CYPRUS: INCREASING ECONOMIC DEPENDENCE ON THE USSR AND EASTERN EUROPE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001600010045-1
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 14
• Document Creation Date: December 22, 2016
• Document Release Date: October 1, 2009
• Sequence Number: 45
• Publication Date: August 1, 1968
• Content Type: IM

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Confidential
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Cyprus: Increasing Economic Dependence
on the USSR and Eastern Europe
Confidential
ER IM 68-96
August 1968
copy N2 61
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WARNING
This document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
August 1968
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
Communist countries. A 1968 trade agreement with
the USSR provides for a 50-percent increase in trade
during a five-year period and for stepped up Cypriot
purchases of Soviet machinery, equipment, and
semimanufactured goods -- items formerly obtained
almost entirely from Free World suppliers. The
share of Communist countries in Cyprus' foreign
trade rose from 3.5 percent in 1961 to 8.5 percent
in 1967, and may reach 20 percent to 25 percent by
the early 1970's.
A decline in two of Cyprus' largest sources of
foreign exchange has begun: foreign military spend-
ing has diminished rapidly as British, Greek, and
UN troops have been withdrawn, and exports of miner-
als are falling because of the exhaustion of mineral
reserves. Other exports -- mainly foods -- are ris-
ing, but most are of low quality and are noncompeti-
tive in world markets.
Cyprus, however, must expand exports to v for
imports and must increase imports to sL?pport ._ c(.):~lc~._:i c
growth. Trade with the Communist countries :-lc?;.:
offered a solution to this problem because :icse
countries are willing to accept low-quality agri-
cultural products from Cyprus in exchange for their
Note: 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.
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own manufactures, which are also difficult to sell
for hard currency.
Soviet interest in expanded trade with Cyprus
probably has mainly a political motivation. The
Soviet Union hopes to have an opportunity to in-
crease its influence in Cyprus at a time 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.
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The Cypriot Economic Dilemma
1. The Cypriot economy has prospered since
the advent of independe..nce in 1960
despite con-
,
tinuous political strife and chronic trade deficits.
Gross national product (GNP) in real terms has in-
creased at an average rate of 6 percent per year
and in 1967 reached $400 million. Per capita GNP
of about $650 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
Table 1) . By March 1968, foreign exchange reserves
were $157 million -- enough to cover about one
year'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 competitive posi-
tion of 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 focus during 1967,
when the Cypriot pound was devalued (by 14.3 per-
cent in terms of sterling exchange, or by a 16.7-
percent increase in the cost of dollar exchange),
foreign 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
(one-third of total exports) and agricultural prod-
ucts (more than one-half of exports). The mineral
deposits, primarily copper, are rapidly running out
and may be entirely exhausted by 1972. Agricultural
exports are of poor quality and difficult to market.
The value of total exports increased by 24 percent
in 1965, by 15 percent in 1966, and by only 2 percent
in 1967 (see Table 2) . Devaluation was necessary in
late 1967 to prevent a further 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 to cause a deterioration in
the trade balance.
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Table 1
Cyprus: Balance of Payments
1963, 1966, and 1967
Million US $
1963
1966
1967
Current account
-8.0
3.9
6.1
Trade balance, f.o.b.
-59.1
-56.6
-62.2
Imports
-114.3
-133.9
-143.1
Exports
55.2
77.3
80.9
Services balance
33.0
49.0
57.4
Government
45.1
64.7
68.9
Of which:
Foreign military
expenditures
Travel
4.5
2.0
3.6
Freight and insurance
-10.9
-13.2
-14.3
Other services
-5.7
-4.5
-0.8
Transfer payments
Private
10.0
10.4
10.1
Central government
8.1
1.1
0.8
Capital account
Private investment
7.8
12.0
12.3
Central government
-1.4
-2.2
-2.2
Balance of capital
and current accounts
a. Preliminary.
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4. At the same time, foreign exchange inflows from
foreign military expenditures will decline. The is-
land's principal source of foreign exchange, British
military expenditures, has already fallen. The
British reduced their spending to $38 million in 1966,
compared with $45 million in 1961, and then announced
their intention to cut spending by a further 20 per-
cent. In view of the United Kingdom's present economic
difficulties, further declines in British spending
are likely.
5. During the past few years, the foreign exchange
inflow from Greek and Turkish forces stationed legally
or illegally on the island has amounted to about $17
million annually,* enough to cover almost a third of
the island's trade deficit. Withdrawal of these forces
began in December 1967, however, and by the end of
January 1968 an estimated 70 percent of these troops
had been withdrawn. Foreign exchange inflows from
the UN forces on the island are about $6 million
annually, and this military contingent is being cut
back as well. If a Cyprus settlement is reached, the
UN expenditure will ce ac;e .
