TURKISH CYPRIOT BUSINESS; ISOLATION OR

UNCLAS SECTION 01 OF 04 NICOSIA 000146

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON PGOV PREL CY
SUBJECT: TURKISH CYPRIOT BUSINESS; ISOLATION OR
SELF-ISOLATION?

REF: NICOSIA 980


1. (SBU) For decades, maintaining the global (except for
Turkey) non-recognition of the "TRNC" has been among the
ROC's top foreign policy goals. This, of course, is the
inverse of a key objective of the "TRNC;" to achieve even
incremental international recognition for its "institutions."
There is no doubt that the GOC has largely succeeded in
preventing foreign recognition of the "TRNC," with the
result, Turkish Cypriot (T/C) businessmen claim, of
significantly higher costs of doing business and loss of
trade and investment opportunities for their companies. The
GOC counters that any obstacles are the result of T/C
"self-isolation"- since GOC policy allows any T/C full access
to ROC facilities and institutions. This cable examines the
degree to which T/C business operations are hampered due to
the recognition-related policies of both the GOC and the
"TRNC." We conclude that, while T/C businesses could, in some
circumstances, expand if it took full advantage of its status
as ROC citizens, the practical and political difficulties of
doing so would not be worth the marginal increase in business
income. End Summary and Introduction.

What Creates "Isolation?"
--------------


2. (U) T/C businesses argue that due to the ROC-inspired
"embargoes," they are unable to utilize "TRNC" ports for
trade or travel with nations other than Turkey, unable to
negotiate bilateral trade agreements, and cannot participate
in state-level international conferences or conventions.
These conditions cause tariffs and transport fees to be
higher than in competing economies and make it difficult to
form international business linkages. Further, the lack of
access to international financial institutions and programs
reduces T/C competitiveness.


3. (U) The ROC officially views T/Cs as full citizens of the
Republic (leaving aside the varying definitions of who is or
is not a Turkish Cypriot.) While T/C voting rights are
suspended unless they live in the south, these "citizens"
have the right to passports, government health and pension
programs, and access to GOC institutions and facilities.
Therefore, when the subject of "isolation" of the "TRNC" is
raised, GOC officials respond that T/Cs are not isolated;
rather,the institutions of the "illegal" state are prevented
from behaving as if they represent any part of Cyprus. If T/C
businessmen do not wish to utilize GOC institutions, this is
their own, "self-isolating" choice.

Ports: Theory and Practice
--------------


4. (SBU) For example, T/Cs are permitted to import/export
through GOC ports. They can even register their companies in
the south and these legal entities can trade through GOC
facilities on the same terms as G/Cs and G/C-owned companies.
This means zero duties on goods imported from the EU and with
tariff rates at the GOC rate on imports from third countries.
No VAT on imports is payable except at point-of-sale (and
therefore, for T/Cs operating in the north, no VAT payable to
the GOC.) Exports are treated as GOC-origin goods so long as
they are produced or substantially-transformed on-island.


5. (SBU) A shipping container shipped through Limassol costs
at least US$350 (and as much as $1500) less than shipping to
Famagusta (the main T/C cargo port) via Mersin, Turkey.
Observers report that the port of Famagusta "is of early
1960s design whilst equipment is from the early 1970s" and
"it cannot be economically expanded." Nevertheless, almost no
T/C trade is conducted through GOC ports. This is due
primarily to northern trade union and "government" polices
that strongly discourage such activity in the belief that it
would abet a slow economic absorption of the north's economy
into the ROC. T/C "officials" and business also express
concern that GOC policies and practices could change at a
moment's notice with potential big losses for companies that
had become dependent on working through the ROC. As one T/C
businessman told us, "how could I ever allow my business to
be liable to blackmail from a government that owes me no
allegiance and which is actively seeking the destruction of
my country?" Another T/C businessman told us that utilizing
GOC ports would be "unethical," even though his expenses are
such that he must charge his customers 25 percent more for
goods he imports than is charged for the same products in the
southern part of the island.

