Kyriakos Tramountanellis x / Wednesday, March 2, 2022 / Categories: Cyprus Company Governance How will the Russian invasion of Ukraine Affect Cyprus? In this short article we express our opinion on the potential economic impact of the Ukrainian crisis on Cyprus. Our opinion is based on our knowledge in finance, regulated markets as well as from being consumers in this interconnected world we live in! Tourism There is no doubt that the Russian and the Ukrainian tourist market will be severely affected. The sanctions imposed by the Western allies and the current prolonged war coupled with the Ruble currency devaluation will make Cyprus and other European destinations very expensive for Russian and Ukrainian tour operators which, if allowed and if there is a demand for travel, will seek cheaper alternatives, like Turkey and other equivalent markets. This will be a significant blow for the Cyprus economy with immediate effect from this summer and for several more summers to come. It was reported that the Russian and Ukrainian tourists markets count for almost 15% - 20% of our total tourism. Conclusion, areas like Ayia Napa and Paralimni, which welcome the majority of tourists from these destinations will be severely affected. Inflation will steal from our pockets! How? 1. Increases in Interest Rates will slow down growth, globally. It is not a secret that we are experiencing the biggest inflation in recent times. The US federal bank is considering to introduce significant increases in interest rates which will make the cost of lending expensive and of course will slow down investment. This approach is also likely to be pursued by the European Central Bank. This will have a significant impact on global growth and especially in Europe where growth was marginal for almost a decade now. 2. Covid Effect The covid effect, which has distorted the demand and supply balance, is also driving prices of commodities and shipping costs upwards, as demand has far exceeded supply. Excess demand is not all! When there is excess demand it is time for all traders to make easy money. Time to make our money, they say! Everyone in the supply chain is adding additional margins because they can (the demand is so strong that it allows it) hence the consumer pays exponentially more for the same goods that could have been acquired before the covid crisis. A simple example. A factory increases marginally, let's say 3%- 5% their wholesale prices of TVs because of excess demand. Then the shipping company does the same by adding a similar increase on their margin because less shipments are available, and therefore less supply . The local shop which sells the televisions and which has the excuse that its purchase price and shipping costs have increased also increases the selling prices. Now we can all understand that the same television now costs 15% - 25% more. This increase is the extra margins added by the supply chain and does not reflect increased costs in the production of the actual television. You will of course be wondering when all this will end? No one knows as this requires a series of calculations based on multiple assumptions and data that are not available to the public. Coupled with the risk of having a prolonged war, which may have unforeseen consequences at a global level, things do not look good at all! 3. Oil Prices & Sanctions to Russia Russia being one of the main suppliers of oil and gas, is in control of the oil and gas prices and could increase its tariffs. The stricter the sanctions, the higher the cost of gas or petrol, which translates, the higher our electricity bills and consumer goods (as increased oil prices drives the cost of production upwards!). Hence, depending on Russia's response to the sanctions and potentially its exclusion from the Swift system (which could potentially backfire in many economies) it can increase the prices of its oil or reduce its supply to Europe making our purchasing power weak for a long period. This effect will again create huge distortions in demand and supply of the oil supply chain, which will be reflected directly within a few months in global consumer products. This is the reason the USA and I believe Germany do not want to exclude Russia from the Swift system (amongst others -at the time of the writing of this article) as they will be shooting themselves in the foot as their consumers and voters will suffer directly by paying higher petrol costs and of course driving inflation upwards. Grim indeed! Recession will come slow and too late! Although recession coupled with the introduction of interest rates are expected to somehow control the inflation mentioned above, no one knows when the demand for goods will match the supply so that the "normal" equilibrium is restored and prices are pushed back. Important point - history has shown that prices never go back to where they were, they may decrease but they will not go back to where they were before! Why should we experience global recession? Wall street has long expected a decrease in the long bull market and the EU has been struggling for real growth for more than a decade. Below we mention the main reasons why we believe recession will come, but at a slow paste. Inflation will stop demand, at some point! Although iron, aluminium and other commodity prices have hit the roof and demand is supporting these prices, this will come to an end. Projects which started or which could not be delayed will finish and will absorb the increased prices. But this will come to an end at some point. Consumers and investors will defer their decision to proceed with big projects, construction, even non essential goods, until prices go back to what was normal, or close to normal, at least. Cost of War All countries contributing to the war directly or indirectly are spending hundreds of millions (during the first week alone) in artillery supplies and humanitarian support which contribute further to their deficits. This, together with the factors mentioned above can be translated into a worldwide economic slowdown which initially will be painful to all but in the medium term will act as a countermeasure to inflation as global demand will eventually slow down. Psychology Psychology is everything in an economy. Having read our article I am sure you lost your appetite to go shopping or to book this year's travel tickets! This adds to the worsening of the economy as consumers like yourself reduce their spending in fear of what is about to happen and as a result local and international companies make less revenues, less profits, spend less etc which also contributes to further shrinkage of the economies. In terms of how it affects Cyprus, as expected, people will be spending less in shopping for luxury items or services which in turn will hurt the local businesses offering such services. If these local businesses have loans it could cause an additional impact to the banking system by increasing the non performing loans with known consequences. \ It all depends on how the local market will react and its reaction depends on how significantly Cyprus will be impacted. So if Limassol and Paphos real estate developments have been targeting high net worth individuals from these jurisdictions (former USSR) it will not be a surprise that they will not be able to make the expected sales something that will impact again the local economy. So what is the cost to Cypriots? 1. Cypriots will have less disposable income as their living expenses will increase but their salaries will probably stay the same. 2. Tourism, hotel and catering industry (including corporate tourism) will be severely hit by an additional slowdown in demand for travel by the reduction of the Russian market which is significant to the tourist industry in Cyprus. 3. The construction industry could be severely impacted as its primary audience for luxurious flats, penthouses and villas was addressed to Russian and Ukrainians high net worth individuals. On the other hand, Cyprus may benefit in the event that wealthy refugees and Ukrainian companies seek shelter in Cyprus which is a very popular jurisdiction. This will mean that accountants, lawyers and estate agents will benefit and at an extended event, the local economy. 4. The banks of Cyprus will be impacted with potential new defaults arising. 5. The economy of Cyprus, all things being equal, will be hurt unless we see a significant flow of wealthy Ukraninans to the republic which will positively affect the local economy as described above. 6. Oil and gas exploration. Maybe, just maybe Europe is allowed to fully utilise its reserves in oil and gas and Cyprus together with other European countries have the opportunity to export their natural resources to other countries. Happy Note History has shown that Cyprus does not follow normal economic trends and somehow it finds its way to overcome such difficulties. Only time will tell! Kyriakos Tramountanellis BSC,FCA,Director CYAUSE Previous Article Country Tax Guide - Tax overview for global mobility - Accace Next Article 4 strategies for attracting and retaining young employees in the tech industry Print 53 Rate this article: No rating Please login or register to post comments.
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