Conceptually, the objectives of the Cypriot citizenship-by-investment (CBI) program are admirable; use the FDI from those seeking second citizenship solutions to generate national economic growth.
The idea is quite normal and appropriate. Canada was at the forefront of this model, which began during the years leading up to the handover of Hong Kong. Today, many countries (including most EU member states) employ such solutions to varying degrees.
Cyprus’ problem, however, has historically been twofold:
First, there is a problem with execution. The Cypriot CBI governmental unit charged with clearing applications is not sufficiently distant from industry players. This state of affairs opens the door to abuse.
The solution is easy: Robust regulatory reform is required, predicated on heightened AML standards, transparency, and governance procedures. Most importantly, all who break the rules (including politicians and bureaucrats) must be criminally prosecuted. Implementing such reforms would immediately neutralise any and all criticism and ensure the viability of the Cyprus CBI program for years to come.
Cyprus’ second problem, however – lack of investment type diversity – is far more complex.
Although there are other available options, the Cypriot CBI program, in terms of applicable investment opportunities, is primarily real estate focused. One simply purchases a two million-plus home and then starts the qualification process.
This has resulted in an artificially overheated property market. Ten years ago, EUR 500,000 bought you a very nice home with a pool and a garden on a hill overlooking Limassol. Today, it buys you a small apartment in the various tower developments across the island.
This concentration of investment in a single asset class in a relatively small economy not only creates a property market outside the reach of ordinary people but also causes developers to increasingly try to outdo each other in order to attract clients, pushing the market up further still. All of this has come crashing down with the CBI program suspension.
Real estate, real economy
People generally believe that Cyprus has four aspects to its economy; tourism, agriculture, financial services, and real estate. Yet, everyone overlooks a fifth, nascent aspect of the economy; small business.
In Cyprus, small business is everywhere. There are no multinationals. Economic consolidation is limited.
There is a small tech sector. There are many small service providers and producers in the automotive and food and beverage industries. There are generic drug producers, telecommunications providers, and light manufacturing. There are private medical and dental clinics.
All of these people make up the “real economy” of Cyprus. They are not sexy like a lawyer or an accountant or a banker, but they are real. They have families and put food on the table. They are hard-working. They make the economy work.
One thing Covid-19 and the world-wide lockdown showed us is that a fixation on economies of scale and a global supply chain creates issues. Germany, with all its power and wealth, could not make simple masks.
As stated, the Cyprus CBI program provides an investor with the option of purchasing real property in excess of two million euros or allows one to invest the same amount in either a small business or a specially certified alternative investment fund. If you choose the non-real estate options, you are additionally mandated to purchase real property valued in excess of EUR 500,000.
This additional requirement for the latter two options creates an uneven playing field that favours developers. To date, over 95% of all FDI into Cyprus under the program has gone into real estate in some fashion or another.
Real estate developers are not bad people. They are not all crooks selling passports to criminals, notwithstanding Al-Jazeera’s now-infamous, sensationalist exposé. I know many of them in many different countries. They have ideas; they have dreams. They want to create and build the very cities that we all live in.
But they are not alone. There are many small business people that share the same dreams but, unfortunately, they have not yet been able to access the Cyprus CBI program in any meaningful way.
The future of Cyprus’ CBI program entails regulatory reform, no doubt. This is positive and should occur. Hopefully, it also encompasses a rebalancing of the FDI criteria in order to create a fighting chance for the rest of us; so that we can better help foster a greater economic diversity for Cyprus.
Steven is a director at Saratoga Capital, a Nicosia-based PE group focused on emerging markets. In addition to normal PE and asset management, Saratoga provides optimal returns for 2nd citizenship and permanent residency investor candidates interested in the Cyprus Naturalisation by Exception Programme. He is a partner in the Nicosia office of Penenden, a CEE-focused law, accountancy, and advisory firm. He functions as the General Counsel of Amedici, a capital markets engagement platform.