April 4 (Bloomberg) -- For five years, Ertan Ercantan made a living selling Turkish rugs to Greek Cypriots coming across the border that splits Cyprus’s capital Nicosia in half. Overnight, they’re gone, he said.
“If things are bad for them, they are bad for us too,” Ercantan, 70, said as he smoked a cigarette and sipped traditional Turkish coffee in his empty shop on March 27. “Look at the street here. Normally these streets are full of people. Now, they are empty.”
Turkish and Greek Cypriots have been arguing over territory for half a century, yet in the island’s Turkish-controlled north there are no signs of schadenfreude over the financial crash in the internationally recognized state to their south. Instead, Turkish Cypriots expect to share the pain because cross-border business has thrived since 2004, even after the failure of a United Nations plan to unify the country.
“This isn’t going to be good for the Turkish Cypriots, politically or economically,” said James Ker-Lindsay, a lecturer at the London School of Economics and author of “The Cyprus Problem.” “They have forged links with the Greek Cypriots over the past 10 years, and a lot do cross over for jobs. We’re talking about a potential massive contraction of the Cyprus economy.”
Cyprus has been divided since 1974, when Turkey invaded after a coup by supporters of union with Greece. Turkey keeps about 30,000 troops in the north and is the only country to recognize a Turkish Cypriot state. Greek Cypriots rejected the UN plan in a referendum nine years ago on the eve of joining the European Union, while the Turks voted in favor.
Greek Cypriots make up more than three-quarters of the island’s population of 1.15 million. They are two-thirds richer than their Turkish neighbors, with per-capita output of $25,600 last year, according to the International Monetary Fund. In the north, aid from Turkey is a key prop for an economy largely cut off from international markets. It received 800 million liras ($440 million) of Turkish grants and loans last year.
The wealth gap may be about to narrow as Cyprus’s economy heads for recession after the collapse of its two biggest banks rocked European financial markets.
The Greek Cypriot government last month shut down the entire banking industry, central to the economy’s growth, for almost two weeks. It also agreed to an EU bailout that involves budget austerity, seizing cash from bank depositors, and the euro area’s first capital controls.
Since March 28, a sign at the crossing on Nicosia’s Ledra Street, near where Ercantan sells carpets, tells Greek Cypriots that they can’t take more than 300 euros across the border.
There may soon be fewer Turks traveling in the opposite direction for work, too.
As many as 3,000 Turkish Cypriots are employed in the south, mostly in construction, and doubts about their job prospects has businesses on the northern side worried, said Kemal Baykalli, deputy general secretary of the Turkish Cypriot Chamber of Commerce.
Like many Turkish Cypriots, Baykalli said he’s hopeful that something good may come out of the banking collapse, in the form of new momentum for reunification.
“Logic tells us that we have to find a way to cooperate on this small island to overcome the crisis,” he said.
On the Greek side, Caesar Mavratsas, a professor of sociology at the University of Cyprus, agrees, though that doesn’t mean he thinks it’s going to happen.
“The rational or responsible thing to do at this point would be to solve the Cyprus problem because that would lead to economic development,” he said. “But in Greek Cypriot politics, rationality and responsibility have been very scarce.”
Sticking points in 2004, and in subsequent UN-backed talks, include property rights, status of settlers from Turkey and power-sharing in a remodeled state.
About three-quarters of Greek Cypriots found the UN proposals on those issues unacceptable, and voted “no.” Among the minority in favor of reunification, and one of the few leading Greek Cypriot politicians to take that position, was Nicos Anastasiades, who was elected president in February.
“This is a great opportunity for Anastasiades to become a true statesman,” Mavratsas said. “I’m not very optimistic because even members of his own party do not agree with him.”
On the Turkish side of Nicosia, Melis Eroglu, 26, said she would vote “yes” to unification, as two-thirds of Turkish Cypriots did last time.
“My vote wouldn’t be about joining the euro zone,” she said during her shift in a bookstore in the historic city center. “It’s about having one Cyprus rather than a divided country.”
Greek Cypriots are pinning their hopes on offshore natural gas discoveries to replace some of the revenue lost from the collapse of the financial-services industry. Mavratsas cites the chance to develop those reserves as one advantage to a settlement with Turkey.
“It’s going to be much more expensive for us if we send it through Greece,” he said.
Turkey has objected to Cyprus’s search for gas on the grounds that Turkish Cypriots should share in any benefits. After the Greek Cypriot government authorized the start of drilling in 2011, Turkey announced its own exploration plans off the north, and sent sent frigates and fighter jets to escort its seismic ship.
Turkey has shelved projects with Italy’s Eni SpA because it’s taking part in the exploration in Cyprus, Energy Minister Taner Yildiz said on March 27. “No energy project in the region is feasible without Turkey,” Yildiz said this week.
Mehmet Ali Talat, a supporter of unification who negotiated with Greek Cypriots as head of the Turkish Cypriot state in the five years through 2010, points to tourism and new construction as another incentive for a reunification deal.
Varosha, a kind of no-man’s land on the east coast, is the most obvious example of unused economic potential. Fenced off by barbed wire since 1974, the resort’s hotels, restaurants and bars, once the island’s smartest, stretch along a sandy beach where wild cactuses grow. Many of the buildings were gutted by rockets during the invasion, while others have fallen into ruin since then.
Under Turkish military control, Varosha’s status is another stumbling block in unity talks. “Investments would skyrocket” if the talks succeed, Talat said in an April 1 interview in Nicosia.
Turkey is pushing for a quick resumption of talks. President Abdullah Gul, speaking during a trip to Lithuania yesterday, said the financial crisis and the change of government in the south should be seen as an opportunity.
Cypriot Foreign Minister Ioannis Kasoulides suggested that Turkey is trying to take advantage of a country in crisis.
“Some are calling for an immediate start to negotiations and are trying to exploit our difficult and weak position,” he said. “We don’t intend to immediately start negotiations.”
For all the potential economic benefits of reunification, Greek Cypriots are probably too daunted by their country’s financial collapse to address such a major challenge now, according to Ker-Lindsay at the LSE.
“Cypriots tend to be quite conservative,” he said. “At the moment, they might be surveying the economic landscape and saying look, we just can’t risk it, it’s too big a task.”
In Nicosia, Ercantan, the rug-seller, said he’s seen plenty of hard times before. For four of the five decades his shop has been open, it was separated from potential Greek Cypriot customers by armed sentries and barbed wire. Still, he said he’s fearful of the economic crisis unfolding in the south.
“I think things will be very difficult for a long time,” he said. “This is not good for any of us.”
To contact the reporter on this story: Tom Stoukas in Athens at email@example.com.