollination perf ing so, to cut corners, especially whe ormed We re en, in Cyprus, are particularly vulnerby pollinators? The latter was estim vironmental impacts are involved ated by able . to Wil biod l iver sity loss, as we are in one Science Daily in 2008 as producing succumb to the siren calls of short-te we a service of the zones where rmism climate change will be worth US$217 billion per annum and cover our natural spaces with . These specially felt. If the temperature houses ‘naturally performed’ services of permafor the wealthy foreigners we are tryin which I’ve nently goes up, we know, for inst g to mentioned but two (you could add ance, that woo to the island? Or will we reco , inter it will become too hot for the pine gnis e alia, CO² sequestration by forests, s on disaster that hit us as a wake-up call? the natural Troodos to survive. Already mu Cyprus water filtering and the prevention ch fore st has spac e to house new arrivals but let’s do of eroundergrowth has dried up and disa sion by trees, etc.) are known as ppeared it in a planned and responsible way ecoservices. after long periods . Might of drought. On the They are services we understand we reconsider Schumacher’s prin more in lowlands there will be more bugs cipl e that the consequence of their absence affecting ‘small is beautiful’? Might we see , as we crops. Bugs of a kind that could that this tend (wrongly) to take their pres not survive is a chance to make not only ence for our lifestyles our current winter temperatures granted. The province of Sechuan but would but our businesses – wha in China develop and multipl tever they may be y happily in warmer has learnt this the hard way. In the – more sustainable by taking all thre 1980s, winters. e pillars of sustainability into account? info: Dr. Artemis Yiordamli is Executive framework of the BIOforLIFE ProjectDirector of Terra Cypria -The Cyprus Conservation Foundation. www.terr (2012-2015) which aims to make Cypr acyp iots aware of the significance of biodria.org.cy. This article was written within the iversity in our lives.


slovenia

“Nismo Cyprus!” * Slovenia’s severe financial and banking problems might look solvable at the moment, but they may not be for long By Kyproula Papachristodoulou

* “We are not Cyprus!”

50 Gold the international investment, finance & professional services magazine of cyprus


E

ver since Cyprus reached agreement with the Troika on a financial assistance package for the economy and the banking sector, Slovenia’s Prime Minister, Alenka Bratušek, has struggled almost daily to convince international markets, her country’s European partners, the international media and her compatriots that Slovenia is not Cyprus. The country faces serious financial problems, poorly capitalized banks, an overbuilt property sector, too much corporate debt and a slump in key export markets. The markets are losing faith in the country, especially after Cyprus’ spat with the other eurozone countries and yet Slovenia is strongly denying that is going to be the next recipient of a European bailout, despite the fact that financial analysts around the globe seem to think it inevitable. In a report published on April 8, 2013, the Institute of International Finance (IIF) stated that “precautionary ESM support would help ensure smoother access to bond markets and could require little more than the new government already plans on its own.” Speaking in parliament in late March, Prime Minister Bratušek underscored the differences between Slovenia and Cyprus and her government’s own assessment that Slovenia will not require outside financial help: “Slovenia is capable of sorting things out itself,” she told MPs. She also affirmed the coalition’s determination to sustain fiscal consolidation and press ahead with bank restructuring and the establishment of a state holding company to warehouse holdings in state-owned banks and companies. Fiscal consolidation will take additional work, she acknowledged, saying that “macroeconomic indicators confirm that the situation is not good and austerity is a must.” She also took note of the IMF’s projection that the fiscal deficit will exceed its target this year by 1.5% of GDP. There is a familiar ring to Slovenia’s insistence that it will not request a bailout and its eagerness to clarify that it does not resemble Cyprus in any way. Those Cypriot officials who repeatedly denied the need for outside financial assistance in 2011 and early 2012 were similarly quick to point out that Cyprus was not Ireland. Indeed! Cyprus is not Ireland but it still resorted to asking for a eurozone financial package (and got much more than it had bargained for). Slovenia, which adopted the euro a year before Cyprus in 2007, is currently going through its second recession in four years. The first, in 2009 when output plunged 8%, was one of the eurozone’s sharpest recessions. The country is not expected to return to growth until 2014 and unemployment has doubled to 10% in less than three years. In its latest forecast, the Organisation for Economic Cooperation and Development (OECD) says it expects the Slovenian economy to shrink by 2.1% this year before expanding by 1.1% in 2014. In its April 2013 Economic Survey of Slovenia, the OECD notes that the country faces a “severe banking crisis” and must act fast to

Banking system size in 2012 (as % of GDP) Slovenia

ITALY

GERMANY

143 269 311

Source: Exane BNP Paribas

PORTUGAL

SPAIN

FRANCE

CYPRUS

337 341 398 716

avoid the “daunting outcome” of a prolonged downturn and being cut off from financial markets. Meanwhile, the EU Economic and Monetary Affairs Commissioner said in late April that “Slovenia is facing serious challenges” and called for decisive action to restructure and recapitalise the banking sector among other urgent measures. Not everyone is so worried. The governor of the Bank of France, Christian Noyer, stated in an interview with The Wall Street Journal a few weeks ago that the eurozone crisis which has claimed Greece, Portugal, Ireland and Cyprus will not claim Slovenia. He said that Slovenia is unlikely to become a big problem for the eurozone as it battles to recover from its economic crisis. Slovenia’s weaknesses, he said, can be “easily fixed. I don’t see a big issue with that country”.

Is it like Cyprus?

Slovenia’s banking problems are significantly different from those of Cyprus. At only about one-third the EU average of 3.5 times GDP, Slovenian bank balance sheets are far smaller than their Cypriot equivalents, which exceeded 7 times GDP. For the system as a whole, reliance on foreign deposit funding has been much smaller, too, at only 6.5% of deposits and 5.2% of assets. Cypriot banks had exposure to Greek government bonds (equal to around 25% of Cypriot GDP) and Greek private sector borrowers (122%). According to an IIF research note issued on April 8, 2013, these were costly exposures, equal to 1.5 and 6.7 times capital, respectively. Banks resident in Slovenia, by contrast, have claims on governments and foreign borrowers that are each equal to roughly 14% of Slovenian GDP and 1.7 times capital. Based on the previously mentioned report, one-sixth of claims on governments, moreover, are vis -à-vis highly-rated euro area governments, and only one-sixth of claims on foreign borrowers vis-à-vis companies and individuals in lower-rated former Yugoslav republics. Overall, the note concludes, the scale of importance of the Slovenian banks to the domestic economy, does not rival that of the Cypriot banks.

There is a familiar ring to Slovenia’s insistence that it will not request a bailout the international investment, finance & professional services magazine of cyprus

Gold 51


slovenia Slovenia’s Prime Minister, Alenka Bratušek, has struggled almost daily to convince international markets, her country’s European partners, the international media and her compatriots that Slovenia is not Cyprus.

The big unknown around asset sales isn’t how much money the country would raise but whether the political will exists to go through with it, and quickly Public finances

At the same time, the country’s public finances relative to other peripheral countries look much better. That does not mean they are in good shape or that they are not going to worsen. On the contrary. The public deficit fell from 6.4% of GDP in 2011 (including 0.14% of capital support operations in loss-making state-owned enterprises) to 4.4% of GDP in 2012. Consolidation started in 2012, with a package of measures including a nominal wage cut in the public sector and reinforced restraint in social transfers. The deficitincreasing capital support operation to the largest bank amounted to some 0.25% of GDP. The European Commission’s 2013 deficit projection of 5.1% of GDP incorporates the full-year impacts of the May 2012 savings package, the approved 2013 budget and the conversion of a hybrid debt-equity instrument of the largest bank into equity. This conversion increases the deficit by 0.9% of GDP. The budget introduces a cut in the wage bill and integrates the effects of the December 2012 pension reform. A marked recovery in capital expenditure is projected from increased absorption of EU funds in 2013. A variety of budgeted discretionary tax measures is net-revenue increasing. Government debt stood at 54% of GDP at the end of 2012, compared with 90% in Cyprus. Slovenian government debt, however, has risen sharply from 22% of GDP at the end of 2008 and is on course to reach 62% this year and as much as 80% by 2015 if the renewed recession proves deeper and longer than expected. The OECD has warned that the debt level, fuelled by the cost of saving Slovenia’s banks plus healthcare, pension, and other costs, could reach 100% by 2015 if the country does not embrace reform.

Up and down

Until recently, Slovenian debt yields had been climbing since March following the Cypriot bailout/bail-in. It’s true that recapitalisation would push up the Slovenian budget deficit and the government also holds big stakes in the country’s three largest banks – which means that wiping out their equity would also increase the deficit. On Wednesday 17 April, though, Slovenia managed to sell €1.1 billion in 18-month bills, more than twice as much raised as expected, and then used €885 million to pay off some of its debt coming due in June. Yields on Slovenian bills and bonds fell slightly

52 Gold the international investment, finance & professional services magazine of cyprus

but the bids, as published, came mainly from the country’s three biggest, stateowned banks. In the end, the auction did not alter sovereign-bank interdependence but, analysts say, it gives the government some time to work on a solution.

Slovenia’s banking problems

Slovenia’s banking issues comprise thinly capitalized state-owned banks which face worrisome increases in Non Performing Loans (NPLs). State-owned Slovenian banks registered €0.7 billion of losses in 2012, equal to 25% of capital, up from €0.5 billion in 2011 and €0.1 billion in 2010. These losses are due mainly to rising impairments on swelling portfolios of NPLs. Defined as loans to borrowers more than 90 days in arrears, NPLs had increased among state-owned banks to 20% of loan books at the end of 2012 (and a roughly equal percentage of GDP). Corporate financial difficulties have been exacerbated by marked bank deleveraging since 2008, with domestic banks repaying €7.3 billion to foreign lenders and reducing the stock of domestic credit by 6% since the end of 2010. Two-thirds of that contraction in credit took place last year, a decrease that was even sharper in underlying terms taking into account capitalized interest on construction sector loans, which account for nearly 40% of NPLs among state-owned banks.

Privatisation

The capital asset management agency of Slovenia (ZUKN) reported that, as at the end of 2011, the Republic of Slovenia held direct ownership stakes in 76 companies, with a book value of almost €9 billion. Various analysts, including the IIF and Nomura, believe that selling state assets is probably by far the best long-term option for Slovenia because it will reduce state involvement in the economy while raising cash without increasing indebtedness. The country maintains majority stakes in numerous banks, retailers, oil retailer Petrol, Telekom Slovenije, insurer Zavarovalnica Triglav, infrastructure companies, such as Luka Koper (Slovenia’s port) and Aerodrom Ljubljana, the airport operator etc. The IIF argues that convincing early action on privatisation might help allay concerns about growth and borrowing needs. “Following the example of Portugal, which moved quickly in 2011 to raise sizable sums from the sale of its 25% stake in the state-owned electricity company, the new government might be able to conclude deals during the third or fourth quarters. Foreign interest could be substantial in any of the three large profitable state-owned companies, namely Telekom Slovenije, Petrol Group and Triglav, the insurance company.” According to the IIF, collectively the three companies have a current market capitalisation of €1.3 billion, of which the state accounts for €0.6 billion. The fact is that support for privatising any state-owned assets has historically been weak in Slovenia. Several of the parties in the current coalition are internally divided, moreover, especially when many would argue that potential prices have been depressed excessively by the current weakness of the economy. As the analysts note, the big unknown around asset sales isn’t how much money the country would raise but whether the political will exists to go through with it, and quickly.


fitness

Healthy Body Healthy Mind Healthy

+

=

Economy

As more and more people start feeling the pinch brought about by reduced salaries, fewer opportunities for work, keeping fit and going to the gym are probably the last thing on their minds. But fitness trainer and consultant Kyriakos Onisiforou believes that now is the time to make an even greater effort to keep ourselves healthy. With so much uncertainty around us, he argues, we should all begin with what we know – our own bodies. Feeling good can lead to some inspired thinking about how to deal with the many and varied problems caused by Cyprus’ request for a Eurozone-backed financial assistance package.

