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DE RUEHNC #0749/01 2621211
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R 181211Z SEP 08
FM AMEMBASSY NICOSIA
TO RUEHC/SECSTATE WASHDC 9161
INFO RUEHBS/USEU BRUSSELS

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