NEW GOC MEASURES FOR TURKISH CYPRIOTS: LESS THAN

C O N F I D E N T I A L NICOSIA 000510

SIPDIS

SIPDIS

E.O. 12958: DECL: 08/13/2017
TAGS: ECON PGOV PREL ETRD EUN CY
SUBJECT: NEW GOC MEASURES FOR TURKISH CYPRIOTS: LESS THAN
MEETS THE EYE

REF: 06 NICOSIA 977

Classified By: CDA JANE B. ZIMMERMAN, REASONS 1.4 B AND D.


1. (C) Summary and comment: The GoC recently announced new
measures ostensibly designed to promote economic development
in the Turkish Cypriot community. These include 30 million
Euro in grants from 2007 to 2010 to joint ventures with at
least 30 percent Turkish Cypriot participation (although the
entire amount of the grant would have to be spent in the
government-controlled area in the south) and two million Euro
in annual grants for bicommunal events organized by NGOs.
Turkish Cypriots have universally dismissed the measures --
which will not come into effect until the fall -- as
meaningless propaganda. Any Turkish Cypriot who participates
in the program is at risk of being branded a traitor.
Turkish Cypriots have also (correctly in our opinion)
ascribed the motives behind the measures as based on the
GoC's desire to do everything possible to prevent passage of
an EU "direct trade" regulation. It would be wrong to expect
too much out of the measures, especially given the
requirement to use joint venture funding only in the south,
official Turkish Cypriot opposition, lack of prior
consultation with Turkish Cypriots, and the red tape and
other restrictions that are likely to accompany any grant.
After all, the GoC has spent much of the last three years
trying to control and/or undermine bicommunal contacts.
Nevertheless, the measures have some potential symbolic value
as a signal of GoC support for bicommunal activities and
intra-island trade. End summary and comment.


2. (SBU) On May 21, Finance Minister Sarris and Director of
the Presidential Diplomatic Service Tzionis formally
announced new measures, previewed to the diplomatic community
April 2, to support private bicommunal cooperation.
Specifically, Sarris and Tzionis announced plans to establish
funds to support bicommunal joint ventures, especially those
involved in trade across the green line, and bicommunal
collaboration by NGOs.


3. (SBU) Presidential Administration staffer Menelaous
Menelaou and Cyprus Chamber of Commerce and Industry
President Manthos Mavrommatis later separately clarified the
following:

-- The Council of Ministers had already approved the joint
venture fund and would approve the bicommunal NGO fund soon.

-- Because the joint venture fund involved state aid to
businesses, the GoC had submitted the outlines of the program
to the European Commission for its approval -- a process
which would take from 2 to 6 months. Thus the earliest this
program could start was September. An October or November
start, however, was more likely. The Cypriot Legal Service
was still looking into whether the NGO fund would also need
Commission approval.

-- The GoC plans to make 30 million Euro available in grants
over four years to joint ventures with at least 30 percent
Turkish Cypriot capital, with 500,000 Euro being the maximum
available to any one joint venture. Due to EU rules, the GoC
cannot treat Greek Cypriot companies any differently from
companies established elsewhere in the EU. Thus, the GoC
cannot restrict the program to only Turkish Cypriot-Greek
Cypriot joint ventures. Thus, any joint ventures involving
EU and Turkish Cypriot companies/investors could apply,
providing that at least 30 percent of the joint venture
capital is Turkish Cypriot and at least 30 percent of the
capital is from an EU company.

-- The entire amount of the grant to a joint venture must be
spent in the government-controlled area of Cyprus. The
grants are considered state aid and thus must meet EU state
aid regulations. EU state aid rules require that the money
be spent in specially designated areas. For Cyprus this is
most of the government-controlled area minus the cities of
Limassol, Larnaca, and Paphos and parts of Nicosia. Since
the acquis is suspended in the north, no part of the Turkish
Cypriot community is designated as eligible for state aid.
Menelaous argued that this restriction was not as bad as it
sounds. Because money is fungible, the grants can free up
some of the joint ventures, own funds for projects in the
Turkish Cypriot community. It also enabled the GoC not to
have to place any restrictions on a joint ventures, use of
property in the north; since the GoC funds cannot be used in

the north, the GoC is protected from accusation that its
money is being used to finance development on properties
owned by Greek Cypriots displaced in 1974.

-- Members of the joint venture would not have to be
registered in the Republic of Cyprus, but could be registered
in any EU member state. Similarly Turkish Cypriot companies
entering into a joint venture could be registered elsewhere
in Europe or could even qualify by demonstrating that they
were members in good standing of the Turkish Cypriot Chamber
of Commerce or Turkish Cypriot Chamber of Industry.