F

By John Vickers. Photograph by Jo Michaelides.

ive years ago a survey revealed that 97% of people in Cyprus believe that exercise is a good thing. Another showed that only 7%8% undertake regular training at a gym or a health centre. This is some way below the EU average of 12%-13%. To be fair, however, people in other countries also believe in the positive effect of exercise and they are clearly not spending much time on it. So why are gyms struggling for survival and why is Cyprus ranked 9th in the table of smoking among adults? Kyriakos Onisiforou believes that it all comes down to “cognitive dissonance” which, is this case, means that people have conflicting feelings about exercise: “People often find themselves in a dilemma between their motive for wanting to exercise, which is usually to look good, and the fact that they need to work to feed their families and so they may feel that they are behaving in a shallow or selfish manner to be spending time training at the gym,” he says. “If they decide to

54 Gold the international investment, finance & professional services magazine of cyprus

go, it often happens that they discover that it is hard work and needs to become a permanent part of their lifestyle, at which point they tell themselves that they have other priorities. That’s when health goes out of the window.” One might imagine that, in times of crisis, people have “more important things” to do than exercise, especially if they are doing it to look better. However, the statistics don’t support this view. “Even after a major event such as the 9/11 attacks in New York, the American fitness industry continued to grow,” explains Onisiforou, surrounded by fitness machines and gym equipment in his Limassol studio. “In a crisis, people realise that they need to cut back on everything and, at the same time, become more sustainable as individuals but as entrepreneurs and professionals too. The money invested in fitness pays dividends. Improving fitness can reduce mortality rates by 30%, which is a huge amount if you are a company employing a large


If you stick to exercise, it is an investment with a guaranteed return

Kyriakos Onisiforou

number of staff. There may not be a clear monetary return on their investment but it is there.” So, is Onisiforou suggesting that those who are suffering from the present situation in Cyprus can benefit by doing some kind of anti-Troika physical exercise? Yes, he is. “Not moving will always create more problems. Anyone in the business world who works out will tell you that your brain is in “supercharged” mode after a good training session. You can withstand more pressure and think more clearly after exercise. And if you stick to exercise, it is an investment with a guaranteed return. The most basic result is that you will feel good. When you have an active body, you will think more effectively and find better solutions.” Fitness, says Onisiforou, is all about progress in your day-to-day workout and how it can gradually improve your health and fitness levels. This concept can be applied to the Cyprus banking sector, he says, “which tried to produce much more than it was capable of. If we compare the economy to an athlete, we are looking at one who has been on steroids for so long that he is on the verge of collapse. It’s an accurate analogy. If you don’t prepare properly for the athlete’s exit from steroid use, he will be destroyed. On the other hand, he can be saved and return to normality but the necessary measures have to be taken seriously, step by step, all the way.

Similarly, if someone wants to lose 20 kilos, it can’t be done it in a couple of months. As a country we are carrying a lot of fat and too many harmful, artificial things inside us. If we want to get out of this recession, we have to get rid of the bad things and take the correct steps that will allow us gradually to return to economic fitness.” Measures to revive the economy and stimulate growth are the responsibility of those in government. But how is the man in the street supposed to adapt to the new situation? One of the obvious effects on people is that we are now cutting down on luxuries and scrutinising everything to ensure that we are obtaining the best value for money when we do pay for things. The fitness market, says Onisiforou, can act as a natural remedy to what’s going on. “Having worked in it for so long, I have seen people from all sorts of backgrounds, from someone running a business generating millions of euros a year to someone generating €30,000 per year. They all have one thing in common: they want value for their money. They want “the real deal”, especially now that their trust in so many institutions has been shattered. If it was difficult to persuade people to invest in fitness before, it is going to be even harder now.” Onisiforou predicts that, as a result of the crisis, many gyms will be forced to close, given that most of them are run on a monthto-month basis and have already begun to face serious cash flow problems. “It’s common practice in good, well-managed gyms to have at least three months of base operating expenses in hand in order to withstand an event like this,” he explains. “If you are struggling to make your expenses each month, you are not capitalising on your clientele. The retention rate should be around 80% in any kind of service industry but here it might be 40%. Gyms need to focus on the value they are giving to customers and on win-win solutions. The usual reactive method is discounting but it ultimately hurts the business. It may bring cash for one month but, for the following months, the people who have bought a discounted membership won’t bring in any additional revenue.” The more imaginative gym/health centre operators are offering people something new, he says. “If we assume that health and fitness are not going to be at the top of anyone’s list of priorities during a crisis when funds are low, one way of helping people is to offer them information on how to train themselves, for example. If you take your dog

out for walks or you have a bicycle, you can get your exercise but it’s useful to know how much you should do. Such a service is good for people who want to pay less and it’s also good for the gyms because they will be paid for providing a service to those who are probably unwilling to pay to go to the gym.” The concept of fitness as a permanent aspect of one’s lifestyle doesn’t appear to have caught on in Cyprus yet and a time of economic crisis is unlikely to encourage such a development. “It will come to Cyprus,” says Onisiforou, “but fitness trends can take anything from 6 months to 2 years to arrive here and be adopted. To a certain degree the difference comes down to a different mindset. Overseas, there is a growing trend towards training for the feelgood aspect of it whereas you rarely hear someone here say that they want to exercise for this reason. In Cyprus, both men and women go to the gym to look better. Some 95 out of 100 will say they want to lose some fat (women) or put on some muscle (men). We all want fast, probably superficial solutions to our perceived problems.” Fast solutions are surely what we want in everything today. What does Onisiforou say to the stressed-out businessman who claims that he has no time for exercise? “It’s not about ‘having time’, it’s about ‘making time’,” he says. “It is a fact that the businessman who doesn’t train reacts more slowly than those who do. I see people of 50 who are taking 5 to 10 pills a day! They are still young! How is their body going to work properly? The brain is affected by the body’s lack of physical exercise. If we don’t take care of our bodies, the bad effect appears in the space of a few months. Imagine what can happen over 5 or 10 years. We can all find 30 minutes a day. Anyone who argues with that is making excuses.” Cyprus today is still in a state of shock after narrowly escaping economic bankruptcy. But sometimes, Kyriakos Onisiforou believes, a shock can have a positive effect, at least in the long term. “Right now people don’t know what’s going on but at least we can take care of ourselves as individuals and try to be as healthy as possible,” he says. “The way things are shaping up, we won’t be able to afford to get sick. This is a very serious situation. What’s more, the body renegerates itself through exercise, not by sitting around. An active body affects the mind in a positive way and enables you to come up with ideas, solutions and ways of helping other people. Starting from within and taking care of ourselves is the key to recovery.”

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opinion

Memorandum Of (Mis)understanding The country’s tax system remains intact and should be the starting point for the rebuilding of the economy

B

y targeting the downsizing and restructuring of the Cyprus banking sector, the Memorandum of (Mis) understanding attracted massive international attention. Rarely in its short history as an independent sovereign state had Cyprus made headlines globally but in March 2013 the world watched with bated breath as the Troika set about “bailing out” (or rather “bailing in” as it turned out) our small island’s economy. The unprecedented, Soviet-style method that was followed to bail out Cyprus had nothing to do with the EU’s acquis communautaire, European solidarity and the fundamental principles of freedom, democracy, equality and human rights protection on which the idea of a European Union was founded. It is no exaggeration to say that the only bright spot left to shine and spread a little hope is the fact that the country’s tax system remains intact. This, in my opinion, should be the starting point for the rebuilding of the economy with the aim of restoring financial stability and reinventing the financial sector on solid ground in order to safeguard sustainable growth. Changes have, of course, been made to the tax system: • The corporate tax rate is marginally increased from 10% to 12.5%. All tax benefits associated with Holding and Financing structures (forming the majority of corporate activity undertaken by foreign investors in Cyprus) continue to exist. As far as trading companies are concerned, the marginal increase in the tax rate is deemed manageable and, in real numbers, is not expected to cause noticeable harm. • Tax on income from deposits is increased from 15% to 30%. The hike on this tax is substantial only in absolute numbers since, in reality, it is only imposed on passive interest income and is not expected to impede growth. On the positive side, this tax does not apply to non-tax residents of Cyprus. What are the tax benefits that remain unaffected? Everything else! • The unconditional tax-free sale of securities including shares and units in funds; (it does not cover securities which derive their value from immovable property situated in Cyprus). • There is no tax on dividend income received from overseas (subject to relaxed conditions as before). • There are no withholding taxes on dividend or info: Costas Markides is a Member of the Board of KPMG. 56 Gold the international investment, finance & professional services magazine of cyprus

Now is the time for the public and the private sectors to join forces in an effort to minimize (if not eliminate) the damage to Cyprus’ reputation

By Costas Markides

interest payments (also applicable to royalty income when the source of such income is not in Cyprus). There are no thin capitalization rules in Cyprus and therefore financing costs are tax deductible in full against taxable income (without reference to the ratio of debt to equity). • Interest expense suffered to finance the acquisition of the share capital of a trading company is fully tax deductible (direct or indirect 100% acquisitions). • There are no exit taxes for Cyprus companies that wish to redomicile or change their tax residency. • The new IP (Intangible Property) regime aiming at stimulating growth and encouraging research and development through the acquisition or development of intangible assets remains unharmed (deemed 80% income exemption allowed, making the effective tax rate to be capped at just 2.50%). • Thin margin taxation on loans that are routed through Cyprus companies remains intact, putting Cyprus firmly on the map as a preferred financing jurisdiction for leveraging overseas investments. • There is no Financial Transactions Tax in Cyprus The tax advantages outlined above, combined with the fact that the legal system in Cyprus is based on the Anglo-Saxon model, provide strong foundations for staging a comeback but these alone will not suffice. The high level of professional services that are being offered in Cyprus and the abundance of talent and experience (UK- and US-qualified accountants and lawyers), in conjunction with the low cost that accompanies such services, give Cyprus a competitive advantage that must be preserved and, at the same time, heavily promoted towards investors on each and every occasion. Now is the time for the public and the private sectors to join forces in an effort to minimize (if not eliminate) the damage to Cyprus’ reputation caused by the recent Eurogroup decisions and to invalidate the unfounded, malicious and unjustified accusations of money laundering. Cyprus must now invest in rebuilding its image by retaining the services of world-class firms possessing the necessary specialized skills and knowledge in this field and set out a short-, medium- and long-term plan for rebranding and marketing Cyprus as a credible, transparent and modern financial centre. Cyprus is small only in size. It is not small in dignity and certainly not in integrity.


Alpha Bank Cyprus Ltd presents the:

Cyprus Economy: is there order out of the chaos?

Confirmed Speakers Theodoros Parperis

Dr. Jose Barrionuevo

Chairman President, The Institute of Certified Public Accountants of Cyprus (ICPAC) Cyprus

Former Director of Global Sovereign Strategy Group at Lehman Brothers, Leader of the team of investment banks that restructured Argentina’s sovereign debt, Managing Director, StormHarbour, USA

Panicos Demetriades

Luis Campos E Cunha

Governor of the Central Bank of Cyprus, Cyprus

Former Minister of Finance, Professor of Economics, Universidade Nova de Lisboa, Portugal

The 2013 agenda includes Keynote addresses • The future of the distressed economies in Europe • Europe’s Outlook: Not yet out of the woods • Cyprus Economic Outlook for 2013 – 2014 • Cyprus Growth and debt challenges • The outlook of the Banking Sector in Cyprus • Can Countries Survive an IMF/Troika Adjustment Programme and Return to Growth? • Lessons learned from the Greek and Portuguese Bailouts • Fiscal Stabilisation Programmes: The Case of Portugal • The Greek and Cypriot Financial Crises: Similarities and Differences. Restoring Financial Stability and Confidence.

