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Memo to World Leaders: Don't Ignore Cyprus



While the world's attention is focused on the European financial crisis, a storm is brewing in the Mediterranean that could cause havoc in the region and have wider international consequences. At its center are conflicting claims between the Greek Cypriots and Turkish Cypriots over a potentially large natural gas discovery off the island's southern coast. Relations between the two sides have remained tense for four decades, despite numerous rounds of negotiations and more open exchanges. In recent years the Turkish Cypriots have become increasingly dependent on Turkey, whose leaders have been aggressively pursuing Ankara's strategic goals in the Middle East.

Cyprus' unresolved status is a consequence of the last time the world took its eyes off the region. World leaders cannot afford to repeat this mistake, especially since this time the stakes are much higher for the Mediterranean, Europe, and the Middle East.

First some background.

In 1974, while Western powers were preoccupied with the immediate aftermath of the Israeli-Arab war and the subsequent oil boycott that threw the global economy into recession, the Turkish army invaded Cyprus in response to a Greek-motivated coup attempt. The fighting split the island between Greek Cypriots in the south and Turkish Cypriots in the north, setting off yet another Mediterranean conflict between two peoples laying claim to the same land. Recognized only by Turkey, the Turkish Cypriots declared their independence in 1983, establishing the Turkish Republic of Northern Cyprus (TNRC).

Ironically, Israelis and Palestinians have periodically visited the island over the years to study its lessons of codetermination and bi-communal activities. The rest of the world has virtually forgotten about the "Cyprus situation."

Isolated from the rest of the world, the TRNC economy has become an economic and demographic satellite of Turkey. Between 1977 and 2008, Turkey's exports to northern Cyprus doubled, growing from approximately 15 percent to 30 percent of the TRNC economy, while Turkish imports from the island fell from approximately 3 percent to 1.5 percent of the TRNC economy. Over the same period, Turkish loans and grants averaged another 10 percent of the TRNC economy. Instead of developing industries, the Turkish Cypriot authorities used the funds to finance government spending, 80 percent of which is concentrated in salaries and transfers, primarily retirement payments.

Northern Cyprus has also served to relieve some of the demographic pressures in Turkey, as the Turkish government provides financial incentives to encourage Turks to "settle" there.

In May 2004 the Greek Cypriots were invited to join the European Union. Although probably intended to encourage unification, bringing only half the island into the European Union widened the economic and political gap between the two economies, forcing the TRNC even further into Turkey's welcoming arms.

Unable to forge a power-sharing agreement to govern a unified island, the two sides finally agreed to gradually open a "green-line," allowing goods and people to flow relatively freely between the two sides. But normalization of commercial ties has not brought the two sides any closer to resolving their political differences. With the TRNC economy already dependent on Turkey for most of its financial and commercial needs, two-way trade across the green line amounted to only $9.7 million per year over the last four years. "Exports" to the south amounted to 12 percent of total TRNC exports, eight times the value of "imports" from the south, which amounted to only 0.1 percent of total Greek-Cypriot exports.

Per capita GDP in the TRNC ($15,000) is about half that in the Greek-Cypriot economy. Although on paper the gap between the north and south economies has narrowed since 1974, the psychological distance between the two communities has widened.

The prospects for the Greek-Cypriot economy began to improve a few years ago with news of a possible discovery of a significant amount of natural gas off the island's southern coast. But the discovery also heightened tensions between the north and the south, with Turkish-Cypriots, fueled by their Turkish "patrons," arguing that the newfound wealth must be shared with them as co-inhabitants of the island.

The Greek Cypriots contracted an American company, Noble Energy, to help them explore and extract the gas.

The natural gas discovery has broader regional implications, since the field is located in the Levant Basin, which stretches between Cyprus and Israel. Having already begun drilling in the Leviathan field off their own coast, the Israelis were more than happy to assist the Greek Cypriots in exploring "Block 12," which Greek Cypriots ruled was well within their "Exclusive Economic Zone." But predictably, Israel's involvement in the gas exploration has further rankled Turkey.

Greek Cypriots began exploratory drilling at the end of September, despite threats from Turkey. Within days Turkish fighter jets escorted the Piri Reis, a Turkish seismic ship sent to the region to perform its own exploration. The Greeks, Americans, and Israelis have promised to protect Greek-Cypriot exploratory activities in the Mediterranean against any interference by the Turks.