-- The Ministry of Finance is heading an interagency
commission that will develop the details of the program,
eligibility requirements, and criteria for awarding grants.
A committee headed by the Finance Ministry PermSec with
representatives from the Ministries of Agriculture and
Commerce will decide which joint ventures receive the grants.
A bicommunal board will be set up to advise the selection
committee. If no Turkish Cypriots agree to serve on the
advisory board, their places will be filled with Greek
Cypriots.

-- The GoC will put two million Euro a year toward grants to
NGOs organizing bicommunal projects or events. The program
will be loosely modeled after the U.S. Embassy's bicommunal
programs. (Note: While Menelaou told us the program would be
administered by the Interior Ministry, a Planning Bureau
staffer told us his office would oversee the program, which
would be administered by a private contractor.) The GoC is
currently consulting the European Commission to determine
whether these grants could also be seen as state aid and thus
whether formal Commission approval is needed. In any case,
it will be several months before this program will begin.

Turkish Cypriot Reaction Universally Negative
--------------

4. (SBU) Reaction from the Turkish Cypriot community to
the measures has been universally negative. Turkish Cypriot
Presidential Spokesman Hasan Ercakica told the press that the
GoC's failure to consult with the Turkish Cypriots on these
measures undermined the spirit of the July 8 agreement, and
that the GoC's unilateral measures were "destroying the
negotiation process." Ercakica characterized the initiative
as akin to "a political attack." The President of the
Turkish Cypriot Chamber of Commerce dismissed the measures as
an attempt by the GoC to assert its sovereignty over the
Turkish Cypriot community.


5. (C) Turkish Cypriots were unanimous in ascribing the GoC's
motive behind the measures as its desire to prevent EU member
state approval of the European Commission-proposed "direct
trade" regulation, which the GoC adamantly opposes. The fact
that the measures were initially previewed to the diplomatic
community and were formally announced by the GoC one day
before an important EU meeting where the "direct trade"
regulation was to be discussed, supports this thesis. GoC
officials regularly argue that the new measures, like the
EU's Green Line regulation, bring the two communities
together, while the "direct trade" regulation would reinforce
segregation and drive the two communities further apart. By
giving Turkish Cypriot products shipped through Turkish
Cypriot ports (and not just those products shipped through
the south) preferential treatment, the GoC believes the EU
would be undermining GoC policy by legitimizing the "illegal"
Turkish Cypriot ports, lowering Turkish Cypriot dependence on
the south, and reducing the Turkish Cypriots' motivation for
a settlement. In a recent poll, 75.8 percent of Greek
Cypriots reported that they believed that Turkish Cypriot
economic development made reunification less likely.
According to GoC dogma, the EU "direct trade" regulation is
not needed as all the benefits it would provide the Turkish
Cypriots are available now through the use of Greek Cypriot
ports; it is the Turkish Cypriots, fault that they are not
taking full advantage of the Green Line measure as the GoC is
trying to find ways to make it work.


6. (C) Turkish Cypriots also appear unanimous in their
belief, based on prior experience, that the GoC is likely to
place so many restrictions on Turkish Cypriot participants of
the grant schemes to make the program unworkable in practice.
A European Commission official working on the EU aid program
in the north told us that a GoC official had told her that
Turkish Cypriot NGOs which had their headquarters on Greek
Cypriot land would not be allowed to use any of the GoC's

funds under the NGO support program. If true, this would
mean only around five Turkish Cypriot NGOs would be eligible
for any aid. While Menelaou insists that the NGO program
will not include any restrictions on property, Turkish
Cypriots remain skeptical.

Other GoC Measures Not Going Forward
--------------

7. (C) On April 2, MFA Cyprus Problem Director Ambassador
Erato Marcoullis had previewed these programs to the
diplomatic community. Ambassador Marcoullis also raised two
other programs for the Turkish Cypriots: creation of a
Turkish Cypriot-run area of Larnaca port and a GoC-run
distribution company for Turkish Cypriot goods. The Larnaca
port idea is not new and has been raised several times. It
would involve part of the Larnaca port being manned
exclusively by Turkish Cypriots and reserved for Turkish
Cypriot goods. The program is not as good as it first
sounds. The volume of Larnaca port is quite small and it
currently does not handle any container traffic. While it
might be significantly cheaper for Turkish Cypriots to ship
some bulk products such as potatoes or scrap iron through
Larnaca (at least at certain times of the year) rather than
Turkish Cypriot ports, shipping through Limassol port would
still be significantly less expensive for most products.
Those Turkish Cypriots willing to risk the anger of their
authorities by openly shipping through the south will, for
financial reasons, want to use Limassol rather than Larnaca.
The potato deal that was blocked by the Turkish Cypriot
authorities (ref a) was to go through Limassol. The one
official shipment of Turkish Cypriot goods that has gone
through the south (a shipment of Turkish Delight) went
through Limassol as do most goods exported from Cyprus.