Tourism

NICOSIA 00000146 002 OF 004


--------------


6. (SBU) Similarly, T/C hoteliers and others involved in the
tourism sector complain that the lack of direct flights into
north Cyprus' Ercan airport is a significant barrier to
increased tourism due to the higher cost of flights to the
north compared to flights to the south (although the price
difference is typically not more than US$50 for a flight from
London,) and the fact that all flights must stop in Turkey
before arriving at Ercan airport (adding 2-3 hours to total
travel time.) When asked why the T/C tourism industry doesn't
promote travel to Larnaca airport (not more than a one-two
hour drive from north Cyprus' major tourist destinations,)
T/C businessmen said it was out of concern that the ROC might
eventually close the crossing points, that tourists don't
want to deal with crossing points when they go on holiday,
and that the "TRNC authorities" would not allow advertising
travel via the ROC.

Access to Credit, But at a Price
--------------


7. (SBU) T/C businessmen have difficulty finding access to
credit at globally competitive rates. Also, some modern
financial services are not offered by local banks. While it
is theoretically possible for T/Cs to use banks in the ROC,
in practice these banks will not finance transactions for
companies in the north. This is (officially) because they
cannot assure their collateral on any property in the north
and because they do not trust "courts" in the north to be
objective if a disagreement arose with borrowers (and the GOC
does not recognize the authority of T/C courts in any case.)
Of course, the GOC would strongly object to any loans made
that somehow utilized "G/C owned" land in the north (75 - 85
percent of total land there) and the the Central Bank would
most likely apply a very high risk-rating to all loans G/C
banks made in the north given these factors. As a practical
matter, no G/C bank would even consider making loans to
businesses located in the north due to the political cost of
such action.


8. (SBU) The 18 local and six foreign (Turkish) banks
operating in the "TRNC" are hamstrung by the same uncertain
status of G/C-owned land in the north and, therefore, either
refuse to accept such land as collateral entirely (in the
case of Turkish bank branches,) require additional
collateral, or apply a steep discount to the collateral value
(in the case of T/C-owned banks.) The small size of T/C banks
and questionable legal status of the "TRNC" has resulted in
T/C bank's access to capital being restricted to sources in
the north. This also is manifested in their limited
correspondent banking relationships which typically do not
include any credit facilities. Cost of communication between
banks is also higher than typical for most banks because the
international inter-bank communication system, SWIFT, denies
northern Cyprus its own country code, something granted
almost exclusively to "states." This all raises the cost of
funds and operating expenses for T/C banks which they,
accordingly, pass on to their customers through high lending
rates. Thus, while T/C businesses can theoretically borrow in
the south, as a practical matter no G/C bank will lend to
them based on assets or business located in the north. Banks
in the north have restrained lending capacity, further
restricted by lack of acceptable collateral and high
expenses; all resulting in high fees and poor credit access
for the T/C borrower.

Green Line Trade Limited
--------------


9. (SBU) Total bilateral trade across the Green Line reached
about US$7 million in 2007. The number of transactions per
month is typically about two dozen undertaken by about 15
companies with volumes highly volatile and dependent upon
what crops are being harvested and the world price for these
commodities. The majority of the transactions are for
building materials, fruit and vegetables, and irrigation
fittings. Trade is significantly hampered by:

-The reluctance of retail stores on either side to offer
products that are clearly produced by the other community due
to concern about political blowback. There has been some
limited success selling "no-name" bulk goods including soap
and toilet paper. Further reducing T/C ability to export to
the south is T/C reluctance to apply EU standards to their
manufacturing, labeling and packaging. As one foreign
consultant told us, "it's taken a long time to convice the
T/Cs that standards are not a G/C plot."

