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PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHNC #0146/01 0591436
ZNR UUUUU ZZH
P 281436Z FEB 08
FM AMEMBASSY NICOSIA
TO RUEHC/SECSTATE WASHDC PRIORITY 8623
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RUEHAK/AMEMBASSY ANKARA PRIORITY 5152
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

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