Saturday, 17 February 2018

Velvet divorce: the high road to Hell for all Cypriots

Guest post by Fiona Mullen, Director of Sapienta Economics

Developments in the past few months, and especially in the past few days, make it tempting to think that there is no way Greek Cypriots and Turkish Cypriots can ever live together in peace and security, that the only way to end the decades-old Cyprus problem, and for Greek Cypriots to exploit the gas, is to go for a velvet divorce.
You will not hear this from any Greek Cypriot politician of course. But you have heard hints from the Archbishop, plus suggestions elsewhere that it is being considered. I certainly hear it in private from my (non-peacenik) Greek Cypriot friends. “We can never trust Turkey, so let them give us Varosha and Morphou, we keep the gas, and the Turkish Cypriots can get their state”, is the general refrain. Partition has of course been a policy of right-wing Turkish Cypriot politicians for decades.
One cannot deny that there has been a total breakdown of trust. Greek Cypriots are convinced that Turkey was fully to blame for the collapse of the talks in Crans Montana. Turkish Cypriots and Turkey are convinced that the Greek Cypriots are fully to blame. There is no appetite for wondering if the truth might be somewhere in the middle.
The Turkish naval blockade of ENI’s attempt to drill for gas offshore in Block 3, and statements by various actors that have accompanied it, have only strengthened the voices of partition.

How would a velvet divorce play out?
Before everyone jumps in and decides that partition is the only solution, it is worth walking through how a velvet divorce could play out for both communities on the island.
The full argument is laid out below but it can be summarised as follows. The direction of politics in Central Europe means it is a high-risk strategy to assume the Turkish Cypriots will have any kind of formal relationship with the EU, even in a velvet divorce scenario. To get any trade with the EU at all, annexation by Turkey will start to look like the answer.
Greek Cypriots will have lost their physical and political buffer with Turkey, and the rump Republic of Cyprus will struggle to market itself as an EU country when it has a spoilt sea and a land border with a likely unstable Turkey.
For a fuller outline of the scenario, let us start with what it might mean for Turkish Cypriots, who are the community most at risk of extinction.

Velvet divorce scenario for Turkish Cypriots
Phase 1. Greek and Turkish Cypriots sign a “land-for-gas” velvet divorce deal. Since this is jointly agreed, the currently unrecognised Turkish Republic if Northern Cyprus (TRNC), or whatever name the Greek Cypriots insist on to sign the deal, is quickly recognised by all EU member states, the five permanent members of the UN Security Council, and all the members of the Organisation of Islamic Cooperation.
Phase 2. Newly recognised TRNC applies to the EU for candidate country status. This needs unanimity in the EU27 and ratification by more than 50 state and regional parliaments. The media in three or four Central European states start a campaign that they do not want “Christian” EU to be “infiltrated” by a “Muslim” country. Borrowing from the Brexit playbook, they claim that 80 million Turks will be able to move immediately to Budapest. Since the UK is no longer around to twist arms, this group of countries vetoes the application. The new TRNC is recognised as a member state of the UN but will not be able to join the EU.
Phase 3. New TRNC tries another tack, applying for EFTA/EEA membership, an Association Agreement, a customs union or similar. Again I am fairly sure (but am prepared to be corrected) that these agreements all need the unanimity of the EU27 plus other EEA or EFTA members. After the previous media campaign, even this kind of arrangement is too much for the Central European states, so again they block it.
Phase 4. So the new TRNC has opened its ports and airports to international traffic. However, since it is outside the customs union and the EU/EEA/EFTA, it can only trade with the EU on the basis of the same, highly restrictive rules that apply to the Green Line regulation.
Phase 5. With no EU agreements to attract investors or raise standards, the only money that continues to flow in is from Turkey. There is no incentive to ensure that public procurement contracts are granted on the basis of a level playing field. (All the great plans for reform of the four-party coalition established in 2018 had long ago failed, owing to infighting over the Cyprus problem as well as vested interests.) Only companies with the best resources to bribe are handed big contracts. Any environmental standards that exist are not respected.  
Phase 6. Within three years the Pentadaktylos mountain shrinks as it is quarried for big casinos. Poison flows into the soil and sea as big contractors pay no attention to environmental risks. Trafficking in women and drugs soars. Under pressure from other countries concerned about security, the Greek Cypriots start heavy-duty security checks on the Ledra Street border.
Phase 7. Within five years there are no Turkish Cypriot businesses or banks left. Turkish Cypriots who have demonstrated in the streets are pushed out of public-sector jobs—the only area where they still dominated. Those who still have a valid Republic of Cyprus passport (under the terms of the velvet divorce, they are not renewed once they expire) leave for other EU countries. Some of them move to the south.
Phase 8. With few Turkish Cypriots left in the country and after a very well funded media campaign promoting the benefits of being part of Turkey’s EU customs union, the remaining residents of northern Cyprus vote to become a province of Turkey.

