An Illusory Compensation for Cypriot Savers
Cyprus is in panic. A tax on bank accounts was announced in the weekend as part of a EUR 10 billion bailout by the European Union and the IMF. Smaller depositors with up to EUR 100,000 will be taxed at 6.75% while depositors with over EUR 100,000 in their bank accounts will be taxed at 10% on their bank deposits. President Nicos Anastasiades expressed his compassion with the Cypriot people stating that it was the worst crisis since Turkey invaded Cyprus in 1974. Although painful, the solution would allow the stabilization of the country’s finances and would prevent its financial system from collapsing resulting in an exit from the Eurozone. While depositors expressed feelings of unfairness and injustice, neighboring countries feared contagion, stating that the EU and IMF might have set a precedent.
The strong reaction to the announcement prompted officials in the southern part of the island to delay the parliamentary vote until Tuesday 19 March in order to soften the impact on smaller savers. Rumor also has it that Russian Gazprom has offered to bail out the Bank of Cyprus in return for exclusive control of the gas reserves off the coast of the island, an offer Cyprus rejected.
The controversial bailout deal for Cyprus proposed by the EU and IMF led President Nicos Anastasiades to promise people, in exchange for their deposits being kept in domestic banks for the next two years, bonds linked to revenues from natural gas.
This forced investment is – for multiple reasons - a highly risky one. Gas reserves, although seen by the Cypriot government as salvation to the debt-crippled country, are not confirmed yet. If the findings are confirmed, it might take years before Cyprus can start exporting its gas. Finally, the Cypriot-Turkish tensed relationship could constitute an obstacle to the effective development of Cypriot offshore hydrocarbons.
Findings not confirmed yet
Back in 2011, a well drilled offshore Cyprus was estimated to contain 7 tcf of gas. The estimation has not been confirmed yet. Experts believe Cyprus could be sitting on gas reserves worth EUR 300 billion equivalent to 20 times its GDP of EUR 15 billion.
Potential export revenues delayed in time
Potential revenues from exports are not expected before 2020. Cyprus’s gas will also have to compete with other regional gas suppliers. How Cyprus plans to export its gas is another tricky question. Building a costly LNG terminal seems to be the only option for cash-strapped Cyprus. Building a pipeline that would go through Turkey is not an option given the everlasting tension between the Turks and the Greeks.
Turkey opposed to exploration projects
The Turkish Republic of Northern Cyprus has formulated its opposition to any exploration of oil and gas before the unity of the Island is achieved. Turkey contests a Cypriot-Israeli accord signed in 2010 delimitating the two countries’ respective exclusive economic zones in the waters between them.
The situation Cyprus is currently facing is dramatic. The government might be powerless, its only remaining hope lying in its agitated waters. However, to promise depositors a share of the gas revenues seems a little too risqué.
Karen Ayat is an analyst focused on energy geopolitics in the Eastern Mediterranean