By Stelios Orphanides
Following the 2013 banking and property bubble bust, Cyprus’s failure or reluctance to effectively reform its economy forced it to restore and even further strengthen its over-reliance on real estate.
In response to falling property prices and rising non-performing loans, which further burdened bank balance sheets, the government decided to make Cypriot real estate more attractive to foreign buyers and help revive the construction sector.
The scheme has already yielded €3.6bn in investment, the ministry of interior said, citing “a recent evaluation,” in response to a questionnaire by the Cyprus Business Mail.
The figure does not cover investment in retail bonds, the vast majority of which are bought by non-Cypriots, as they offer similar benefits when it comes to acquiring a Cypriot passport. According to the Public Debt Management Office, in 2015 the government sold retail bonds worth €205m mainly to foreign investors, compared to €61m in 2014. In 2016 alone, the number of non-Cypriots who invested at least €2.5m each in retail bonds was 95.
The impact on the real estate market were also significant. Property transactions, which dropped 40 per cent in 2013, rebounded 20 per cent the following year, and another 9 per cent in 2015. The annual increase between January and September this year was 32 per cent.
In 2015, 600 non-Cypriots acquired properties on the island, compared to 443 the year before and 335 in 2013, according to the land registry.
While the increase in external demand, also supported by tax breaks offered to property buyers, included reduced transfer fees and exemption from capital gains tax last year, was not enough to halt the drop in property prices, it helped restrain the fall as home prices fell in 2015 for a seventh consecutive year.
The number of passports issued to non-Cypriot property buyers remains undisclosed. The Ministry of Interior declined to comment to questions related to the number of beneficiaries or their country of origin, which are believed to be mainly Russians and Chinese.
However, a source familiar with the matter said the number of passports alone issued by Cyprus is “over 1,000” and is a figure supported by the investment data provided by the interior ministry.
“The number of cases approved under the current administration is many times higher compared to those during the term of the previous government,” under former president Demetris Christofias, the source said.
The reason for the government being discrete in this matter may relate to fears of being exposed to criticism from abroad. According to Politico.com, Malta, which issued 900 passports to third-country nationals in 2015 alone, has already been censured.
“If I didn’t have a great deal of love and sympathy as well as respect for Malta as a country, I would say what I was inclined to say two years ago,” Frank Engel, a Luxembourgian MEP of European People’s Party was quoted as saying by Politico in August. “These are the practices of a banana republic which must be rigorously counteracted within the EU”.
The Cyprus Business Mail understands that for the time being there are no thoughts in the European Commission to place restrictions on the right of member states to issue passports to third country nationals, a practice applied also by other countries such as Bulgaria and Austria.
“This matter is still a responsibility of national governments and it is expected that the national governments treat the matter responsibly,” a European official said, speaking on condition of anonymity.
Christophoros Christophorou, a political analyst and author of the Sustainable Governance Report on Cyprus for the Bertelsmann Foundation, said that such government policies raise questions about security and may be regarded as a kind of “Trojan horse” by the EU.
“It’s not the Cypriot citizenship which is given, it’s the EU-citizenship,” he said in a telephone interview. “It also commits other member states and Brussels. The one who acquires the Cypriot citizenship also has the same rights in other member states.”
By granting the Cypriot citizenship to third country nationals, there is a possibility of undermining “policies of other member states or even the EU like in the case of sanctions” imposed against other countries or citizens of other countries like in the case of Russia following the annexation of Crimea in 2014, he said.
Applicants for the Cypriot citizenship have to undergo a “thorough” background check by Cypriot authorities, including the anti-money laundering unit Mokas, and are also required to present a clean criminal record, the interior ministry said.
“In any case, even if the applicant acquires the Cypriot citizenship and is convicted for any offence, the law provides for the cabinet’s discretionary power to rescind the citizenship,” the ministry said.
Additional procedures are in place to ensure that the funds invested in such cases are not illicit and transactions have to be completed via Cypriot banks, subject to supervision by the Central Bank of Cyprus, the ministry added.
Christophorou said that policies promoting land development are generally not sustainable as they are not taking into account the cost on the environment and society.
“All those references to reforms towards more sustainable forms of economic activity included in Cyprus’s bailout agreement received little attention,” he said. “The economy continues to be based on tourism and land development”.
If Cyprus is going to continue to sell passports and visas, it could at least divert investment towards “light industry or new technologies,” he said. “What kind of an economy do we actually want?”
For the time being, investment in real estate appears to benefit one of the few Cypriot heavy industrial units. The share price of the Vassiliko Cement Works which supplies construction companies with raw materials has increased from under €0.40 in late 2013, to €2.75. By comparison, three years after the 2013 crisis, the Cyprus Stock Exchange general index continues to fluctuate around 65 points compared to 90 in late 2013.