How much is Russian business worth to Cyprus? 12 Dec 2022
How much is it worth? From the Sapienta Cyprus Reflections sub-series
Welcome to Sapienta Cyprus Reflections. It is free for now. More about this subcategory of Sapienta Cyprus Snippets here.
On 28 February this year, within four days of Russia invading Ukraine and sanctions already building up, subscribers to Sapienta Country Analysis Cyprus reports received the first cut of my estimates on the value of Russian business to Cyprus, as well as an assessment of how it might affect the Cyprus economy. After some feedback from clients, I updated those figures and re-sent them to clients at the end of March and published a fully revised Russia report at the end of April.
The value to professionals of rapid analysis
This kind of fast analysis, based on my huge database of historical statistics and 20 years of closely studying the Cyprus economy, is invaluable for those of you—financial and professional services professionals and diplomats—who focus on “the now”, who need to respond to urgent requests from your own clients, shareholders and headquarters about rapidly developing situations.
I did similar rapid analyses when Covid-19 hit in March 2020. I did the same in March 2013 during the Cyprus financial crisis. When Turkish naval ships prevented Eni from drilling in the Republic of Cyprus Exclusive Economic Zone (EEZ) in February 2018, monthly report clients received an in-depth background about what on earth this was about. You get the picture: something big happens, you get everything you need to understand it in the monthly report, or even sooner in some cases.
My analysis of Russia and all other analysis is based on hard data. If there are no statistics, I am transparent about where I make assumptions. This makes my work a rather different animal from academic economic studies. In academia, statistics are pondered over apparently for years, but in reality between tutoring and marking and multiple faculty meetings and conferences abroad and so on. The academic analysis is published years after the statistics have been released (with the risk that this is long after they have been heavily revised) and sometimes they come up with models that may ultimately be no better at predicting outcomes than ones with fewer equations.
Spotting the trend is key
Given how often historical statistics are revised by the statistics authorities (this is not just a Cyprus phenomenon), my view is that if you are in the prediction game, the important thing is not to hit the right number but to be the first to spot the trend. To give a recent example, back in October I said that it looked like inflation had peaked. Sure enough, the official organizations are now saying the same. If you are a government or corporate bond investor, knowing this early could be the difference between profit or loss.
Anticipating the trend because of one’s deep knowledge of the subject is also another skill. Back in March, household international names were saying that Cyprus was most exposed to Russia, that the sanctions would hit Cyprus hard. They also misread the foreign direct investment (FDI) data which I tweeted at length about here.
Meanwhile, here at Sapienta Economics, after digging deep into the available data, I said, “ Sanctions on Russia will not have a critical impact on the two largest banks”. As for the impact on operating income, I said, “Operating income from non-residents: moderately significant impact” but I said that it “could accelerate takeovers”. If you have been watching shareholder developments at Hellenic Bank and Bank of Cyprus lately you can see this was a good call. I noted the massive decline in Russian deposits since before the 2013 crisis and also went deep into the FDI data to show why “FDI statistics are highly problematic”.
Estimated value of Russian business: 4.8% of GDP…
But back to the clickbait: how much is Russian business worth to Cyprus? After a lot of number-crunching on each affected sector—tourism, banking, professional and support services, and construction—and explanations of any assumptions I made on the value of each of these to the economy, I estimated that Russian business was worth 4.8% of GDP in a “pre-war” 2022. This is significant but down from 6.3% of GDP in 2013.
When the IMF was predicting real GDP growth of only 2%, or only 1-2% growth I stuck my neck out in the same Russia special report and said that the economy would grow by 3.6% in 2022, compared with 4.5% without the war. As reasons for my optimism I argued that many of the sanctions relating trusts only came into effect in May and September, that there was going to be a post-lockdown tourism boom from elsewhere (indeed there was), as well as a boost from incoming Ukrainians (anecdotal reports say that there has indeed been a boost). Only in the “extreme” scenario, where all Russian business disappeared overnight, did I forecast a mild recession. As it turns out, the economy has outperformed even my optimistic expectations earlier this year. Real GDP growth is likely to be close to 6% in 2022. I wrote about the resilience of the Cyprus economy in this post.
…but the value of Russia to Cyprus is falling
There is good reason to believe that dependence on Russia has shrunk even further this year. Some of the bigger accounting firms have aggressively removed Russian business, meaning that in future iterations I would probably be cutting the estimated share of Russian business for professional services firms from the April estimate of 35%. This would also bring down the estimated share of the administrative services firms from the current level of 20%. Future iterations will of course be shared with clients of Sapienta Country Analysis Cyprus first! You can find some samples of the monthly report here. Or feel free to get in touch. My Twitter handle @FionaMullenCY is open.