Velvet divorce scenario for Greek Cypriots
After Phase 1 above, Greek Cypriots are able to sell the gas. This assumes that prices ever rise enough to exploit it, before renewables wipe out the entire gas market.
Under Phase 8 of the scenario above, the physical buffer between Greek Cypriots and Turkey no longer exists. Since there are no Turkish Cypriots in any positions of power any more, and definitely not any moderate ones, the Turkish Cypriots are no longer a political buffer either, i.e. there is no one to make the case to Turkey for a more moderate line. No one dares cross for religious services any more. The sea, soil and drinking water suffer from environmental degradation carried out in the north and the international media start to notice.
Trade in goods between rump Republic of Cyprus and the northern Cyprus province of Turkey is technically possible under the EU-Turkey customs agreement. However, in practice it never climbs beyond a few million euros because of invasive security checks at the borders. These security checks have the strong political support of Greek Cypriot distributors, who fear competition from Turkish goods.
Rump Republic of Cyprus becomes known as the EU country that borders a (likely) unstable Turkey. Pollution of the soil and sea from the north damages tourism. Investment is limited to pouring concrete for passports. Cyprus’ international reputation for probity continues to deteriorate. There are no jobs for the young, so they start to leave again.

Federal solution scenario for all Cypriots
Now let’s look at a scenario for a federal solution. They key difference here is the amount of investment that it will trigger and the chance for both sides to improve their reputations.
Phase 1. Around €3 billion of the funds that the media report was identified by European Commission President Jean-Claude Juncker in 2017 pour in to upgrade the infrastructure of northern Cyprus and help harmonise environmental and other standards with the EU.
Phase 2. Tax incentives for joint ventures between Greek Cypriots and Turkish Cypriots fix all the issues that businesses worried about with respect to distribution and franchise agreements. This opens up a bigger market for operators from both sides. 
Phase 3. Billions of private investment pours in for flagship investments encouraged by the EU, which wants to market the Cyprus story as an EU success. Investors are therefore attracted by AAA guarantees and equity stakes from banks like the European Bank for Reconstruction and Development (EBRD), the European Investment Bank (EIB) and the Council of Europe Development Bank (COEDB). These bank-backed investments come with a precondition that they reinforce economic interdependence between the two constituent states. Flagship investments include turning Varosha into a twenty-first century walkable eco-city. Other investments focus on the whole of Famagusta to promote its cultural and natural heritage and consolidate transport and other infrastructure links between the two constituent states.
Phase 4. Lawyers and accountants at last diversify their passport-based market and make plenty of money helping Turkish companies set up companies to do business in the EU. This brings in business from all over the Middle East. As local and international businesses see the benefits of being based in an EU jurisdiction with a clean reputation, Cyprus’ international reputation improves, which also boosts its diplomatic standing.
Phase 5. Cyprus becomes the primary energy hub in the Eastern Mediterranean, trading oil and gas from all the other countries that still aren’t talking to each other: Lebanon, Israel, Egypt, Turkey, Jordan and Syria.

These are the choices that face all Cypriots today. There is the easy high road to Hell, or the tougher right road to a brighter future for everyone. Which one would you pick?


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