Dr. Nikolaos Georgikopoulos

Harris Georgiades Minister of Finance, Cyprus

Financial Economist, Visiting Research Professor New York University-Leonard N. Stern School of Business, Research Fellow in Financial Economics at KEPE, Greece

Panel Discussions The Banks CEOs discussion: The Future of Banking in Cyprus. What is the role of the Banking Sector in the “Post Memorandum Cyprus?” The Economists’ panel discussion: Analysing the new Economic Reality of Cyprus. Economists, Academics and Financial Media personalities discuss economic future of Cyprus

Guillermo Nielsen

Dr. Petr Zemcik

Former Secretary of Finance Argentina, President of Strategic Investments, Argentina

The congress is addressed to: CEOs and CFOs of companies from all sectors of the economy, Enterpreneurs, Senior Managers, Professional Accountants and Auditors, Industry Leaders and Policy Makers

Director of Economic Research, Moody’s Analytics, UK

Equivalent to 6 CPD units

Wednesday 22 May 2013| Hilton Park Hotel | Nicosia Keep updated about the conference by visiting http://www.imh.com.cy/3rdnicosiaeconomiccongress For further details, participation fee and registration contact: IMH, Aigaleo 5, 2057, Strovolos, P.O. Box 21185, 1503, Nicosia. Tel: +357 22 505555, Fax: +357 22 679820, e-mail: events@imhbusiness.com, website: www.imhbusiness.com Coordinator

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Emilios Ayiomamitis


financial services

Positive and Motivated Despite the problems caused by failures in the banking sector and the knock-on effects on the broader economy, there are reasons for optimism in the long term. By JohnVickers, Photography by Jo Michaelides

milios Ayiomamitis was been appointed as a member of the Board of Directors of Horwath DSP Ltd last month and he now heads the firm’s Limassol office. He spoke to Gold about his new appointment and about how he expects the recent financial assistance package agreed with the Troika to affect business in Cyprus in the immediate future. Gold: You have been appointed a Member of the Board of Horwath DSP Ltd and you are heading the firm’s Limassol office following a merger. Tell us something about this merger. Emilios Ayiomamitis: I started my own accounting firm in mid 2010 which had a steady growth over its short life. In April 2013 we merged with Horwath DSP Limited in order to develop and expand the company’s office in Limassol.

Gold: Limassol is a second Cyprus office for the company. Would you agree that expansion at this particular time sends a particularly positive message to the local and foreign business community? E.M.: Indeed. Both the management and staff are doing their best to remain positive despite the economic gloom due to the recent decisions taken at Eurogroup level. Keeping positive and motivated makes it easier to pass the right messages onto clients, both local and international. Also, in times of recession there are always new business opportunities. Gold: What is the particular expertise that you feel you bring to Horwath DSP? E.M.: I feel that the valuable and extensive experience that I have gained over the years in both audit and tax, while working within a “Big 4” firm, will perfectly

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financial services

The bailout will correct many imbalances that none of the political parties dared to touch upon over the past 30 years complement the existing expertise of the directors and staff of Horwath DSP. Gold: How does being a member of Crowe Horwath International give you a competitive edge over other local firms? E.M.: Crowe Horwath International is the 9th largest audit firm network in the world, so member firms have access to a vast knowledge library as well as to rigorous training sessions, enabling us to continuously enrich our knowledge and experiences so as to provide our clients with first-class services. Moreover, we can gain from their specific expertise in sectors such as shipping and energy. Gold: How has the company reacted to the new state of affairs that has been created by the drastic changes to the Cyprus banking sector? E.M.: As you know, the new state of affairs was imposed on Cyprus overnight and our main concern was our clients. We immediately communicated the situation to them and we made ourselves available to answer any questions they had. None of them has yet expressed a willingness to abandon Cyprus or to remove any Cyprus companies from their structures. Gold: How does Horwath DSP intend to go about retaining clients and attracting new business? E.M.: Our philosophy is to offer our clients a first-class service through personal contact. Moreover, we respond to their needs in a timely and professional manner while keeping our fees at reasonable levels. On the question of attracting new business, this will prove to be a tricky task! However we remain positive and we are stepping up our efforts by approaching markets other than the traditional markets of Russia and Eastern European states. Gold: The professional services sector has been a key driver of growth in the economy in recent years. How seriously do you think it has been affected by the impact of the bailout agreement? E.M.: The professional services sector is closely related to the banking sector and it is therefore

bound to be negatively affected but the extent of this effect is yet to be known and cannot be easily predicted. However, considering that under the current tax law, the advantages offered by the Cyprus holding company remain second to none, in weighing the pros and cons, clients will realise that it will be to their benefit to keep Cyprus companies in their structures and, therefore, I believe that only a very small percentage will avoid using Cyprus companies. I would think that business from international clients will be mildly affected for a few years until it picks up again, provided that any future amendments to the bailout agreement do not take away any of the existing benefits. Gold: Some people have expressed the view that, despite its apparently harsh provisions, the bailout will ultimately prove to have been a positive thing for Cyprus. Would you agree? E.M.: I tend to agree with this view, provided that the planned reforms are carefully and fully implemented. Another positive thing I see in the bailout is that it will correct many imbalances that none of the political parties dared to touch upon over the past 30 years. Gold: The 10% corporate tax rate has long been viewed as a key to attracting foreign companies to the island. Is the rise to 12.5% going to make a serious difference to one of the country’s main ‘selling points’? E.M.: I don’t believe that the 2.5% increase in corporation tax will make a difference to foreign companies based in Cyprus since this rate is still significantly lower than that in all other European countries. Also, the main income of Cyprus hold-

ing companies is dividends and gains from sales of shares, which are both exempt from corporation tax. However, the issue that policymakers need to address here is that of credibility and stability. It is of immense importance to take all the necessary steps to ensure that there will not be any further changes to the rates. Gold: How difficult will it be for Cyprus to regain its reputation as an international business centre? E.M.: It will be a challenging and lengthy task for Cyprus to regain its reputation as an international business centre and to gain new business. The first thing that needs to be done immediately is to end the current economic uncertainty and to take all the necessary action to bring our banking system back to normality. Clients are naturally not happy to have lost part of their deposits but what makes them extremely upset is the inability to carry out their normal business transactions due the restrictions imposed by the Central Bank. The 30% of deposits blocked by the Bank of Cyprus should be released, as quickly as possible. Gold: How optimistic are you about the future of the professional services sector in particular and of Cyprus in general? E.M.: I would say that I am optimistic about the future, especially considering the prospects created by the discovery and exploitation of the oil and gas reserves. These will attract huge investments in Cyprus and, therefore, all sectors of the economy will return to growth. Gold: What are your ambitions for Horwath DSP and yourself? E.M.: My ambitions are to add value to Horwath DSP and to help develop the business further in sectors and markets that were not previously developed. A personal goal is to grow the Limassol office to a similar size as the head office.

No clients have yet expressed a willingness to abandon Cyprus or to remove any Cyprus companies from their structures

60 Gold the international investment, finance & professional services magazine of cyprus


THE 4TH LIMASSOL

FORUM ...COMING SOON

IN Business magazine in association with London School of Economics and LSE Cyprus Alumni proudly announce the organization of the 4th Limassol Economic Forum. The Forum will bring together some of the most influential politicians, economists, business leaders and experts to discuss the challenges facing the local, regional and international business community. This high-level business Forum is addressed to senior executives genuinely interested in influencing Europe’s economic and business development.

Wednesday | 13 November | 2013 | Four Seasons Hotel | Limassol

Stay updated with the forum’s agenda on www.imhbusiness.com For further information: IMH, Aigaleo 5, 2057, Strovolos, P.O. Box 21185, 1503, Nicosia. Tel: +357 22 505555, Fax: +357 22 679820, e-mail: events@imhbusiness.com website: www.imhbusiness.com

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debt restructuring

Don’t Cry For Me,

NICOSIA G

uillermo Nielsen was the Argentine Secretary of Finance from 2002-2005, a period of economic crisis and subsequent recovery from the deepest depression in the country’s modern history. He negotiated two stand-by agreements with the IMF and was also in charge of the private debt restructuring, which required a deep haircut and involved negotiations with banks and investment funds in the USA, Europe and Japan, and with retail investors in Italy,

By John Vickers.

62 Gold the international investment, finance & professional services magazine of cyprus

Japan and Argentina. Dr. Jose M. Barrionuevo, meanwhile, led the team of investment banks that restructured Argentina’s $104bn defaulted sovereign debt in what remains the largest and most successful sovereign debt restructuring in history. Both men will be in Cyprus this month to address the Nicosia Economic Congress. Ahead of their visit, they spoke to Gold about how they dealt with Argentina’s debt restructuring and how they view the way the Troika has dealt with Cyprus.


In the case of Cyprus, I think that the small size of the country played against giving rational considerations and providing a more careful assistance package GUILLERMO NIELSEN Gold: You were Secretary of Finance in Argentina during a period of acute economic crisis and subsequent recovery. How difficult was it for you as a politician taking very unpopular and difficult decisions? Guillermo Nielsen: To begin with, I am not a politician. I am an economist used to working with politicians and with lawyers in the area of policy. The Argentine crisis exploded in late December 2001 and the following month I was appointed to the Board of the Central Bank, during the most important banking crisis and bank run in our history. In May, as a result of a political reshuffle I was appointed Secretary of Finance and in that role I had to head the negotiations with the IMF. Later, I led the restructuring of the Argentine private debt. They were very difficult times and, for me. one of the most costly incidents in emotional terms was in Japan, where I had to meet a large group of defaulted investors

– most of them retirees or elderly widows who had invested in Argentine bonds to get a better return and, instead, found themselves suffering. In terms of policy decisions, devaluation had already taken place by the time I reached the Ministry and the political crisis gave us tremendous power in terms of decision-making freedom. In the early stages we did not have any political interference whatsoever, other than what the IMF tried – unsuccessfully – to impose. Gold: You have seen how several bailouts have been imposed in Europe. The Irish one appears to have worked but is the Troika taking the right decisions? G.N.: I am critical of the way these bailouts have been imposed on Greece and Cyprus. The lengthy decision-making process of the European institutions does not work in favour of tackling economic crises effectively and I am afraid that the degree of political interference

then & now

G

uillermo Nielsen was Secretary of Finance of Argentina between 2002-2005. He negotiated two stand-by agreements with the IMF and was also in charge of the private debt restructuring – which was the largest at that time, requiring a deep haircut and involving negotiations with banks and investment funds in the USA, Europe and Japan, and with retail investors in Italy, Japan and Argentina. Today he is President of Strategic Investments, an Argentine company dedicated to providing financial engineering schemes, primarily in the energy sector.

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debt restructuring

does not help either. In the case of Cyprus, I think that the small size of the country played against giving rational considerations and providing a more careful assistance package.

has been inflicted on depositors when, in reality, the problems are due to very poor banking supervision, which is essentially a government responsibility.

Gold: How do you view the agreement reached with Cyprus? G.N.: I am looking forward to going to Cyprus to get a first-hand idea of the precise terms of the agreement reached with the Troika. I think there is still a degree of uncertainty about the final figures regarding the cost of the rescue package, which is something I have never seen before. I am also puzzled by the way this haircut

Gold: The decision to use uninsured deposits in the island’s two biggest banks has been a controversial one, not least because it has never been done before. Was it a good idea and do you think it will be used elsewhere? G.N.: I do not think it is a good idea at all! I am looking forward to obtaining a clearer picture about why the authorities (or the Troika) decided to move in that direction.