NICOSIA 00000146 003 OF 004



-Concern that becoming dependent on supplies from the other
side would present unacceptable supply disruption risk. A G/C
cheese manufacturer cannot source raw milk in the south
sufficient to meet demand for his product. When asked why he
doesn't buy milk from T/C dairies (assuming T/C compliance
with EU dairy standards),he said that he would not take the
risk of a) one side or the other changing the rules so that
the milk couldn't cross, b) lack of confidence that the T/Cs
could trace the source of any problems in case of
contamination and, c) concern that his competitors or some
future G/C government would label him a "traitor" for buying
milk from animals which "grew fat on occupied G/C land."

-The business risk that any transaction could be stopped for
political reasons. For example, transactions for the sale of
T/C-grown citrus and potatoes have at times been stopped by
the "TRNC government" because they were concerned that the
goods would be exported by the G/C buyers out of Limassol and
sold as "Cypriot" agricultural products. The fact that an
orange is highly fungible was less important to the T/C
"officials" than the perceived risk that such a transaction
might be used by the G/Cs to "prove" that the "TRNC" is not
economically isolated.

-G/C travel agents refuse to book hotels in the north
although there clearly would be added revenue for them for
tourists wishing to visit crusader castles or casinos
unavailable in the south. It is not illegal for them to make
such bookings so long as the hotel is not on "G/C-owned" land.

-Although the Cypriot Chamber of Commerce and Industry has
offered to help T/C truck drivers to obtain ROC commercial
driver's licenses allowing them to do business on both sides
of the line, the T/C drivers have refused, following the
"TRNC government" line that their "TRNC" commercial licenses
meet EU requirements and therefore should be sufficient. The
GOC does accept the regular drivers licenses issued by the
"TRNC."

Limited Foreign Investment
--------------


10. (SBU) Because of the question of working with an
unrecognized state and the issues related to land ownership,
very little foreign direct investment finds its way north of
the Green Line. The exception, other than Turkey, comes from
a few Israeli real estate developers and individual British
citizens buying property because of the relatively low
prices. Lack of international finance, strong vested
intersts, and the small market size further limit the
attractiveness of "north Cyprus" to foreign investors. Even
franchises typically refuse to grant franchise/distribution
agreements directly to T/Cs due to these concerns and
potential disruption to their operations in the south,
working instead through their Turkish franchise holders who
may then sub-franchise north Cyprus to a T/C. By not having
direct links with franchises and brand owners, T/C businesses
are effectively kept out of the global supply chain and lack
effective communication with many global markets. There have
been no instances in which G/Cs and T/Cs cooperate on a
franchise or distributorship covering the entire island
although this should be possible in theory.


11. (SBU) Comment: If T/C businesses chose to try and operate
purely on the basis of reducing costs or increasing exports,
they would be able to somewhat increase their sales and
margins assuming no change in relevant GOC policies. However,
"officials" in the north have no incentive to diminish their
own authority and so can be expected to continue to put
roadblocks in the way of transactions that are designed to
bypass "TRNC" institutions. Furthermore, we believe, the
Turkish authorities would strongly object to activity seen as
strengthening GOC control over northern Cyprus' trade. This
all reflects one of the most striking aspects of the problems
in Cyprus: politics completely trumps business interests
here, even when both sides could come out ahead financially.


12. (SBU) Comment continued: The result is an economy in the
north that has high costs, low productivity, and is poorly
integrated into the global trading and financial regime. T/C
businesses have come to depend on subsidies for many
operations, damaging competitiveness and transparency. They
often use "isolation" as an excuse for not dealing with
business problems, including facing the impracticality of
operating a modern, competitive and self-sustaining economic
infrastructure for a "TRNC" population of about 200,000 with
a 2007 "GDP" (PPP basis) of about US$4.5 billion - about the

NICOSIA 00000146 004 OF 004


same as the US GDP contribution of Albany, Georgia. The
dependence on Turkish financial aid (and concomitant Turkish
influence and increasing domination of the business sector)
is only enhanced by current GOC policies that in practice, if
not entirely in theory, isolate the T/C business community.
As we are constantly told by members of the T/C business
community, "we just want to do business the way everyone else
does." But it has been a long time since they have done
"normal" business.

SCHLICHER