8. (C) By proposing to hire Turkish Cypriot staff at the
Larnaca port, the GoC was, at least officially, trying to
find a way to reduce the Turkish Cypriot fear that the GoC
bureaucracy would find ways to introduce impediments to the
export of Turkish Cypriot goods. While the proposal, if
instituted in Limassol rather than Larnaca, might help
address this fear, it will not completely eliminate it, as
the Turkish Cypriot goods would still need to pass through
the Greek Cypriot police and Customs, both at the Green Line
checkpoint and at the port entrance. The Green Line
regulation also prohibits a significant part of current
Turkish Cypriot exports (such as dairy products) from
crossing over to the south. In any case, Presidential
Administration staffer Menelaou admitted to us that the GoC
has stopped working on this proposal due to lack of Turkish
Cypriot interest. The GoC Port Authority staff in Larnaca
laughed when we asked about the proposal and did not appear
to believe it was a serious offer or that it would ever be
implemented.


9. (C) The original official idea behind establishing a
GoC-run distribution company for Turkish Cypriot goods is to
overcome the psychological barrier that still prevents most
Greek Cypriots from being seen buying or selling Turkish
Cypriot goods. Almost all Greek Cypriot stores refuse to
carry goods recognizable as Turkish Cypriot out of fear of
being branded traitors and boycotted by their customers,
suppliers, and employees. Those Turkish Cypriot goods that
have crossed the Green Line tend to be goods that are not
required to be labeled as Turkish Cypriot, such as
agricultural products. Hotels will also buy Turkish Cypriot
toilet paper and tissues that they place in their rooms, and
construction companies will buy Turkish Cypriot material that
they place in their buildings and homes -- but only because
the final consumer has no idea that the products he or she is
using come from the north. If the GoC is the middleman,
however, Greek Cypriots and Greek Cypriot companies buying or
selling Turkish Cypriot products would be protected from
public opprobrium. Menelaou told us, however, that the GoC
had decided not to create a GoC-run distribution company for
Turkish Cypriot goods because it decided acting as a private
trader was not an appropriate government role. This did not
preclude, however, a private bicommunal joint venture from
receiving GoC funds to establish such a company.


10. (SBU) Also in May, the European Commission finally
approved a new regulation that will expand the scope of the
Green Line regulation by allowing fish and honey to cross the
Green Line. Before this trade can begin, EU experts must
come and conduct several tests and all fishing boats must be
registered and inspected. Thus the earliest trade in these

products can begin is this fall. Three restrictions on fish,
however, will significantly limit the impact of this new
regulation. Only caught fish will be permitted to cross the
Green Line (fish from fish farms is still prohibited),fish
can be sold only to shops or restaurants (not to
wholesalers),and the fish must be fresh (processed or frozen
fish is also prohibited.) While it appears it was the
European Commission that imposed these restrictions rather
than the GoC, this has reinforced the Turkish Cypriot
stereotype that the GoC is busy working behind the scenes to
quietly sabotage any measures designed to support the Turkish
Cypriot community.

Comment
--------------

11. (C) While the GoC programs may not be ideal, there are
ways the Turkish Cypriots could try to use them to their
advantage. Establishment of a warehouse in the south or a
GoC-funded distribution center for Turkish Cypriot goods are
two examples. The joint venture measure could even help
break down Greek Cypriot reluctance to be seen buying Turkish
Cypriot goods; Greek Cypriots buying Turkish Cypriot goods
will have some degree of political protection if they are
buying those goods from a company financed by the GoC. In
theory at least, the Turkish Cypriots would not even have to
have Greek Cypriot participation but could establish a joint
venture with any EU firm. Nevertheless, Turkish Cypriot
practice is to insist on everything or nothing and not to
accept small piecemeal progress. This, coupled with growing
Turkish Cypriot frustration, lack of trust, and a desire to
do everything in their power to prevent Papadopoulos's
reelection, suggests that the Turkish Cypriots will do little
to take advantage of the GoC's latest offer, flawed as it is.
For the GoC this may be the best outcome. It will be able
to take credit for efforts to improve Green Line trade
without having to take any action (or have its goodwill
tested),and can further paint the Turkish Cypriot community
as the intransigent party.
ZIMMERMAN