I am puzzled by the way this haircut has been inflicted on depositors when the problems are due to very poor banking supervision

Gold: You have suggested in the past that the Troika appears to ignore the possible social effects of its crisis resolution schemes. Did the same thing happen in the case of Argentina? G.N.: In the case of Argentina it was worse. Don’t forget that we were forced to be pioneers on this issue of restructuring the debt in this way. For the first time we used the concept of “debt sustainability” to calculate the haircut, a feature that has since become standard. We also used GDP warrants on a scale unseen before. Prior to our crisis, haircuts were smaller and bore no relation to the possible cash flow of the countries involved. Gold: Whatever the terms of the agreement, the essential thing is that it works. Will this Cyprus bailout do what it is supposed to? G.N.: Again, I would like to get a first-hand impression. I have many doubts that I would like to clarify before answering this question. Gold: Given that the agreement has been finalized, are there things that Cyprus can now do in order to minimize the effects of the bailout and to ensure that it succeeds? G.N.: Once you reach an agreement with the Troika, or with the IMF there is not much that you can do to change things. That is why it is very important to negotiate well, and to only sign agreements that the country can honour.

JOSE M. BARRIONUEVO Gold: You led the team of investment banks that successfully restructured Argentina’s $104bn sovereign defaulted debt in 200405. How daunting a task was it at first? Jose M. Barrionuevo: It was a fairly daunting task given, as you might imagine, the large opposition by many banks, investors and international organisations that refused to focus on a workable solution for Argentina that included principal debt write-offs. After the economy shrank to about a third of what it used to be, it was essentially impossible for Argentina to honour its payments. In fact it couldn’t before the sharp devaluation and the collapse of its economic activity.

The Italian public ended up on Guillermo’s side. I will never forget that 64 Gold the international investment, finance & professional services magazine of cyprus


Gold: Why is the Argentine experience so significant today? J.M. B.: It is significant because it was the first time that the idea of debt sustainability was applied to a formal debt restructuring. At the time, most people opposed the idea, mainly on political grounds. Just five years after Argentina successfully restructured its debt in 2005, the International Monetary Fund began implementing debt sustainability frameworks for European countries, starting with Greece in 2010. Now, every multilateral organisation and most investment firms conduct debt sustainability exercises. What is of greater relevance to the people of Cyprus today, as it was then to the people of Argentina, is the fact that debt sustainability implies the opportunity to have a slightly better distribution of the financial costs of the crisis and thus avoid yet another political crisis. While the people of a country invariably bear most of the costs during crisis, sustainability helps distribute the costs in a fairer or more even way. For example, during the Argentina crisis, the Argentine people paid as much as $150bn while investors, banks and other bond holders ended up also losing about $70bn, representing about one-third of the total cost. Gold: How did you succeed? J.M. B.: Argentina succeeded for two reasons. First, the authorities gave us their full support and, more importantly, they genuinely believed that this was the right approach to find a fair resolution to the crisis. The idea of ensuring that the debt restructuring would be sustainable immediately was so critical that both the then Minister Roberto Lavagna and Chief Negotiator Guillermo Nielsen were keen on giving investors “upside” should the economy perform better than we envisaged through the use of GDP Warrants, which actually turn out to be one of the best performing instruments. In addition, Argentina committed to a strong fiscal performance for the first four years of the programme, providing a strong anchor to the restructuring. This was very important, but no doubt the debt write-offs were the critical element of Argentina’s success as it lifted a huge debt burden that allowed the economy to start growing at an average pace of over 10% for the first few years. Second, Argentina succeeded because of the extraordinary commitment, courage and effort of Roberto Lavagna and Guillermo Nielsen. I saw first-hand the personal efforts and dedication of Nielsen. I never seen any one in my life give so much for a cause as he did, facing angry investors, pensioners in Italy and Germany, explaining to them Argentina’s situation. The Italian public ended up on Guillermo’s side. I will never forget that. There were too many positive things on the human side that no doubt had a very positive impact on

the lives of millions of Argentines. From a market perspective, we succeeded because we showed investors that Argentina could not repay its original debt after the massive foreign exchange adjustment. Although no one likes to take losses, it became clear to investors that the investment paradigm that Argentina’s currency board would be around forever was flawed and that without it, the performance they expected would never hold. We used debt sustainability to show the debt level that the Argentine economy could now service. Not surprisingly, after losing about 67% of the dollar value of the economy, a 67% debt write-off didn’t seem like rocket science. There was a fully-fledged model that showed this but this was the basic concept. Gold: By comparison, Cyprus’s needs appear to be extremely small, yet the Troika’s financial assistance package will have a harsh impact – hopefully a temporary one – on much of the country’s population. Could it have been less painful? J.M. B.: Absolutely. It could have been and should have been markedly less painful. The European Union – especially the big countries – had a responsibility to ease the pain in Cyprus. They have the resources. Cyprus is not an innocent bystander but it suffered from the same banking games that affected other European countries. Because of its geopolitical importance, the impact on Cyprus of the crisis is actually much worse, which again indicates the importance of greater and broader support. Gold: The decision to use uninsured deposits in the island’s two biggest banks has been a controversial one, not least because it has never been done before. Was it a good idea and do you think it will be used elsewhere? J.M. B.: I don’t think it was a very good idea and I don’t believe anyone else will try to replicate it. In fact, seizing deposits is a very bad idea that you only use when you don’t have any external support, as happened with Argentina. However, in the case of Cyprus, the European Union and the European Central Bank should have provided much stronger support early on to avoid such drastic and negative action. Gold: Had you been involved, do you think you would have come up with a plan on similar lines to the one agreed for Cyprus? If not, how would you have approached it? J.M. B.: There are many aspects that were pursued well. However, I would have focused on providing Cyprus much more front-loaded financing support to ensure that it could deal effectively with the banking crisis. I would also have paid more attention to the government’s debt dynamics because focusing on the banking crisis is only credible if the government itself is in a strong position to start with, again highlighting

then & now

J

osé M. Barrionuevo led the team of investment banks that restructured Argentina’s $104 billlion defaulted sovereign debt in what remains the largest and most successful sovereign debt restructuring in history (2004-05). He started his banking career in September 1994 at Chase Securities in New York. Five years later, Institutional Investor named him one of the Top Forty most influential Bankers under Forty. Prior to this, he worked at the International Monetary Fund. Today he is the Managing Director of the StormHarbour Global Capital Markets Group in New York.

the importance of receiving greater and frontloaded financial support from the European Union and the International Monetary Fund. But for the IMF to be more involved, Europe needs to show greater commitment and debt sustainability needs to be addressed now, not later as European governments appear to prefer. Gold: You began your career at the IMF, which appeared to show an unusual lack of generosity towards Cyprus, contributing just 10% of the total financial package. Were you surprised by this? J.M. B.: Not too surprised. The IMF realised that in the case of Greece, one of the problems was that the official funding was provided before the debt restructuring took place. This made the official funding part of the debt sustainability problem of Greece, rather than its solution. My view is that the IMF wants to see progress on debt sustainability and bank restructuring with a lot more European support before committing additional international resources. This was simply the lesson of Greece for them, which I find quite right.

Guillermo Nielsen and Jose M. Barrionuevo will be among the main speakers at the 3rd Nicosia Economic Congress organised by IMH on 22 May at the Hilton Park Hotel, Nicosia. For participation and more information, visit www.imhbusiness. com/3rdnicosiaenomiccongress or call 22505555.

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Excellent networking opportunities www.cyprusgasconference.com

Framing a Bright

Future Dr. Mostefa Ouki Vice President, Energy & Chemicals, Head of Global Gas, Nexant Ltd, UK

Roudi Baroudi, CEO, Energy & Environment Holding, Qatar

Christopher Goncalves, Director, Global Gas & LNG Leader, BRG, USA

Gina Cohen Consultant to the Natural Gas Industry, State of Israel

Leigh Elston, Middle East and Africa Editor, Interfax Global Energy Services, UK

Dr. Amir Mor Energy & Environment Economist and Financial Analyst, CEO & Owner, Eco Energy Ltd, State of Israel

Dr. Thanos Dokos, Director-General Hellenic Foundation for European & Foreign Policy, Greece

Register before the 31st of May and take advantage of the early bird booking rates!

THEMATIC SESSIONS • • • • • •

What is the Future of Eastern Mediterranean Natural Gas? Supply, Demand and Prices of Natural Gas & LNG Geopolitical Developments Impacting the Eastern Mediterranean in Natural Gas Upstream Focus on Cyprus Natural Gas Investment Opportunities in Cyprus Cypriot and Israeli Transportation of Gas: Gas Pipeline or Liquefaction

Dr. Carole Nakhle Associate Lecturer in Energy Economics, UK

Thomas A. Kazakos, Director General, Cyprus Shipping Chamber, Cyprus

Dr. Charles P Ellinas CEO, Cyprus National Hydrocarbons Company, Cyprus

Steve Roberts MBA, C.Eng MIGEM, Principal Consultant, Oil and Gas Consulting, GL Noble Denton, UK

Anthony Livanios CEO, ENERGY STREAM CMG GmbH, Germany & Greece

Niki Tzavela, Member of the European Parliament, Greece

Dr. Ali Hussain Oil Consultant, UAE

Hugh Pope, Project Director, Turkey/Cyprus – International Crisis Group, Turkey

Anthony Melling, Principal, Berkeley Research Group LLC, UK

Dr. Theodoros Tsakiris, Assistant Professor for Geopolitics of Hydrocarbons, University of Nicosia, Cyprus

Τετάρτη Φεβρουαρίου 2013 |Hilton Ξενοδοχείο HiltonNicosia, Park | Λευκωσία 20th20 & 21st of June 2013, Park Hotel, Cyprus Keep updated about the conference by visiting: www.cyprusgasconference.com For further information: IMH, Tel: +357 22 505555, Fax: +357 22 679820, e-mail: events@imhbusiness.com, website: www.imhbusiness.com

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{May 14 - June 13, 2013}

issue

26

74

+ BOok review MONEY: The Alchemists: Inside the Secret World of Central Bankers By Neil Irwin 71 BUSINESS: Marvel Comics: The Untold Story By Sean Howe

68

{money}

68 Risk and the Internal Audit function Internal Audit is an aid in dealing with four key areas of risk. 69 EU Governments Save Their Banks Greece and Spain championed EU bank support with public money in 2012. 70 Into Battle! Computer forensics grows in importance in the fight against financial fraud

72

{business}

72 Painting a Positive Picture Jotun’s CEO Morten Fon on the company’s success and its plans for Cyprus.

73

LIFESTYLE: Lunch with the FT: 52 Classic Interviews By Lionel Barber 81

74

{economy}

74 CEOs choose China for foreign investment China is the world’s top destination for foreign investment, according to a new global survey. 75 Social Protection and Health Expenditure on the Rise EU government spending on these has increased relative to GDP.

76

{tax&legal}

76 Transfer pricing in Cyprus All the details from Reanda International. 77 Resolving International Disputes Businesses seek out specialist legal advisors to tackle growing problems.

78

{lifestyle}

78 Watch and Learn Investing in vintage and antique timepieces.

the international investment, finance & professional services of cyprus

Gold 67


internal audit

{money}

Risk and the Internal Audit function By Christos Tsolakis

E

xperience tells us that while for many organisations in Cyprus, the Internal Audit function exists only in order to comply with Laws and Regulations, there are a few in Cyprus that correctly perceive Internal Audit as an aide in dealing with the four key areas of risk that they face: • Financial Risk to the effective financial operations of the organisation. • Commercial Risk to the commercial success of the organisation. • Organisational/Operational Risk to the tangible and intangible assets of a company. • Compliance/Regulatory Risk that exposes the organisation to compliance issues or external litigation. Internal Audit can assist a company’s management in achieving its business objectives and greatly contribute to the management of risk, fraud prevention and detection, operational and financial control efficiency, compliance with policies and procedures, accurate and reliable financial and management information and financial reporting. PwC’s 2012 global study on the State of Internal Audit indicates that, year-on-year, business executives expect their Internal Audit to play an increased role in helping them navigate the rapidly-changing risk landscape. Business executives accordingly invest (with people, tools and training) in the Internal Audit function to enable it to meet these expectations. According to the study: • Data privacy and security now form the single most requested area for increased Internal Audit focus with 46% of stakeholders asking for added capabilities in this area.

