Shockwaves spreading throughout Europe and the world from the financial crisis in Cyprus aren’t expected to cause much of a ripple for mainstream businesses in Israel, despite the proximity of the two countries. It could have a larger impact on specific business sectors, however, such as Israel’s Mekorot water company, which is near completion of a desalination plant on the island.
Israel’s five largest banking groups have reported having no direct exposure to the island country, and the head of the Israel Export Institute claimed little if any Israeli exports would be affected by the measure. Many Israeli companies base their operations in Cyprus because of the proximity and its lower tax rates: 10% compared to 25% in Israel on income and complete exemption from capital gains tax deriving from the sale of assets located outside the country.
Neither does Cyprus apply withholding tax on dividends paid to foreigners. But under Cypriot law, companies must be managed and controlled from the country’s territory to be deemed Cypriot companies for tax purposes: Otherwise they are only taxed on income earned in Cyprus itself.
Providing a toehold in the eurozone of which it’s a member nation, Cyprus is a popular venue for currency-trading (forex) firms and gambling operations run by Israelis.
Cyprus pleaded for a new loan from Russia Wednesdayto avert a financial meltdown, but won no immediate relief after the island’s parliament rejected the terms of a European bailout, raising the risk of default and a bank crash. Finance Minister Michael Sarris said in Moscow he had reached no deal with his Russian counterpart Anton Siluanov, but talks would continue. Russia’s finance ministry said Nicosia had sought a further 5 billion euros on top of a five-year extension and lower interest on an existing 2.5 billion euro loan.
Cyprus has to seek Moscow’s help after the eurozone’s plan for a 10 billion euro bailout was cast into disarray on Tuesday when the island’s parliament rebuffed EU demands for a levy on bank deposits to raise 5.8 billion euros. Moscow has its own interests in ensuring the survival of Cypriot banks, which have served as an offshore financial haven for Russian businesses and individuals.
The European Central Bank’s chief negotiator on Cyprus, Joerg Asmussen, said the ECB would have to pull the plug on Cypriot banks unless the country took a bailout quickly.
Israel’s major banks − Leumi, Hapoalim, Israel Discount Bank, Mizrahi Tefahot and First International Bank of Israel − all said they had already avoided transferring deposits to Cyprus after identifying it, along with other European countries, as posing too high a risk in light of the financial crises sweeping the continent. Some Israeli banks, however, said they might be subject to indirect exposure to the Cypriot banking system through clients operating in Cyprus.
The Israeli Credit Insurance Company hasn’t yet raised its premium on trade with Cyprus despite its growing financial crisis, but is considering doing so. The company has ranked Cyprus as a high risk for the last six months while placing the unaffected independently-controlled northern part of the island in its “highest risk” category.
Chemicals and refined petroleum products accounted for 92% of Israel’s $912 million exports to Cyprus in 2012, with Oil Refineries Ltd. (Bazan) the largest exporting company by a wide margin. Other companies with sizable exports were IDE Technologies, Hogla Kimberly, Ormat Industries, Haifa Chemicals, Carmel Olefins and Netafim. Israel’s exports to Cyprus dipped 3% compared to 2011 while imports tripled to reach $965 million.
Meanwhile the Cypriot government decided to halt purchases of desalinated water in light of the crisis and relatively heavy rainfall accumulations over the past few months. The move could have implications for Israel’s government-owned Mekorot water company, which is close to completing a desalination plant at Limassol with daily production capacity of 60,000 cubic meters. Cyprus is contractually obligated to pay Mekorot even if it doesn’t use water from the facility, but may find this difficult due to its financial predicament.
According to industry sources, Cyprus has relatively little storage capacity in its reservoirs and might soon be faced with no choice but to resume buying desalinated water. Four years ago the country reverted to paying an exorbitant price to import water by tanker from Greece during a drought.
The crisis might also delay the laying of a 2,000 megawatt undersea power cable connecting Israel and Cyprus by the Israel Electric Corporation. The cable is meant to provide mutual backup in the event of a power plant shutdown or an unexpected overload in demand.
Cyprus, with European Union assistance, also has plans to run a power cable to Crete in Greece. The project will cost an estimated 1.5 billion euros and would provide Israel access to Europe’s electric grid.