CYPRUS' ECONOMY STILL STRONG, THANKS TO RUSSIA

UNCLAS NICOSIA 000759 SENSITIVE SIPDIS TREASURY FOR OFFICE OF EASTERN EUROPE E.O. 12958: N/A TAGS: ECON PREL PGOV EFIN CY SUBJECT: CYPRUS' ECONOMY STILL STRONG, THANKS TO RUSSIA ¶1. (SBU) Finance Minister Charilaos Stavrakis said Cyprus continues to enjoy solid economic growth and a positive economic outlook, but that "it can't go on forever." During Ambassador Urbancic's September 22 introductory call, the Minister noted that Cyprus has "almost zero" exposure to the problematic debt instruments plaguing other economies, and was benefiting economically from continued strong financial flows from Russia, "whether it is due to our tax treaty, religious and cultural ties or low tax rates ." Regarding the financial sector difficulties currently being experienced in Russia, "our most important financial partner," the Minister said it was unclear whether it would drive more Russian money to Cyprus as a safe haven, or the reduction in cash flow for Russian business would mean less money coming here. Next week, Stavrakis will be traveling to meet his Russian counterpart in preparation for a "high level" meeting later this year between President Christofias and unnamed Russian officials. ¶2. (SBU) Stavrakis maintains a cautious economic outlook, although he expects Cyprus to achieve a 3.5 percent growth rate for this year and a small budget surplus. Given the small size and openness of the economy, he expects the main economic drivers (tourism, foreign investment, and selling financial services to international firms) to eventually be impacted by the current global financial turmoil. Inflation should moderate from the current 5.1 percent rate to 2.5 - 3 percent next year, depending on global commodity price changes. Stavrakis noted that last year's strong growth, capital inflows, and continued full employment make inflation his biggest problem. ¶3. (SBU) Stavrakis explained that Christofias does not want his ministers involved in the reunification talks, but stated that as an ecomic expert, he believes that a solution would result in an economic boom. Also, Turkey would become an important trading partner for the island. He tempered this enthusiasm, however, by noting that the cost of rebuilding Famagusta and infrastructure in the north would be enormous, and he did not know where this money would be found. No meeting with a Cypriot Minister is complete without a recitation of how committed President Christofias is to a "fair solution" to the "Cyprus Problem." Stavrakis said that the USG has the "unique opportunity to exert its influence on the Turks to help the situation by their giving concessions." The Ambassador noted that we are urging all sides to make decisions so that a solution can be achieved. Urbancic