• Regulations and government policies form the second largest requested area for increased focus, with 32% of stakeholders asking Internal Audit to become more involved in supporting the business in understanding and managing associated risk. It is apparent that companies that manage risk well have Internal Audit functions that go beyond the traditional role of exclusively providing assurance over financial controls. Our study found that management nowadays demands increased Internal Audit involvement in risk identification and the management of risk. Successful Internal Audit departments create plans through comprehensive, top-down risk assessments in which the entire enterprise risk management process is taken into consideration. According to the survey results, 45% of organisations still do not create their audit plans using this robust, top-down risk assessment approach. A majority of respondents cited organisational and cultural resistance as the most common barriers to Internal Audit’s active involvement in a fully comprehensive risk management function, followed closely by a lack of Internal Audit resources and expertise. The report finds that Internal Audit teams in leading companies provide stakeholders with advice on risks and controls rather than merely reporting on any gaps. Some 78% of the survey respondents whose company were better at managing risk say their chief audit executives have a more active role in the executive meetings, compared to only 61% in companies that are lagging behind. Most Internal Audit departments in Cyprus are not actively involved in a fully comprehensive risk management function to identify and

info: Christos Tsolakis is a Partner in PwC Cyprus specialising in Risk Assurance Consulting. 68 Gold the international investment, finance & professional services magazine of cyprus

manage risks. The key barrier to this is the lack of resources, expertise and tools. The active involvement of the Head of Internal Audit in executive meetings and the education of the executives regarding risk management, fraud prevention and detection and compliance issues would greatly contribute to a more efficient and effective Internal Audit function. PwC understands that significant risk is rarely confined to discrete areas within an organisation but rather tends to have a wide-ranging impact across the organisation as a whole. As a result, PwC’s Risk Assurance practice has developed a holistic approach to risk that protects business, facilitates strategic decision-making and enhances efficiency. This approach is complemented by the extensive risk and controls, technical knowledge and sector specific experience of its Risk Assurance professionals. PwC’s Risk Assurance practice provides companies with significant technical expertise and deep knowledge across all industries. Skilled team members assist companies in developing risk and compliance programmes, building and running Internal Audit functions, supporting the needs of high-performing Internal Audit functions with audit control and subject matter expertise, and creating internal control processes around business performance issues, IT systems as well as strategy and contingency planning. The end result is a risk solution tailored to meet the unique needs of clients.

Most Internal Audit departments in Cyprus are not actively involved in a fully comprehensive risk management function


EU Governments Save Their Banks

banking

{money}

Greece and Spain championed EU bank support with public money in 2012 By Kyproula Papachristodoulou

T

he restoration of European banks’ balance sheets through government intervention over the past four years has been of unprecedented magnitude. The intervention took various forms, ranging from direct support for financial institutions to monetary policy operations aimed at preserving financial stability, to general economic support measures as part of fiscal policy. According to the latest Eurostat figures, which cover the actual impact on government deficit and debt directly related to the support for financial institutions, public interventions in 2012, notably in the form of bank recapitalisations, increased government deficits in a majority of EU member states that reported such interventions. The increase was particularly large in Greece (4% of GDP) and Spain (3.6% of GDP). The largest impacts to date were recorded in 2010 and 2012. Eurostat believes that it is likely that support for financial institutions will continue to have a substantial impact on the government deficit/surplus of individual EU Member States in 2013. In 2012, public interventions to support

Support for financial institutions will continue to have a substantial impact on the government deficit/ surplus of individual EU Member States in 2013 financial institutions increased government deficits in 13 out of 19 Member States that reported such interventions (eight Member States did not report any such interventions). It is worth noting that all capital injections, whether treated as government expenditure or as acquisition of equity, generally affect government debt, as governments need to finance them. In 2012, the overall impact on government debt resulting from past and present support for financial institutions was estimated at 5.2% of GDP for the EU and 5.5% for the euro area. Other cases of noticeable increases in the 2012 deficit (more than 0.2% of GDP but less than 1%) involved Belgium, Cyprus, Latvia, Austria and Portugal. In some EU Member States (Denmark, Ireland, Italy, Luxembourg, Hungary and Sweden), government deficits

Largest impacts of interventions on government deficit (%GDP) 0

Ireland, 2010

Greece, 2012

Spain, 2012

Latvia, 2010

Germany, 2012

-5 -10 -15 -20 -25 -30 -35 Published deficit

Impact of support for financial institutions

Source: Eurostat, supplementary tables for the financial crisis

Portugal, 2010

in 2012 were reduced overall due to government interventions. This resulted from fees on guarantees granted to financial institutions, property income (interest and dividends) receivable from financial instruments acquired by governments, and from other revenue such as capital taxes. The largest government interventions to date occurred in 2010. Overall, in the period from 2007 (when only the UK undertook public interventions) to 2011, the most significant increase in deficit due to government interventions in financial institutions was noted for Ireland (more than 26% GDP, cumulated over the reference period of 2007-2011). For several other EU Member States, such as Germany, Spain, Latvia, the Netherlands, Austria, Portugal, Slovenia and the United Kingdom, the deficit increased by a significant but more limited extent: from around 0.5% to 3% over the reference period. Lithuania also reported an increase in the deficit, but for a much smaller amount. In other EU Member States, government deficits were marginally reduced due to revenues from government interventions. Both for the EU and the euro area, the net impact was marginally deficit-increasing in 2007, 2008 and 2009, became much more pronounced in 2010 and decreased sharply in 2011. The net impact was noticeably deficitincreasing again in 2012, largely due to bank recapitalisations and resolutions. A spike in government expenditure for 2010 was mainly due to massive capital transfers to Irish banks as well as federal and state-level liquidation agencies in Germany.

the international investment, finance & professional services magazine of cyprus

Gold 69


financial fraud

{money}

Into Battle!

Computer forensics grows in importance in the fight against financial fraud

By Rakis Christoforou BBA, CPA, ABV, CFF, CGMA, ACFE

D

uring the last two decades there has been significant growth in the use of computers, the Internet, e-mail, and mobile phones in criminal activities including Financial Fraud. In their struggle to uncover such fraud, forensic accountants and computer forensic experts now look not only at paperwork but also at electronic evidence, commonly known as e-evidence. Computer forensics has evolved as the main tool for the discovery of Electronic Stored Information (ESI). When investigations were restricted to paper evidence, forensic accountants and lawyers would ask for and received truckloads of documents. Their strategy involved finding evidential matter in the form of paperwork that would help them prove a matter of fact. The strategy has not changed much since then but the nature of the evidence has. These days the amount of e-evidence would fill supertankers if it were to be printed because so many more transactions are computerized. Moreover, computers and other

electronic devices at work are used for personal purposes as well and, therefore, much more information is stored electronically than it used to be on paper. In today’s digital world, fraudsters leave digital footprints of their activities which reveal their actions and intentions. Digital evidence comes in many forms, including the hard drives found in personal computers, external drives, telephones, smart-

Fraudsters leave digital footprints of their activities which reveal their actions and intentions phones, personal data assistants, surveillance cameras and telephone voicemail systems. The amount of information left on each of the above devices has often provided sufficient evidence to catch and convict financial fraudsters and other criminals, many of whom attempt to destroy their digital trails by deleting the relevant files. In fact, “delet-

70 Gold the international investment, finance & professional services magazine of cyprus

ing” is a misnomer. Choosing the delete option may erase a file’s reference from the directory but it does not erase the file until it is overwritten entirely. Furthermore, businesses have disaster/recovery systems that perform automatic backups. Therefore, even

What is Computer Forensics?

C

omputer forensics is the application of computer investigation techniques to gather e-evidence suitable for presentation in a court of law. The goal of computer forensics is to perform a structured investigation while maintaining a documented chain of evidence (also know as the chain of custody) to find out exactly what has happened on a computer and/or other electronic devices and who is responsible for this. The Internet history, e-mails, lost or deleted files are examples of data that the fraud investigator can utilize as evidence in his engagement.


BOOK REVIEW The Alchemists: Inside the Secret World of Central Bankers By Neil Irwin (Business Plus, 2013)

W

RRP: £25 (£17.50 from amazon.co.uk)

if a particular file was never saved or it was deleted shortly after it was created, it may still be retained on multiple backup media. Most files usually contain metadata – additional data about the original data that can provide the investigator with important relevant information. When files and messages are saved, modified or sent, computer software automatically creates artifacts or metadata. Normally this information cannot be changed. Most times, metadata includes information about the date the document was created, who created the data, when it was modified, etc. Metadata can be as revealing as a fingerprint, thus forming important e-evidence to be used in court. When the Enron Corporation declared bankruptcy in December 2001, much of the subsequent investigation relied on computer files and their metadata as evidence. A specialized team of forensic accountants, computer forensic experts and lawyers searched hundreds of Enron employees’ computers and were able to find important e-evidence that was later used in court. E-evidence can prove intent and is hard to

deny. However, there are certain aspects that need to be taken into consideration when dealing with a computer investigation: C  omputer forensic investigations can be very costly because specialized skills and software may be needed in order to properly retrieve relevant information without changing or damaging it. I t is an area that is constantly evolving. Recently, programmers have begun to design anti-forensic tools to make it harder to retrieve information during an investigation. W  e are now experiencing a shift from desktop computers to handheld devices (e.g. mobile phones) and additional technical knowledge is needed to retrieve information from these devices. T  he Achilles heel of e-evidence is that lawyers and judges involved in a case may not always understand the accounting and technical details of the case and, as a result, may not appreciate the relevance of e-evidence without the help of a forensic accountant and/or a computer forensic expert.

hen the first rumblings of the coming financial crisis were heard in August 2007, three unelected men suddenly became the most powerful in the world. They were the leaders of the world’s three most important central banks: Ben Bernanke (US Federal Reserve), Mervyn King (Bank of England), and Jean-Claude Trichet (European Central Bank). Over the next five years, they and their fellow central bankers deployed trillions of dollars, pounds and euros to try and contain the waves of panic that threatened to bring down the global financial system. His gripping account of the crisis and the most intense exercise in economic crisis management ever seen is the truly global story of the central bankers’ role in the world economy. The book breezes through central banking’s troubled history but where Irwin really provides spice, is in his blow-by-blow account of the financial crisis and its aftermath. Of the book’s three main protagonists only Bernanke comes out remotely well. These alchemists may not have produced gold, but they provided enough monetary glue to hold societies together.

The importance of using computer forensic techniques to uncover evidential matter in a financial fraud investigation cannot be understated. Electronic evidence is an extremely fragile and often high-value form of evidence that tends to be undetectable to the human eye. Like other forms of trace evidence, e-evidence must be collected, preserved and handled with care by professionals who know how to gather and prepare it for judicial cases. If the evidence is destroyed or modified, the case could be lost in court.

info: Rakis Christoforou is certified in Financial Forensics and accredited in Business Valuation. He is a member of the AICPA (American Institute of Certified Public

Accountants – Forensic & Valuation Services section) and the ACFE (Association of Certified Fraud Examiners). He is also Vice-Chair of the Economic Crime & Forensic Accounting Committee of the Institute of Certified Public Accountants of Cyprus (ICPAC). the international investment, finance & professional services magazine of cyprus

Gold 71


interview

{business}

Painting a Positive Picture By John Vickers

otun is one of the world’s leading manufacturers of decorative paints, marine, protective and powder coatings. The Group, which employees more than 9,000 people in 71 companies and 36 production facilities on all continents, sells its products in more than 90 countries through own subsidiaries, joint ventures, agents, branch offices and distributors. Total sales in 2012 amounted to over €2 billion. Last month, Jotun Cyprus Ltd moved into new offices in Limassol. The Group’s CEO Morten Fon spoke to Gold about its success and its plans for Cyprus.