The conflict over the natural gas comes at a very delicate time in the Mediterranean and the broader region.

The final round of UN-sponsored negotiations between the north and the south, which were restarted in 2008, is scheduled for the end of October in New York. These talks are seen as the last opportunity for any kind of agreement before the EU Presidency rotates to Cyprus in June 2012. Turkey, has now failed to persuade the Europeans to change their normal rotation procedures for the leadership of the EU presidency. Since Ankara does not recognize Cyprus, it says it will cut off diplomatic contact with Europe during Cyprus' presidency. It is unlikely that the two parties will come to any agreement in New York. In any event, subsequent talks would probably have to wait until well into 2013, after Greek-Cypriot elections.

The Cyprus situation has aggravated an already strained relationship between Turkey and the rest of Europe, of course. Turkey has felt deeply snubbed over the stalled talks focused on its accession into the EU. Chances of restarting the talks were dashed when Chancellor Angela Merkel reaffirmed Germany's apprehensions about Turkey's candidacy at the end of September. A week later Turkish fighter jets accompanied the seismic ship to Cyprus.

American and European concerns over Turkey's intentions to exercise greater influence in the broader Middle East region have also been heightened lately, especially in light of Prime Minister Recep Tayyip Erdogan's recent highly visible trip to Egypt in mid September, where he told a cheering crowd that together the Egyptians and Turks constitute "a force 150 million strong" and that "we are virtually encircling the Mediterranean."

At the same time, relations between Turkey and Israel—onetime friends—reached a historic low last year after nine Turks were killed in an Israeli operation to stop a flotilla of ships trying to break Israel's blockade of Gaza. Turkey has become an increasingly vocal supporter of Palestinian efforts to gain United Nations recognition and Prime Minister Erdogan has threatened to send Turkish military ships to escort future Gaza-bound flotillas. In this environment, it is hard to believe that Prime Minister Erdogan will "allow" the Israelis to get any of the natural gas extracted off the coast of Cyprus.

Already under pressure given its financial links to Greece, the Greek Cypriot economy took another hit this summer when the country's brand new electrical generator was destroyed by munitions stored close by. The economy is limping along and will probably finish the year with no economic growth. After sitting on the sidelines of the European financial crisis, last week Russia provided €2.5 billion to help stabilize the Greek Cypriot economy. Russia's "generous" act, for which it probably also received some rights to the yet extracted natural gas, may prove to be too little too late. With public debt hovering above 60 percent of GDP, the Greek-Cypriot economy is expected to grow by only 1 percent next year, according to the International Monetary Fund.

The Turkish-Cypriot economy has also hit the skids, forcing the government to go ask its exclusive lender of first, last, and only resort—Turkey—for bi-monthly infusions of cash. But the Turkish Cypriots are beginning to learn that there is no free lunch, as the Turks have begun imposing, and this time enforcing, conditions placed on their loans and grants. High-level Turkish officials visit the island almost weekly to see first-hand how their money is being spent. The visits also provided an opportunity for the Turks to continue to beat the drum, warning the Greek Cypriots of serious ramifications if they do not share their newfound wealth with the north. Since these rants are all in Turkish, it is assumed that they are primarily aimed at audiences in Turkey and the TRNC.

Having already "outsourced" some its economic policies to Ankara, there is evidence that the TRNC has begun outsourcing some management of its economy as well.

Turkey could claim its own rights to some of the natural gas, if the TRNC became this century's "Sudetenland." Prime Minister Erdogan would probably portray any international reaction as an attempt by the Americans and Europeans to appropriate gas that he believes legitimately belongs to the Turks and to the Turkish Cypriots. He could further inflame the streets in Cairo, Beirut, Damascus, Gaza, and Ramallah by charging that the West's real motive is to ship Turkish natural resources to Israel.

Hopefully this time American and European leaders will not take their eyes off Cyprus. The West should do everything in its power to defuse tensions in the region in order to avoid a potential international incident that could exacerbate Europe's economic ills and further destabilize an already unstable Middle East.

Howard F. Rosen, resident visiting fellow at the Peterson Institute for International Economics, has participated in a project funded by US Agency for International Development to improve the competitiveness of the Turkish-Cypriot economy.

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