CYPRUS: INCREASING ECONOMIC DEPENDENCE ON THE USSR AND EASTERN E

Created: 8/1/1968

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Intelligence Memorandum

Cyprus: Increasing Economic Dependence on tbe USSR and Eastern Europe

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^ Intelligence memorandum

Cyprus: Increasing Economic Dependence on the ussr and Eastern Europe

Summary

Faced with an incipient hard currency deficit, Cyprus is prepared to rapidly expand its trade with Communist8 trade agreement with the USSR providespercent increase in tradeive-year period and for stepped up Cypriot purchases of Soviet machinery, equipment, and semimanufactured goodsitems formerly obtained almost entirely from Free World suppliers. The share of Communist countries in Cyprus' foreign trade roseercent1ercent innd may reachercent toercent by thes.

A decline in two of Cyprus' largest sources of foreign exchange has begun: foreign militaryhas diminished rapidly as British, Greek, and UN troops have been withdrawn, and exports ofare falling because of the exhaustion of mineral reserves. Other exportsmainly foodsarebut most are of low quality and are noncompeti-

Cyprus, however, must expand exports to pay for imports and must increase imports to support ocono'iiic growth. Trade with the Communist countries hasolution to this problem because these countries are willing to accept low-qualityproducts from Cyprus in exchange for their

tiote: This memorandum was produced solely by CIA. It was prepared by the Office of Economic Research and was coordinated with the Office of Current Intelligence.

cwn manufactures, which are also difficult to soil for hard currency.

Soviet interest in expanded trade with Cyprus obably haaolitical motivation. The Soviet Union hopes to have an opportunity toite influence in Cyprusime when it is attempting to expand its presence in the Mediterranean. Soviet officials may also hope eventually to make some arrangement with Cyprus for use of naval facilities on the island.

1. The Cypriot economy has prospered since the advent of independenceespitepolitical strife and chronic trade deficits, ^ross notional product (GNP) in real terms hasat an average rateercent per year and70 million. Per capita GNP of0 is among the highest in the Middle East. The balance of payments has been in surplus during most years because of expenditures by the large foreign military forces on the island (see Byoreign exchange reserves7 millionenough to cover about one yoox's imports.

2. During the past few years, however, the Cypriot government has failed to act in recognition of the temporary nature of its income from foreign military forces or the precarious competitiveof its mines and farms, which produce almost all of its exports. The government chose to put most of its foreign exchange holdings in foreign securities and to ignore investment in Cyprus for the development of new sources of income. This shortsightedness came into sharp focushen tho Cypriot pound waa do valued3 per^ cent in terms of sterling exchange, orpercent increase in thc cost of dollaroroign military forces were reduced, and exports from the island's diminishing mineral reserves dropped sharply.

3. The weakness of Cypriot exports has been apparent for years. These consist of minerals ipne-third of total exports) and agricultural prod-

(mora than one-half of exports). The mineral deposits, primarily copper, are rapidly running out and may be entirely exhausted Agricultural exports are of poor quality and difficult to market. The value of total exports increased byercentyercentnd byercent7 (see Devaluation was necessary in7 tourther decline in exports, but it is no solution to the problem. Imports must be increased if incomes are to continue to rise. The increase in imports and the poor growth prospects for exports are likely toeterioration in the trade balance.

-eONrTTONTIXTT'

Table 1

Cyprus: Balance of7

Million US S

7

the same time, foreign exchange inflowsmilitary expenditures will decline. Theprincipal source of foreign exchange,expenditures, has already fallen. reduced their spendingillionillionnd thenintention to cut spendingurther 20 In view of the United Kingdom's present further declines in British spending

are likely.

the past few years, the foreignand Turkish forces stationed

on the island has amounted toillionnough to coverhird of the island's trade deficit. Withdrawal of these forces began in Decemberowever, and by the end of8 an estimatedercent of these troops had been withdrawn. Foreign exchange inflows from the UN forces on the island are aboutillion annually, and this military contingent is being cut back as well. yprus settlement is reached, the UN expenditure will cease.

are dim for tha rapid growthforeign exchange sources. Foreign directfor example,eak ofnd has since declined. consisting mainly of emigrantto onlyillion annually and areto increase substantially. Tourism haschance ofore importantearner. Because of the CypriotEuropeans should be attracted by theprices in terms of their own currencies. travel receipts will increaseif the island can maintain stable prices,its political calm, and develop improved And even under the most favorablegains from tourism will not fully offset

Inaluding grant* from the Turkieh government to the Turkieh Cypriot oommunity.

