Cyprus Mail

Is Cyprus prepared for a New Cold War?

Yevgeny Fyodorov, deputy from the ruling United Russia party

By Dr Olga Kandinskaia

I AM not an expert on international politics, neither am I a historian. I am writing this article from a point of view of an economist who happens to be Russian and who has grown up during the Cold War era.

The fundamental distrust between the USA and the Soviet Union, which had been brewing since before the World War II, culminated in more than 45 years of extreme hostility between the two superpowers which effectively divided the whole world into the two opposing camps. That was the original Cold War, 1945-1991. Coined by George Orwell in 1945 and picked up by politicians in 1947, the term “cold war” has nevertheless stayed as part of history for 23 non-confrontation years – reminding us of that dark period when suspicion penetrated all levels of international relations, from politics to culture.

It has become evident in the last few months that this term is no longer just part of history. It is increasingly being used by journalists and now also politicians to describe the escalating tension between Obama and Putin.

Some prominent writers, such as Robert Legvold, professor at Columbia University, specialist in the international relations of the post-Soviet states, have appealed against the return of the term saying that “no one should casually label the current confrontation between Russia and the West a ‘new Cold War’. After all, the current crisis hardly matches the depth and scale of the contest that dominated the international system in the second half of the twentieth century. And accepting the premise that Russia and the West are locked in such a conflict could lead policymakers to pursue the wrong, even dangerous strategies.”

No matter how we prefer to label this new rising wave of mistrust between Russia and the West, the confrontation is back. After the EU summit in Brussels on August 30, EU Commission President Jose Manuel Barroso openly referred to the crisis as “a new Cold War” underlying that strategically “it makes no sense to have this kind of conflict”.

Certainly from a point of view of an economist, this type of confrontation will be highly damaging because it will waste resources, erode economies and undermine the well-being of people.

In the world which is splitting once again into two opposing camps, Cyprus has suddenly found itself in a rather awkward position. Despite its historical ties with Russia and having an economy which is highly dependent on the income from Russian tourists and Russian offshore companies, Cyprus at the same time is obliged – as an EU member – to support the official EU line of sanctions. This has already resulted in €13.5 million loss from agricultural exports due to the Russian embargo on EU food products in response to the EU sanctions over Ukraine. Yet this loss is nothing compared to the damage which may occur should the confrontation escalate further.

As reported on July 29 by the pro-Kremlin daily newspaper Izvestia, Russian lawmakers have drafted amendments to introduce a new legal term “aggressor country”. The document describes as an “aggressor country” a state that has “imposed sanctions on the Russia Federation, Russian citizens, or Russian companies”. The new bill would give “the government the right to approve a list of aggressor countries in order to defend the foundations of constitutional order, to ensure the state’s defense and security, to protect the domestic market of the Russian Federation and the development of the national economy”.

Izvestia quoted Yevgeny Fyodorov, a deputy from the ruling United Russia party, saying the new proposals would allow the Russian government to restrict auditing and consulting companies registered in “aggressor countries” in their operations in Russia.

Fyodorov, who is one of the main advocates of the new amendments, named six major international auditing and consulting firms – Deloitte, KPMG, PWC, Ernst and Young, Boston Consulting Group, and McKinsey – that the government would be able to restrict.

Such legislation would mark a significant escalation in Moscow’s response to sanctions, and would upgrade the current confrontation to an entirely new level.

Cyprus could be labelled as an “aggressor country”. As bizarre as it may sound at the moment, it may be a reality of the not so distant future. To say that our financial sector and tourism will be affected is an understatement. Is our government prepared for such a scenario?

Our past shows that for many years our economy has been drifting without any strategic plan and solely relying on luck. Our most recent past shows that we have run out of luck, and that already twice in the last three years our government stepped into the negotiations room totally unprepared. The first critical mistake happened on October 26-27, 2011, when the EU summit adopted the decision to force private investors to accept a 50 per cent haircut on Greek government bonds. The second time our government was caught by surprise was in March 2013, the infamous Eurogroup meeting, which resulted in the massive deposit haircut destroying one major bank and crippling the other.

Being prepared for an adverse scenario is an essential part of any managerial strategy – be it a company or a whole country. It is time for Cyprus to start planning proactively – anticipating bad luck. Being in the EU camp and standing up for democratic values together with other countries is the right course, but we also need to anticipate the costs. Focusing on strategic planning to diversify Cyprus economy should be an immediate priority.

Dr Olga Kandinskaia is assistant professor of finance and director of the MSc Management Programme at Cyprus International Institute of Management (CIIM)

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