72 Gold the international investment, finance & professional services magazine of cyprus


The Cypriot authorities now need to prove that they have a stable and predictable business

environment

Gold: 2012 was an excellent year for Jotun with record sales and strong growth in earnings. What’s the secret of the company’s success? Morten Fon: A number of factors affect our performance. We have a strategy that has stayed firm over time, we have a fortunate geographical footprint and, lately, raw material prices have stabilised. Most of all, however, our successs is based on a very strong corporate culture and our 9,000 excellent employees. Gold: The company is unusual in a global context in that it has remained for almost 90 years under the ownership of the founder’s family. What are the advantages of such a model? M.F.: The Gleditsch family is still the majority shareholder of the company and this has ensured long-term thinking and a willingness to invest. Jotun has invested in a number of greenfield markets and both management and owners have the patience to wait for payback. In addition, the family involvement has helped ensure our strong corporate culture. We call this sense of close-knit family, this enterprising spirit, desire to work together and shared success Jotun’s “Penguin Spirit”. Gold: What made you set up Jotun Cyprus Ltd? M.F.: Cyprus is an important part of our global marine coatings network, both when it comes to vessel ownership and vessel operation. In addition, we have chosen to sell marine products locally too. Gold: What was behind the decision to move into new offices in Limassol? M.F.: To be honest the old office was not up to the standard we wanted to see and I firmly believe that our employees deserve to have good offices and a good working environment. They will perform better and Jotun will benefit. Gold: The move came at a time when Cyprus was still reeling from the shock of the drastic changes to its banking sector.

Would you agree that your decision sends a very positive message to the local and international business community? M.F.: Yes, and I hope it can be a small signal among the many more negative messages. We have been in the marine coatings industry for many years and we know that it is cyclical, meaning that there will be better times ahead. Our decision will ensure we are better prepared for them than ever. Gold: Have recent developments in Cyprus (the bailout, the bank restructuring, etc.) had any effect on your plans for your business on the island? M.F.: We have, of course, evaluated the situation but, as I said, we will continue to build our business and prepare for better shipping markets. Gold: How quickly do you think that Cyprus will be able to restore its damaged reputation as an international business centre? M.F.: That’s a difficult question but for those operating their shipping business from Cyprus I believe it will be more positive once there is an upturn in the global shipping market. In more general terms I believe that the Cypriot authorities now need to prove that they have a stable and predictable business environment. Gold: How do you see the future of the Cyprus shipping industry, which obviously has a direct effect on your own business? M.F.: Again, my point of view is that it will be affected by the global shipping market and any new changes in laws and regulations. As long as this stays stable, Cyprus will be a good place to be for shipping. Gold: What are Jotun’s future plans, as regards further expansion and entering new markets? M.F.: As part of our organic growth strategy we will continue to look for and invest in new markets. At the same time we are continuously investing in capacity and stronger market positions in our existing markets.

BOOK REVIEW Marvel Comics: The Untold Story By Sean Howe (Harper Collins, 2012)

F

RRP: £16.99 (£10.02 from amazon.co.uk) rom a tiny office on Madison Avenue in the early 1960s, a struggling company named Marvel Comics introduced a series of bright-costumed superhero characters – Spider-Man, The Fantastic Four, Captain America, The Incredible Hulk, The Avengers, Iron Man, Thor, X-Men, Daredevil – who quickly won children’s hearts and sparked the imagination of pop artists and intellectuals. Interweaving history, anecdotes, and analysis, Howe traces Marvel’s long rise to a multi-billiondollar enterprise, revealing how it weathered Wall Street machinations, Hollywood failures, legal battles and the collapse of the comic book market. He also introduces the men behind the magic, including self-made publisher Martin Goodman, energetic editor Stan Lee, and Jack Kirby, co-creator of many of the company’s characters. A story of fertile imaginations, lifelong friendships, unlikely alliances and thirdact betrayals that incorporates more than one hundred original interviews with Marvel insiders then and now, this is a gripping narrative of one of the most dominant pop cultural forces in contemporary America. If you bought the comic books years ago, you’ll want to read this now.

the international investment, finance & professional services magazine of cyprus

Gold 73


china

CEOs {economy}

choose China for foreign investment C EOs have rated China as the world’s top destination for foreign investment, according to a global survey by PwC and the China Development Research

Foundation. According to the report, Choosing China: Improving the investment environment for multinationals, more than half (56%) of the CEOs surveyed chose China above other major and emerging economies including Brazil, Russia, India and the US. CEOs say they are attracted to China’s expanding consumer markets, skilled talent pool and government incentives. “A major factor in China’s economic success has been its ability to attract foreign investment,” says Dennis Nally, Chairman of PricewaterhouseCoopers International Ltd. “In 2012, China attracted US$111.7 billion of global FDI. And we predict that it will overtake the US as the world’s largest economy in purchasing parity terms in four years time. But China will face new challenges, as emerging markets become more competitive in attracting foreign investment, widening the breadth of choice for enterprises globally,” he says. According to the survey, China offers the best prospects for investment among CEOs of consumer, industrial product and service companies (58%). But Brazil is favoured over China by technology businesses (80% and 64% respectively) and the financial services sector (55% and 48% respectively). “China is facing intense competition in some industries it is targeting,” Nally says. “But the government is investing in measures to increase China’s long-term attractiveness as

an investment destination.” CEOs highlighted a drive to increase domestic consumption (48%), deepen financial reforms on foreign exchange and interest rates (43%), and double per capita incomes by 2020 (41%) as the top three policy commitments that would have the greatest impact on their businesses. When asked about further measures to improve China’s competitiveness, CEOs highlighted improving government transparency and anti-corruption (73%), reducing economic intervention (53%), and speeding capital market reforms (30%) as areas for further improvement. M&A (43%) and greenfield (44%) investments were the strategies most favoured by CEOs for growing their businesses in China over the next five years. “While transactions and organic growth are the preferred modes of expansion, more collaborative approaches such as alliances, joint ventures and licensed production will become increasingly important to succeeding in the China market,” says Nally. Companies with a limited global footprint (with operations in fewer than five countries) could offer a major opportunity to China in terms of attracting innovation as well as financial capital. “As China shifts to become a more knowledge-oriented economy, it could win new investment from smaller and specialist foreign companies. Firms such as specialist technology and media enterprises are currently underrepresented,” he says. Talent remains a key area of concern, with only one in four CEOs (27%) indicating the availability of skilled talent having

74 Gold the international investment, finance & professional services magazine of cyprus

China will overtake the US as the world’s

largest

economy in purchasing parity terms in four years time

influenced their decision to invest in China. “The war for talent has been well discussed and documented. However, as some CEOs in our survey have highlighted, China’s challenge is about capacity, not capability. Many foreign companies have already established alliances with local universities and institutions to help develop a ready pool of talent,” Nally says. The Choosing China report was produced by PwC and includes the views of 227 CEOs from PwC’s Global CEO panel, polled at the beginning of 2013. The panel is made up of a cross-section of multinational companies across all sectors, company sizes and home locations (both from developed and emerging economies). It includes businesses with operations in China and those without, to provide a balanced understanding of what markets they are focusing on and what part China plays in their plans. To download a PDF of the report, go to: www.pwccn.com/choosingchina.


spending

Social Protection & Health

{economy}

Spending related to social protection and health as a percentage of total

Expenditure on the Rise

general government expenditure was lowest in Cyprus

Interest payments to service debt account for 13.9 % of total public spending in Greece By Kyproula Papachristodoulou

S

ocial protection and health are the two main areas in the European Union where public money is directed. Over the past few years, spending by governments on these has increased relative to GDP. According to the latest available Eurostat figures, in 2011, EU-27 general government expenditure amounted to 49.1% of GDP. More than half was devoted to social protection and health, which accounted for 19.6% and 7.3% respectively of GDP (slightly down compared with 19.9% and 7.5% respectively in 2010). Other areas comprising a large share of government expenditure are general public services (6.6% of GDP), education (5.3%) and economic affairs (4.0 %). General government expenditure amounted

to around €6.2 trillion in 2011 in the EU-27. As a ratio to GDP, the highest levels of government expenditure were found in Denmark, France, Finland and Belgium, all with proportions above 53% of GDP. In ten of the twelve Member States that joined the EU in 2004 and 2007, total general government expenditure remained below or around 46% of GDP. Among the ‘old’ EU Member States, Luxembourg had the lowest proportion at 42.0% of its GDP. Of all the reporting countries, Switzerland had the lowest government expenditure relative to GDP (33.8%). Defence, public order and safety, environmental protection, housing and community amenities and recreation, culture and religion represented a total of 6.0 % of EU-27 GDP in 2011. From 2010 to 2011, in terms

EU – 27 and EA-17 general government

expenditure by main function as % of GDP, 2011

20.2 19.6

20

% of gdp

15

10

20.2 19.6

6.8 6.6 5

1.5 1.3 1.9 1.8 0

5.0 5.3

4.1 4.0

General public services

Source: Eurostat

Defence

Public order and safety

EA-17

Eu-27

0.9 0.9 0.9 0.9 Economic affairs

Enviromental Housing and protection community

1.1 1.1 Health

Recreation, Education culture and religion

Social protection

of GDP, general government total expenditure decreased for all functions except general public services, which increased largely due to increases in interest payable. For instance, general public services represent nearly a quarter of total expenditure in Greece (versus 13.5 % for EU-27) – interest payments to service debt alone account for 13.9% of total public spending in Greece. The structure of public expenditure is relatively homogeneous across countries and particularly in the ‘old’ EU Member States. In the twelve Member States that joined the EU in 2004 and in 2007, more differences are noticeable. Expressed as a percentage of total general government expenditure, spending related to coverage of the main social risks (social protection and health) was highest in Germany (58.8%), Denmark (58.3%), France and Finland (both 57.3%). The lowest percentages were found in Cyprus (33.5%), Latvia (42.2%), Romania (44.5%) and Hungary (44.8%). In fact, the weight of health and social protection combined in total public expenditure is lowest in the twelve Member States which most recently joined the EU as well as in Portugal, where it represents less than half of total government expenditure. Compared with 2002, spending by government on social protection and health has an increased weight relative to GDP. After having remained relatively stable (less than 25 % of EU-27 GDP) until 2008, the share of these two combined functions increased substantially to reach 27.6% in 2009. Social protection and health expenditure together amounted to 27.4% in 2010 and 26.9% in 2011.

the international investment, finance & professional services magazine of cyprus

Gold 75


transfer pricing

{tax&legal}

Transfer pricing

in Cyprus

R

eanda International is a leading international network of independent accounting and consulting firms based in Asia The network’s 2nd Quarter 2013 issue of Prism provides a general overview of information and development of transfer pricing in various countries where Reanda has a presence. HTT Audit Ltd is the Cyprus member firm of Reanda International. The following information relates to Cyprus.

Legal framework

The legal framework governing transfer pricing is Section 33 of the Income Tax Law which defines in detail which parties and persons are deemed to be related and/or connected based on the principal of direct and indirect control. When associated enterprises or connected persons transact with each other, the conditions applied between their commercial and financial relations must not differ from the conditions that would exist, if the enterprises or persons were independent. If there is a difference in those conditions that results in lower tax profits, the taxpayer must adjust its tax computation accordingly to eliminate the effect of abusive transfer pricing. Non-resident tax payers and foreign tax authorities that wish for a corresponding adjustment in a Cyprus company’s/person’s taxable profits as a result of a primary adjustment made abroad due to transfer pricing need to apply to the Inland Revenue Department (IRD) for a Mutual Agreement Procedure (MAP). The MAP will follow the European Union’s Arbitration Convention route or Double Taxation Treaty (DTT) provisions to resolve the case depending on the origin of the claim. If the MAP is successful, the IRD will opt to give a tax credit to the taxpayer. Cyprus tax legislation does not provide for the application of secondary adjustments. A

secondary adjustment is an adjustment made in addition to the primary adjustment to deal with excess cash in the hands of an enterprise after a primary adjustment takes place. For example, if the purchase price of a specific invoice is adjusted downwardly to make the transaction as if its terms were at arm’s length, then the adjustment value (invoice price vs. arm’s length price) is treated as a constructive dividend or a constructive loan or a constructive equity contribution and taxed accordingly.