Table 2

Cyprusi Composition of Foreign Trade

CONFIDENTIAL

tha loss front military oxpendituros for many years.

7. On balance, Cyprus probably willillionillion in foreignearningsn comparisonsin the following tabulation (million US

Increase in trade gap

and Turkish troop withdrawals

7

reduction of military bases

2

6

receipts

9

looeee

Such losses would eliminate or cut deeply into the country's balance of payments surplus.

Trade with Communist Countries

retain balance in ita internationalcontinuing its development efforts, Cyprusand diversifying its bilateral tradeUSSR and other Eastern European countries. the Communist countries willing toagricultural goods difficult to market The Eastern European countries, likeinterested in conserving foreign exchange,are willing to accept low-qualityif no hard currency is involved. with Cyprus involving low-qualityCommunist countries also expand their markets

and occasionally are able to dispose of their own surpluses of obsolete machinery and equipment.

yprus and the USSR signed atrade agreement that not only calls for aincrease in trade but also stipulates aCypriot imports from primarily raw materialsequipment, and semimanufactures such as

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PI DENT IASt

gas pipe, wire, and pig iron. At present, Cyprus has six bilateral trade agreements with Eastern European countries* and will probably increase and diversify its trade with them if the terms ofw Soviet agreement prove satisfactory.

imports from theillionxports to them wereand this trade turnover representedof Cyprus' total foreign trade. Byimportsillion fromand exports8 million accountedpercent of total trade. On the basis oftrade with the Communist countries and theexpand markets for poor-quality CypriotUSSR and Eastern Europe could accountercent of the island's total trade currently Cyprus' most important trade partner

ercent of total trade, probably will see its share of the trade decline.

the past, Cyprus' imports from thecountries consisted mainly of fuel oil,and sugar. Cypriote have shown afor Western-made manufactured goods.

The recent bilateral agreement with theillingness to shift to some Soviet-made manufactured goods if necessary. If pressuredrain on the island's reserves, the government probably would not hesitate to impose controls on imports of Western consumer goods.

of manufactures fromwill be attractive to Cyprus if they can

* In general these agreements consist of commodity lists with set quotas that are renewable annually. Settlements are made through clearing aaoounte denominated in pounds sterling.'

Jjie^paid for with commodities which are difficultapossible to market in the West. Communistalreadyonsiderable amount of Cyprus' agricultural exports, as indicated in Table 3.

Low-quality Cypriot raisins and eau-de-vie de vin command such low prices in Western markets that it if; unprofitable for the is Landers too the West. Other Cypriot exports, such as citrus fruit and potatoes, face increasingly heavy competition in Western markets from Israel, Spain, and other Mediterranean countries.

Communist markets providefor stimulating growth and diversificationexports. In the short run, Cyprusits output of citrus fruit, potatoes,for marketing in the Communistinadequate water resources wouldincreases in the output of these crops forof years. The production of dryfarmingas tobacco, cotton, almonds, and olivesas Cypriot cultivation methods become All of these products, as well ascurrently in surplus in Cyprusanddifficult to market in the West because ofbut they probably could be sold inEuropean countries. ew Cypriotgoods such as low-quality footwearclothing might be marketed in the USSR. also possible that bilateral trade will bein the future if Communist countrieslong-term credits for capital goods. however, have so far been neitherrequested in Cypriot negotiations with

Pronpocts

facing its international economicCypriot government has no obvious alternatives

to expanded bilateral economic relations with the Communist countries. Because of the island's heavy dependence on imports of economic necessities and the government's dependence on customsolicy of rigid domestic economic controls to improve the balance of payments would induce andegree of economic hardship. Expanded economic ties within the sterling area appear unlikely because Cyprus cannot market many of its exports in the West and probably will receive less rather than more economic aid. Moreover, the British devaluation,

the military reduction, and the cessation of British aid have shaken the confidence of many islanders in the desirability of heavy dependence on the United Kingdom. No other Western country is likely to extend the aid required by Cyprus to overcome its incipient balance of payments problems.

15. Soviet interest in expanded trade with Cyprus probably hasolitical motivation. The USSR hopes to have an opportunity to increase its influence in Cyprusime when it is attempting to expand its presence in the Soviet officials may also hope eventually to make some arrangements with Cyprus for use of naval facilities on the island.

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