Cyprus should likely brace for impact from a potential global trade war kicked off by the United States. So says the smart money, although analysts add that the nature and scope of the fallout, as well as the timing, remain unclear.
Part of the conventional wisdom has to do with simple observation – the upheavals in the stock exchanges and financial markets of the past week. But also, the lessons of the recent past still ring loud here.
“Remember in 2008 when our then finance minister (Charilaos Stavrakis) infamously stated that the global financial crisis would ‘pass Cyprus by’? And we all know what happened next,” remarks economic historian Alex Apostolides.
“Hopefully we won’t have the same attitude now.”
Apostolides thinks Cyprus will indeed get affected by what’s happening globally.
“After all, it’s a total rewriting of the global system.”
First the basics: small, open economies like Cyprus tend to do badly with tariffs, as tariffs represent a closing up of economies.
“It will affect Cyprus negatively. The issue is how much, and what can you do about it. That said, it’s not like we’re going to make decisions on our own; rather, decisions will be made collectively by the EU. We need to follow the EU’s lead and support whatever it does.”
An economist at the European University, Apostolides hastens to add that he’s “no soothsayer”.
Still, one can observe certain trends.
“The main takeaway is that this whole affair won’t be limited to the issue of trade. Because trade also makes you want to buy financial assets from other countries – e.g. China buying up US bonds.
“A reduction in trade means reduced surpluses that were otherwise going to be invested in finance. So we can expect that global flows of capital will likewise dip or get re-diverted.”
That means financial markets globally will likely go through a liquidity constriction.
And Cyprus, as a financial services centre, might get impacted.
“For instance”, notes Apostolides, “the attractiveness of opening up a company to Cyprus will not survive a trade war.”
But he qualifies: “I’m not predicting that Cyprus will go bankrupt or anything like that.”
The analyst stresses that historical experience shows Cyprus does not do well in tariffs environment.
He cites from history the year 1932 when Britain imposed what was called the ‘imperial tariff’. However, colonies like Cyprus got a preferential (lower) tariff rate. This happened in the wake of the global depression after 1929.
“Granted, the world economy was different back then. Cyprus at the time was already experiencing a deep recession, but the UK tariffs made the situation even worse.”
As it turned out, though, the result was a mixed bag. On the upside, the squeeze spurred the start of industrialisation on the island. Some of the big corporate names in bottling, for example, arose during this period.
The IMF has already warned that US President Donald Trump’s aggressive tariffs pose a “significant risk” to the global economy at a time of sluggish growth, recommending that “the US and its trading partners work constructively to resolve trade tensions and reduce uncertainty,” by avoiding steps that could further harm the world economy.
Where does that leave Cyprus? For the moment, the outlook is not good, although not dire either.
“The situation will affect us down the line,” opined Michalis Persianis, head of the Fiscal Council.
“The primary impact will be easily manageable. But the secondary impacts will be much more significant and are far less predictable.”
By primary impact he means direct trade with the US – by no means sizeable.
The latest figures from the Statistical Service show that the island exported goods worth nearly €22.7 million to the US from January through to November 2024. Cheese products, primarily halloumi, accounted for the largest portion of exports.
Products like halloumi, fish, and some medicines make up the bulk of Cypriot exports.
“What we’ve got are conditions of extreme uncertainty. From the point of view of the Fiscal Council, this makes it difficult to quantify the problem, hard to predict.
“So everything we say now, put an asterisk next to it – some degree of speculation.”
Persianis said the ‘fog’ will start clearing up at the end of the 90-day tariff pause – announced by the US government following the turmoil on ‘Liberation Day’.
Of greater concern to Cyprus are the secondary impacts – shifting world trade, currency fluctuations, even changes in shipping routes.
The expert thinks that external demand will be impacted. That is to say, demand for Cypriot goods and services abroad – such as tourism and the ICT sector which is a major driver of growth.
“It might also affect demand for housing in Cyprus – slowing down demand, helping bring prices down.”
Another possible danger sign is the impact on sovereign debt.
“You see, investors prefer sovereign debt to private debt in times of uncertainty,” explains Persianis.
Cypriot bonds are not as liquid as other sovereign bonds. German sovereign bonds, by comparison, are more known, so those debt bonds get scooped up. This makes them very liquid compared to Cypriot bonds which are not as popular.
“So investors might get rid of their Cypriot bonds and/or stop buying new Cypriot debt, preferring other sovereign bonds. This would drive up the yield – the interest rate – of the Cypriot sovereign bonds.”
And a higher interest rate translates into a higher cost of servicing the national debt.
Cyprus has a policy of issuing sovereign debt of about €1 billion a year – usually a ten-year bond.
“The main reason to issue new debt is not so much to finance the needs of the Republic, but to ‘stay alive’ in the bonds market – so that investors are familiar with the Cypriot bonds, so that our bonds are not so ‘exotic’.”
Still, Persianis adds that a higher interest on Cypriot bonds “would not be tragic – not a nightmare scenario.”
But at the same time tourism might go down, inflation up, along with declining trade.
“So multiple factors could impact at around the same time…think of it like death by a thousand cuts.”
So far, there’s been no discernible impact on the Cyprus economy – too early. Any tangible effect would take months – perhaps sometime in the summer and beyond.
“However, this should not cause complacency in the meantime. In other words, if the numbers are good over the next few months, we shouldn’t grow contented.”
For this reason, the Fiscal Council advises the state not to take its eye off reining in inelastic costs – such as the public payroll.
“Maintaining fiscal discipline is key,” notes Persianis. “Plus, it’s likely the only thing we do have control of.”
Bottom line: the facet of direct trade with the US on its own is not a game changer. It’s the secondary impacts Cyprus should be wary of.
Another aspect has to do with the US dollar falling against the euro – meaning it takes more dollars to pay for imports from Cyprus.
On the plus side, since the dollar is cheaper, this brings down the price of oil – denominated in US dollars. So you get more ‘bang for your buck’ – or in this case for your euro – when buying oil.
At the same time, oil prices are dropping because of investor uncertainty. Brent crude oil futures tumbled to $60 per barrel mid-week, their lowest since February 2021, as fears of a global slowdown hit energy markets.
So there might be a silver lining in all the mayhem – cheaper electricity. People could use a breather.
We contacted the Electricity Authority of Cyprus (EAC) asking whether it plans to make advance purchases of oil – futures contracts – to take advantage of current lower oil prices.
Their official response was brief: the EAC has taken no such decision yet. But the Cyprus Mail was also told that on Friday the organisation held a conference call with its main supplier to discuss the issue.
“We are at the stage of exploration,” the EAC told us.
Unofficially, a source at the state-run power utility said they were “studying the matter” but would not rush into a decision.
The same source did recall that in spring of 2020 – during the Covid pandemic – the EAC had made advance purchases of mazut (some 20,000 metric tonnes) when prices were low.
Alerted to this, Persianis commented that the Fiscal Council “welcomes the intention of the EAC to proceed with a hedging exercise, which should be standard practice anyway.”
He added pointedly: “The absence of a hedging exercise guarantees higher consumer prices in the medium and longer run.”
In a futures contract, the EAC would buy oil now for, say, $60 per barrel for future deliveries. The delivery might take place early next year.
“But you’d be locking in the $60 rate from now. If you do that, you can bring down your average cost of buying oil for 2026,” said Persianis.
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