Application of transfer pricing

Cyprus follows the Organisation for Economic Cooperation and Development (OECD) Transfer Pricing Guidelines. Any method described in the Guidelines can be used, provided it is considered the most reliable method for the particular case. Per Transfer Pricing guidelines, where traditional transaction methods are equally reliable as transactional profit methods, then they must be preferred. Traditional transaction methods: (a) The Comparable Uncontrolled Price (CUP) method: comparison of selling price/ fee of the seller under question with similar transactions between unrelated parties. (b) The resale price method: comparison of the gross margins of party purchasing goods/ services from related parties with similar businesses where the supplier/provider is unrelated. (c) The cost plus method: comparison of the mark up over costs of a supplier of goods/services to related parties with similar businesses selling to unrelated parties. Transactional Profit methods: (a) Profit split method: split of the combined profits of the related parties on the basis of an arm’s length agreement. (b) Transactional net margin method: comparison of net profit indicators.

76 Gold the international investment, finance & professional services magazine of cyprus

Selection of tax payers for investigation

Tax payers to be reviewed are selected on the basis of risk. Indication of high risk cases as specified above expect to involve transactions with: (a) tax havens (b) related entities that have high tax losses (c) companies that have tax losses for utilisation in a Group Structure (between domestic cases only) Per Cyprus tax legislation, the burden of proof is on the taxpayer, who needs to provide evidential documentation to satisfy the assessor that prices used are at arm’s length and that these prices have been decided in accordance with OECD Transfer Pricing Guidelines.

Penalties/Interest

Transfer pricing adjustments are considered to fall within the scope of tax avoidance, unless the IRD proves there has been fraud or willful default (tax evasion). Therefore, the provisions of the law relating to tax avoidance will be applied (interest since the tax year in which the avoidance took place and penalties not exceeding 10% of the additional tax imposed). In cases of fraud or willful default, additional penalties will be imposed, provided that the case is in agreement with the IRD (to avoid further legal action).

Disagreement with IRD

Taxpayers can object the decision of the IRD in the following bodies: (a) Tax Tribunal (b) Cyprus District Courts (to appeal the decision of the Tax Tribunal) (c) High Court of Justice (to appeal the decision of the District Court) Tax Tribunal decisions are binding on the IRD


arbitration

{tax&legal}

Resolving International Disputes Businesses seek out specialist legal advisors to tackle growing problems

T

he number of businesses hiring in-house specialist lawyers is set to rise according to a new PwC survey, after a third reported an increase in the number of international disputes. The survey, Corporate Choices in International Arbitration, showed that 35% of the polled counsels had reported a rise in the number of international disputes. When asked what method they would choose to resolve their disputes, twice as many opted for international arbitration than other forms such as litigation. Currently companies tend to seek this specialist expertise from external law firms but under the current constraints of the economic climate and the rising cost of proceedings, many more are likely to start recruiting in-house, the report says. Whilst 90% of respondents had a dedicated legal department, the survey revealed that only half (49%) had a dedicated in-house disputes team. In partnership with Queen Mary, University of London, researchers analysed International Arbitration (IA) trends in more than 100 multinational businesses, focusing on the financial services, energy and construction sectors. Overall 73% said that IA was well suited to resolving transnational disputes, with preferences strongest in the construction and energy sectors. When asked to rank various dispute methods in order of preference, 68% of construction respondents said arbitration was their preferred method compared to 56% for energy, whilst in financial services, 82% ranked court litiga-

Many businesses opt for arbitration for international disputes due to its speedier process and private nature tion as their number one method. Despite this, over two thirds (69%) of in-house counsel in financial services companies felt that IA was becoming more suited to resolving their disputes. Gerry Lagerberg, PwC’s head of international arbitration, said: “One of the key findings of the research is this trend in specialist counsel being brought in-house. In part, this is down to a cost-control measure but it will also serve as a real vote of confidence in IA as these firms recognise the value in having arbitration specialists embedded more within their multinational businesses”. Of those that said arbitration was not their preferred method for settling disputes, 22% said this was down to it being less cost effective than other methods – such as litigation, according to the report. Many businesses opt for arbitration for international disputes due to its speedier process and private nature. There is usually no appeal process and the final decision is binding, unlike litigation. To download a copy of the report: www.pwc.com/arbitrationstudy

BOOK REVIEW The Lawyer Bubble: A Profession In Crisis Steven J. Harper (Basic Books, 2013)

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RRP: £17.99 (£17.09 from amazon.co.uk) lthough this book is about the legal profession in the US, many of the key points raised doubtless apply to other countries too. As someone who has been listed in numerous compilations of the best lawyers in America, Harper is well placed to know what is happening to his former profession and he has come up with a devastating indictment of the greed, shortsightedness and dishonesty that, he says, now permeate it. In addition, there is a growing oversupply of new lawyers, widespread career dissatisfaction and spectacular implosions of pre-eminent law firms. Yet eager hordes of bright young people continue to seek jobs with high rates of depression, life-consuming hours, and little assurance of financial stability. The global financial crisis has only worsened these trends but, according to the author, correction is possible.  Being honest about the legal job market, revisiting the financial incentives currently driving bad behaviour, eliminating the billable hour model and more can take the profession to a better place, he argues as part of his proposals for “a meaningful course correction”.

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investing in timepieces

{lifestyle}

Watch & Learn

Time after time, vintage watches have proven that their appeal is adamantine: an expression of luxury, a lesson in horology, and a historical journey through the ages. Passion, it would seem, supersedes price every time. By Chloe Panayides


O nce upon a time, a pioneer in the field of aviation, Alberto Santos-Dumont, found himself at a crossroads. The year was 1904, and whilst the pocket watch had served him well thus far, Santos-Dumont now craved the ownership of a timepiece that would allow him the ease and efficiency of reading it without ever having to remove his hands from the yoke, and divert his attention from the flight. Courtesy of Cartier – and Santos-Dumont’s craving – this budding need burst forth as the world’s first ever wristwatch. Over a century later, the dissemination of technology – namely digital clocks and mobile phones – into every crevice of society has decimated the wristwatch’s functional vitality but it still stands strong as a symbol of power and prestige. Its persuasion is enduring. So much so, in fact, that auction house Christie’s ‘Important Watches’ sale, held in New York In December 2012, realised over €95 million, with multiple new record highs reached for rare examples of Rolex, Panerai and Patek Philippe. A macrocosmic look at the vintage watch market reveals that it is an estimated €5 billion venture. Experts verify that the value of the vintage watch has been on an upward trajectory for the past 25 years. Eric Engh, manager of retail site Old Watch explains that, indeed, true connoisseurs only buy vintage and antique (the former understood as being any wristwatch created before 1970, and the latter prior to 1950). Engh asserts: “New or nearly new is a fool’s market. With 175 manufacturers of luxury brands, the majority [of models] will not

follow through as an investment.” Vintage, however, exudes a different charm. Francois-Henry Bennahmias, CEO of North America for Swiss watchmaker Audemars Piguet, admits that the financial crisis has quelled demand for new lower-end luxury watches – whose price tags read no higher than €18,000 – encouraging buyers to be more selective. No manner of item is more expressive of this selectivity and exclusivity than vintage. Bennahmias confidently concedes: “When you buy vintage, you’re very safe.” Where, however, does one begin the quest to discover the vintage watch that promises value? Prospective buyers are advised to heed, primarily, three major caveats: (1) persist

A wristwatch still stands strong as a symbol of power and prestige with only the finest brands, (2) purchase a competitive model, and (3) pursue provenance. Brand and model are inextricably linked. Besides being of limited release, or possessing ‘complications’ – a horological term for the different things a watch can keep track of, spanning day and date, to chiming bells signalling precise intervals – a timepiece must belong to a watchmaker whose name has transcended generations, and who has commanded veneration for creating masterpieces. Experts align this allure with profitable return, crediting the illustrious Swiss-based watchmakers Patek Philippe and Rolex as possessing it exemplarily; both manufacturing houses have a proven, distinguished history of excellence spanning over a century that is sought after by collectors and connoisseurs alike. Patek Philippe was founded in 1839 in Geneva. Known for its keen craftsmanship and sophisticated mechanical movements, the prices of its vintage pieces have been exploding in the market. 2012 was a particularly spectacular year, with the Swiss brand achieving the most

records for getting the highest bids at auction. A bi-coastal auction held by Bonhams in December of 2012 saw a rare 18K gold Patek Philippe 2499 chronograph, featuring perpetual calendar and moon phases, sell for $422,500. Earlier in the year, Christie’s New York acquired for auction the post-war Patek Philippe 2523. Described as “a ghost” for how sparingly it appears on the market to prove its existence and how swiftly it disappears into eager hands once spotted, this timepiece, complete with a mechanism allowing the time of 40 different countries to be told, commanded $1 million. Across the Atlantic, Antiquorum’s Geneva auction was also graced by this ‘ghost’, selling for $1.05 million. More impressive still was the 1928 Patek Philippe wristwatch – credited as one of the last surviving examples of a singlebutton chronograph – that sold at auction in 2011 for $3.6 million, holding the record for the most expensive wristwatch ever sold at auction. Household name Rolex has likewise been displaying such distinction at auctions of late. Whilst Rolex watches newly entering the market have somewhat plateaued in price recently, the rewards to be reaped from rarities are echoing worldwide. The anti-magnetic Milgauss, the ‘Paul Newman’ Daytonas, and military Submariners of vintage origin are all making waves due to their embodiment of advancements in complications and mechanism, as well as their sheer scarcity. Ken Specht, founder and editor of The Specht Sheet, a trade source for evaluating the price movements of Rolex, Patek Philippe, and Cartier watches, explains the discrepancy between vintage and modern Rolex prices: “Rolex made one million Oysters (wristwatches with the first successful waterproof case) between 1926 and 1955. They now produce nearly the same quantity in a year.” An over-saturated supply utterly dilutes

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investing in timepieces

Tick, tock goes the musical clock

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espite their inherent charm, vintage wristwatches may have met their match: the mellifluous tones of the musical clock and exquisite history of the pocket watch have been calling collectors and connoisseurs the world over who, it seems, simply cannot resist the distinguished tick-tocking of old-time clocks. A sample of recent sales is sure to astound:

1. A fine rock crystal, lapis lazuli, jade and emerald

boudoir clock belonging to watch and jewellery house, Cartier, sold at auction in December of 2012 at Bonham’s New York for $116,500. Created in the year 1929, the clock features 15-jewel adjusted lever movement and the case is set within an arched panel of rock crystal, gold bezel and engraved gold hands.

