CYPRUS: SHIPPING INDUSTRY CALM AMID GLOBAL TURMOIL

UNCLAS NICOSIA 000749 SENSITIVE SIPDIS DEPT FOR EUR/SE E.O. 12958: N/A TAGS: EWWT CY SUBJECT: CYPRUS: SHIPPING INDUSTRY CALM AMID GLOBAL TURMOIL (U) This cable is sensitive but unclassified. Please protect accordingly. ¶1. (SBU) Summary. Shipping executives in Cyprus tell us that their industry continues to flourish despite the global economic turmoil and volatility in energy prices. Their biggest problems are the Turkish embargo on Cypriot-flagged ships, the dispute with EU authorities over Cyprus' tonnage tax, and a lack of personnel to man the ships. End Summary. ¶2. (SBU) Cyprus may be a small island country but it occupies an important position in international maritime affairs. At the end of 2007, according to Lloyd's List, the Cyprus Registry ranked as the 10th largest merchant fleet worldwide and 3rd largest in the EU (after Greece and Malta) with a total of 985 ocean-going vessels (over 100 Gross Tons or GTs),totaling 18.9 million GTs. Cyprus-flagged vessels make up around two percent of the world's ocean-going merchant fleet. Smooth Sailing -------------- ¶3. (SBU) We spoke with executives of the Cyprus Shipping Chamber (CSC),the highly influential industry association for Cyprus, regarding the effects of the current global financial upheaval on international shipping. They said business continues to be excellent, with their biggest immediate problem the lack of seamen available to man the fleet. High fuel costs have been passed on to customers without any negative effect on customer demand, maintaining the historically high margins shipowners are enjoying. Ships continue to operate at full capacity with developing countries, especially China and India, taking up whatever slack is created by reduced imports into the US and Europe. (Comment: This may be in part due to the relatively high percentage that dry bulk carriers comprise of the Cypriot fleet vice container ships. End Comment.) ¶4. (SBU) The CSC officials could not say whether access to credit has been affected by recent turmoil. They noted that shipowners typically have long-established relationships with their bankers and over the past decade especially, the shipping business has been good for both. They anticipate no decline in the asset value of their ships given the limited capacity in shipyards and apparent continuing strong demand for cargo space. Shipping and Cyprus -------------- ¶5. (SBU) In addition to ship-owning, Cyprus, and more specifically, Limassol, has become the largest third-party ship management center in the EU and third largest globally. The membership of the CSC collectively own, control or manage a fleet of 2,170 ocean-going vessels, totaling 43 million GTs, making it one of the largest shipping organizations globally. ¶6. (SBU) Shipping generates around four percent of Cyprus' GDP, or about USD 842 million in 2007 prices. The bulk of this revenue (around 96 percent) comes from Cyprus-based ship management and ship owning companies. Direct revenue from the Cyprus Registry generates only around USD 7 million. Local attorneys and accountants earn another USD 27 million. ¶7. (SBU) Not included in the above amount is revenue generated from Cypriot ports, which was estimated at USD 89 million in 2007. Additionally, the shipping sector employs around 4,000 people locally in Cyprus, while another 40,000 people from different nationalities are employed on vessels owned or managed from Cyprus. Quality Up, Quantity Down -------------- ¶8. (SBU) Over the last decade or so, the Cyprus Registry has been shrinking in size. The Registry reached its peak, in terms of size, in 1995, when, according to Lloyd's List, it had 1,674 ocean-going vessels and was 4th largest internationally. Since then, the size of the register has decreased considerably but with a concomitant improvement in the age and quality of Cyprus-flagged vessels. Characteristically, the average age of ships on the Cyprus Registry has dropped from 16 years in 1995 to 14 years in 2007. As a result of this improvement, in 2006 Cyprus was removed from the Paris Memorandum of Understanding (MOU) "grey list," which includes registries with a low safety track record. Despite the improvement in its safety track records, the Cyprus Registry has not yet managed to get off the U.S. Coast Guard's list of vessels targeted for increased port state controls, which is based on a three-year rolling average of detentions. However, given current trends, Cyprus is likely to come off the U.S. Coast Guard's list as well in the near future. Turkish Embargo: a Major Problem -------------- ¶9. (SBU) In 1987, Turkey imposed an embargo on Cyprus shipping, which was expanded in 1997 to include all ships under a foreign flag sailing to Turkey directly from any port in the government-controlled area of Cyprus or ships of any nationality related to Cyprus in terms of ownership or, sometimes, even ship management. A recent study conducted by the Ministry of Communications and Works has tried to put a dollar value to the impact on the Cypriot economy of the Turkish embargo. Following are highlights of the study. -- The actual direct annual costs for the economy of the Republic of Cyprus were estimated at USD 175 million in 2007. -- The biggest casualty of the embargo has been the crippling of Cyprus' once thriving transshipment business through its ports. This trade has recorded a dramatic decrease of more than 75 percent since the embargo took effect in 1997, leading to an estimated loss of earnings of USD 121 million. Cyprus still hopes to become a trans-shipment hub and there is talk of a major container company (SeaLand) developing Limassol as a regional transshipment hub. -- The Cyprus ship management sector suffered as well from the implementation of the Turkish ban. Ships managed by a ship management company located in Cyprus can be detained or delayed when calling in Turkish ports, resulting in financial losses for the ship managers and/or ship owners, which are estimated between USD 58,000-94,000 per vessel per call. The overall loss for the ship management sector is difficult to estimate but one source puts it at USD 47 million. Tonnage Tax Controversy -------------- ¶10. (SBU) Shipping companies in Cyprus pay an annual tax based on the gross tonnage of each ship, as opposed to the corporate tax that they pay in other countries. This difference has been the source of conflict between the GOC and the European Commission because the Commission considers this practice an indirect state grant (since ship income is not taxed). Upon EU accession in May 2004, Cyprus obtained a derogation for three years. This derogation expired on May 1, 2008. The GOC and the local shipping industry are involved in intensive mediation efforts with the Commission to sort out a compromise short of treating ship income as taxable corporate income. ¶11. (SBU) Comment. Shipping remains an important sector in Cyprus. The Turkish embargo against Cypriot shipping has been a major drag on the rate of growth of the registry in Cyprus, but ship management companies continue to choose to locate here due to the low corporate income tax rate (10 percent) and excellent financial services and communications available. Turkey's non-recognition of the Government of Cyprus, which lies at the root of the embargo, remains more as a stumbling block in Turkey's road towards EU accession than as a real drag on the Cypriot economy, the shipping industry notwithstanding. We do not foresee a lifting of that embargo before a resolution of the Cyprus problem. End Comment. URBANCIC