Bring northern Cyprus back into the fold
By Nick Kochan

The division of Cyprus between Greek and Turkish residents represents a festering sore for the European Union and for the wider international community. Resolutions have been painfully pursued since 1974, when the island was divided, but none has yet satisfied both sides. The Turkish Republic of Northern Cyprus continues to face embargoes from the EU and most large states.

The time has come for a further push, this time by Gordon Brown, the UK prime minister, and Recep Tayyip Erdogan, Turkey’s prime minister, to bring northern Cyprus back into the fold. The two men recently proposed an initiative at the United Nations, where there is a will to continue the process, initiated by Kofi Annan, the former UN secretary-general, which culminated in a referendum in 2004. Both sides were asked to vote on unification around a carefully balanced series of compromises. Two-thirds of Turkish Cypriots voted in favour, but two-thirds of Greeks voted against and the issue was shelved. The result has left the Turkish Cypriot community feeling bruised.

While the politicians continue to wrestle with the problem, business and financial considerations risk drawing northern Cyprus out of the western fold and towards other, less palatable regions. Radical Middle Eastern states have been prepared to flout criticism from Greece and elsewhere and trade with northern Cyprus. Syria, for example, recently opened a ferry route to Famagusta in northern Cyprus. Northern Cyprus will use this as a lever to open up other trading and transport links with the Islamic world. Business contacts with Iran are growing and many students attending the six Turkish Cypriot universities originate from Palestine, Iran and Sudan. That said, the bulk of the north’s business and political links continue to be with Turkey, the largest investor in the island and guarantor of its independence.

Disparity in economic resources between the north and the Republic of Cyprus in the south risks intensifying the north’s isolation. While the south has a thriving economy, partly supported by EU subsidies and partly by an offshore banking and financial services sector, the north struggles to obtain investment to develop its resources. The south is more than twice as wealthy as the north, with gross national product per head of $22,000 compared with the north’s $10,500. Three-quarters of the island’s 1m-strong population live in the south.

UK investors and bargain hunters have bought and developed cheap properties in the north in the expectation of a sharp revaluation of their assets if the political climate warms. Properties cost between a third and half the price of those in the south, although investors take some risk on title, as former Greek owners will seek the return of land now occupied by Turks. Turkish Cypriots have similar claims on land in the south, now occupied by Greeks.

Israeli investors have also invested in the island’s hotel and property sector for the same reason. Russians are taking an interest in the north’s banking sector and one Russian bank is expected to open imminently.

The north’s tourist trade, the largest contributor to its economy, is dependent on Turkish visitors, who can fly direct. Western tourists have to break their journey at Istanbul before flying on to the airport at Ercan. This inflates the cost of air travel. Lack of recognition hits every part of the economy, including the banking system, which is denied an exclusive code to enter the Swift system for transferring payments from north Cyprus banks to international banks. Outdated systems of transferring money through fax and e-mail result in security risks to the banks. A strong casino and gambling industry has led some to question the north’s financial probity.

Economic isolation risks creating an embittered community on the fringe of Europe and in one of the world’s more delicate hotspots. There are a number in the EU who recognise the dangers and would like to soften or remove the embargo, but the Republic of Cyprus – an EU member – would in practice be able to block such a move.

The best hope for political change is the economic invigoration of this territory. That would not merely improve local prosperity but also encourage business and political interests in the south to invest in the north. The search for economic prosperity needs to go hand-in-hand with political moves towards unification. Once the island reaches its economic potential, memories of past feuds can be forgotten and a stable and unified state created.
(Copyright The Financial Times Limited 2007- Published: November 13 2007 19:17)