2. An intricately-decorated 18 century musical clock, once th

owned by the penultimate King of Egypt, King Farouk, also sold in December 2012 – this time at Bonham’s at New Bond Street – for €480,000, far surpassing its estimate of €178,000 to €296,000. The musical clock, playfully described by Bonham’s as like a ‘ye olde jukebox’, belonged to the repertoire of James Cox (c.1723-1800) of Shoe Lane, London. By trade, Cox was actually a goldsmith and jeweller as opposed to watchmaker, perhaps explaining the elaborate design of agate and silver.

the demand, forcing collectors and connoisseurs to focus their attention on searching for the unique and unmatchable. Consider, for example, the 1942 Rolex Chronograph that came up for auction in May 2011. Out of a mere 12 pieces that were created, only 8 are still in existence, and this one particular example commanded a staggering $1.16 million. Acquiring extremely rare – if not oneof-a-kind – pieces has become known in the watch-sphere as the ‘trophy’ market. Watches that have graced the wrists of icons and the fabulously famous are automatically imbued with this rarity factor,

3. Sotheby’s Treasures, Princely Taste auction is described as a superbly cu-

rated sale of magnificent furniture and decorative arts. On July 4th 2012, a bejewelled musical elephant clock, once having belonged to Nassir al Din Shah Qajar, the Shah of Persia, came up for sale at the London-based auction, selling to an Asian collector for an impressive €1,911,378. Circa 1780, the clock had been tagged with an already mighty of estimate of €750,000-€1.5 million, thus proving that its thrall was mightier still.

4.

Another Sotheby’s sale – the New York-based Important Watches & Clocks auction – held in May 2012, witnessed one of the most important sales in timekeeping history. The Duc d’Orléans Breguet Sympathique clock, created in 1795, set the auction record for being the world’s most expensive clock, reaping €5.2 million. The last time the piece was offered for sale was at a Sotheby’s auction back in 1999, at which time it sold for €4.3 million.

5. The old-world charm of the pocket watch seems to far surpass all other

timekeeping items. Henry Graves, a patron of Patek Philippe, commissioned the creation of an ultra-complicated pocket watch for Henry Graves Jr. Comprising 24 functions, the pocket watch became known as the ‘Supercomplication’ and sold in 1999 to an anonymous buyer in New York City for an astonishing €8.4 million. Made in 1933, the 18K gold pocket watch stands, to this day, as the most expensive timepiece ever sold.

somewhat regardless of their contemporary chronology. Auction activity proves that this provenance should not be underestimated. Swiss luxury watch manufacturer Omega has seen its pieces perform exceptionally well at auction of late, with experts agreeing that this is largely due to its association with the James Bond franchise. With the recent release of Skyfall, Omega has now represented James Bond in seven separate cinematic events, self-professed as being ‘perfect partners’ due to their kindred honour, robustness, reliability, and fashionableness. The ‘Planet Ocean’ watch, branded as the ‘official’ Skyfall timekeeper,

80 Gold the international investment, finance & professional services magazine of cyprus

may have come equipped with specialist diving features (including a helium escape valve, chromium nitrate diving scale, rotating diving bezel and water resistance down to 600 metres), yet it is surely the engraving of Skyfall 007 on the watch’s rotor and the 007 insignia in place of the 7 o’clock position that saw this watch, worn by Daniel Craig during filming, sell for €195,000 – easily exceeding its €7,000 to €9,000 estimate. The Christie’s auction took place one month prior to Skyfall’s November 2012 release date. Nicolette Tomkinson, a Christie’s executive, concedes: “The premium you put on the Bond aspect is obviously very difficult to assess, and it will change from auction to auction. Still, people (had) never even seen him wearing this watch on screen and already it’s making that kind of money. It definitely was…part of the Bond fever that night.” Regardless of the fever that certain timekeeping pieces inspire, it is of paramount importance that they are acquired in nearmint condition and fully functioning order. Paul Boutros, an engineer who collects watches made by Vacheron Constantin and Audemars Piguet, explains how eager owners inadvertently undercut the investment potential of their watch by regularly wearing it. Even the subtlest of scratches may tarnish a watch’s going price, not to mention sweat that can enter the case and cause it to decay. For an unknowing owner, a faded face would be solved by a simple refinish. Boutros asserts: “The person wearing the watch likes that, but we collectors want all original, all the time. We look for legitimacy in the watch.” Nathaniel Borgelt, a horological coordinator at the Patrizzi & Co. auction house assists in illuminating just what is meant by ‘legitimacy’: “The case, crown, dial, and movement should bear the company logo. Replacements lower the value, though a new crown is the least concernNote 007 ing.” Similarly, the on the dial external original accessories are a bonus. Borgelt


“When you buy vintage, you’re very safe” explains: “Ideally, a watch should come with its box, papers, and service records but it’s rare to get all three.” In keeping with Boutros’ concern, Borgelt confirms: “Even if [a watch] is an original, sellers may reapply the luminescent substance to the markers to make it look better. This actually drops the value.” Indeed, maintenance should not be considered an impediment; rather, the little service and space needed for safe storage are unique positives belonging to the timekeeping world. Experts simply advise that one should not engage with the upkeep themselves. A so-called ‘tune-up’ from a trusted company every three years should suffice to preserve condition and precision. Keeping the service papers and being able to present them upon resale will also make your piece more competitive. To avoid the detriment of sunlight and temperamental weather conditions, a dark place should be sought to protect the dial, hands and markers from fading; an automatic watch should, moreover, be kept on a watch winder to ensure that the movement stays alive. Besides the little time and money required to maintain one’s investment, wristwatches have the added bonus of being considered a wasting asset in certain countries, eliminating tax on their capital appreciation. Furthermore, if the watch acquired is in some part made of gold, an investor automatically enters another fecund field of play. Nevertheless, potential investors should be acutely aware of the risk of fraud as, unlike merchandise that circulates with obvious discrepancies, the faux-wristwatch market is littered with finely-made, complicated pieces that feel very real, and are indistinguishable from the genuine product to the untrained eye. Patrick van der Vorst, a former Sotheby’s appraiser, maintains that whilst it’s easy for an appraiser to determine whether a watch is real or fake, the subtler problem lies in being able to tell whether corners have been cut in maintaining the watch.

“What mainly happens is that someone buys a €1,500 watch and reuses the original wheels or crown but in a more expensive watch. They’re original watch parts, but they wouldn’t have belonged to that watch. While the watch is not a fake, its value is lower.” Overall, experts agree that, congruent with all specialist markets, there is no substitute for knowledge and experience, and that the services of someone seasoned in the business should always be sought, whether that be a watchmaker, an enthusiast, an appraiser or just an honest retailer. Similarly, alongside managing the physical assets, it is essential to manage one’s expectations, maintaining sharp realism regarding the outcome of any venture. Barry Zimmerman, financial advisor and watch collector, explains: “Any collectible’s value is subject to change due to forces that may or may not be correlated with the economy. [Collectors] have to understand that not all watches have the same liquidity and valuations can be very subjective.” Dwight Zahringer, a Detroit-based private watch dealer and enthusiast, advises that the key is to buy a watch at the right time, such as during the current crisis-induced slowdown, and have the patience to hold on for months or years to yield return. When one feels that the time is right to engage in the market, three primary options are available for trade: the Internet, private dealers, and auction houses. If one takes the time to become a part of a forum community online, trust and fruitful relationships may be built between private buyers and sellers. Be warned, however: the risk of failing to handle your watch prior to purchase may never be eliminated by good faith and words. There is no protection should a sale go awry. Dealers with established networks allow for the tracking down of specific items, and trade-ins may be accepted. Similarly, without the publicity of the auction house, certain watches that remain under the radar of ardent collectors may be acquired for a more competitive price. Eric Engh tells the tale of purchasing a watch privately for $31,000 and thereafter publicising his buy, resulting in an auction sale price of $100,000. Still, auction houses present a rich op-

portunity to come into contact with some of the rarest pieces and, pending demand, the keenest prices. Once upon a time, the wristwatch may have been a creation of mere need. Today, it stands strong as a coveted want and, apparently, a priceless passion; an investment space to be closely watched.

BOOK REVIEW Lunch with the FT: 52 Classic Interviews By Lionel Barber (Portfolio Penguin, 2013)

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RRP: £20 (£12.80 from amazon.co.uk) his is a selection of interviews from the popular column in the Financial Times conducted with film stars, politicians, tycoons, writers, dissidents and lifestyle gurus in the unforgiving proximity of a restaurant table. The list of people who have had Lunch with the FT since 1994 reads like an international Who’s Who of our times. Meet the rich and famous, the weird and the brilliant, the brave and the virtuous, brought to you by the newspaper’s global network of columnists and correspondents. This book, published as part of the Financial Times’ 125th anniversary celebrations, contains 52 interviews (one for each week of a year) with people as diverse as Angela Merkel, Martin Amis, George Soros, Sean “P. Diddy” Combs, Angelina Jolie and Jimmy Carter Meet not just oligarchs and royals, but the tycoon who will pay African presidents to quit, and one of the Arab world’s most notorious sons. The interviews give readers a real insight into the real people behind the facades they wear in public. A free lunch obviously loosens the tongue.

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Gold 81


A Victim of its Own Success

THE LAST WORD

Is Apple losing its shine? By Peter Economides

I love my eleven inch Macbook Air. But when I see a grey-suited, whiteshirted, maroon- tied, elderly, conservative gentleman with an Apple Macbook Air on his lap, it does something to me! It makes me want to distance myself from my own Macbook Air. And that’s not good for Apple. There’s a growing sense that Apple is losing its shine. And ubiquity has a lot to do with it. It’s when successful brands become the victim of their own success. Apple has a few other problems too. And they all point in the same direction. Last month, I spent some time in the office of the Global CMO of one of the world’s best brands. A brand that he can fairly say he had a major hand in creating. The walls of his Amsterdam office were lined with ads, posters, packaging and other bits of branded material in a good sample of the world’s major languages. All with a consistent look. All with a consistent feel. Like any global brand. But not a watereddown, middle-of-the-road, lowest common denominator kind of consistency. This is consistently with attitude. Consistently with edge. Consistently with a point of view. Consistently with style. Like a handful of great global brands. This guy is an expressive, compelling, interesting CMO. Some call him opinionated. I prefer to call him a man with an opinion (it’s not the same). A man with the independent mind to form it and

with the individual courage to express and defend it. He is a rare breed in a global corporate world rushing towards boring sameness. “That work is all mine. I am the only person who will put his aesthetic stamp on

The world is suffering from a lack of leadership.

it. And I don’t care whether mine is the best stamp or not. But I know it needs the stamp of one man.” Spot on. You’ve probably read the bestselling Steve Jobs biography. Yes it’s true. He was a dictator. A dictator for the consumer. A man who trusted his insight sufficiently to make major decisions without the crutch of research. A man who, when asked what his criteria were for approving a new product launch, replied, “If I am proud to show it to my family, then I launch.” A man who operated as much with the analytical left side of his brain as he did with his holistic right side. A rare marketer. An even rarer leader. The world is suffering from a lack of leadership. It needs those rare left brain/ right brain hybrids who see the big picture as well as the parts. Those with enough humanity to intuitively understand human nature. Those with the analytical skills to deconstruct and reconstruct the world to make it, in a big or small way, a better place. Those with the ability to win support. Not because they present a watered-down middle-of-the-road point of view that can’t be rejected but can be ignored. But because they present a point of view that can’t be ignored. Apple after Steve Jobs. Who will be the new dictator?

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

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

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CHRISTOS THE FIRST NAME IN ethi c s

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With global know-how, it’s easier to cut through. When you have access to global expertise, navigating complexity becomes much simpler. At Barclays, the focal point is your dedicated Relationship Manager, who will channel the knowledge and skills of the entire Barclays Group on your behalf. They will diagnose needs and identify relevant solutions for your business. To find out more about how Barclays can help, go to barclays.com/wealth or call us on +357 22 654477* for our Nicosia office or +357 25 208000* for our Limassol office.

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*Available between the hours of 0830 and 1700 Monday to Friday. Calls may be recorded for security reasons and so that we may monitor the quality of our service. Call costs may vary. Please check with your telecoms provider. Barclays offers banking, wealth and investment management products and services to its clients through Barclays Bank PLC and its subsidiaries. Barclays Bank PLC is registered in England and authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered No. 1026167. Registered Office: 1 Churchill Place, London E14 5HP. Barclays Bank PLC is regulated by the Central Bank of Cyprus in the conduct of its banking and investment business in Cyprus.


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