6. Prospects are dim for the rapid growth of
other foreign exchange sources. Foreign direct in-
vestment, for example, reached a peak of only $6
million in 1965, and has since declined. Transfer
payments, consisting mainly of emigrant remittances,
amount to only about $11 million annually and are not
likely to increase substantially. Tourism has the
best chance of becoming a more important foreign
exchange earner. Because of the Cypriot devaluation,
Nestern Europeans should be attracted by the island's
lower prices in terms of their own currencies. But
foreign travel receipts will increase substantially
only if the island can maintain stable prices, con-
tinue its political calm, and develop improved tou-ist
facilities. And even under the most favorable cir-
cumstances, gains from tourism will not fully offset
* Including grants from the Turkish government to
the Turkish Cypriot community.
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Cyprus: Composition of Foreign Trade a/
19.64-67
Value in Million US $
1964 1965 1966 1967
Value Percent Value Percent Value Percent Value Percent
Beverages and tobacco 3.9 6.8 5.0 7.1 7.0 8.6 7.6 9.1
Crude materials 22.1 38.5 28.0 39.5 36.7 44.8 27.8 33.2
Asbestos 1.6 2.3 2.3 2.2
Iron pyrites 4.3 4.6 6.0 6.9
Copper concentrates 12.0 15.5 21.8 12.2 O
Cupreous pyrites 1.4 3.0
3.7 3.3 Z
171
Food 24.1 42.0 31.4 44.3 31.6 38.6 39.4 47.1
Machinery and transportation equipment 3.9 6.8 3.4 4.8 3.1 3.8 4.1 4.9 ~
Miscellaneous 3.4 5 9 3 1 A A
3
Animal and vegetable oils
Beverages and tobacco
Chemicals
Crude materials
Food
Machinery and transportation equipment
Manufactured goods
Mineral fuels
Miscellaneous
?
.4 4.2 4.8 5.7 tt
57.4 100.0 70.9 100.0 81.8 100.0 83.7 100.0
2.0 1.9 2.8 1.9 3.1 2.0 2.7 1.6
2.2 2.1 2.5 1.7 2.2 1.4 2.5 1.5
9.8 9.3 12.9 9.0 15.4 9.9 14.7 8.9
2.5 2.4 3.4 2.4 3.6 2.3 3.8 2.3
21.0 20.0 21.6 15.0 22.4 14.5 24.1 14.5
19.3 18.3 35.3 24.5 36.1 23.3 38.4 23.2
27.4 26.0 39.5 27.4 42.8 27.6 46.4 28.0
9.5 9.0 10.1 7.0 10.6 6.8 12.0 7.2
11.5 10.9 16.0 11.1 18.8 12.1 21.1 12.7
Total 105.2 100.0 144.1 100.0 155.0 100.0 165.7 100.0
a. These data differ from balance of payments data because they are based on customs returns, which
measure exports and imports as they cross customs frontiers. Balance of payments figures measure pay-
ments for traded merchandise, which differ in timing from movements of goods. Moreover, import figures
here are c.i.f., whereas imports in the balance of payments are f.o.b. Because of rounding, components
may not add to totals shown.
z
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the loss from military expenditures for many years.
7. On balance, Cyprus probably will lose be-
tween $12 million and $23 million in foreign ex-
change earnings in 1968, in comparison with 1967, as
shown in the following tabulation (million US $) :
Increase in trade gap
-12
to
-14
Greek and Turkish troop
withdrawals
- 7
to
-16
UK reduction of military bases
- 2
to
- 6
Tourist receipts
+ 9
to
+13
Net losses
-12
to
-23
Such losses would eliminate or cut deeply into the
country's balance of payments surplus.
Trade with Communist Countries
8. To retain balance in its international accounts
while continuing its development efforts, Cyprus is
expanding and diversifying its bilateral trade with
the USSR and other Eastern European countries. It
finds the Communist cou.tries willing to import
Cypriot agricultural goods difficult to market else-
where. The Eastern European countries, like Cyprus,
are interested in conserving foreign exchange, and
they are willing to accept low--quality agricultural
goods if no hard currency is involved. Through
agreements with Cyprus involving low-quality goods,
the Communist countries also expand their markets
and occasionally are able to dispose of their own
surpluses of obsolete machinery and equipment.
9. In March 1968, Cyprus and the USSR signed a new
five-year trade agreement that not orly calls for a 50-
percent increase in trade but also stipulates a shift
of Cypriot imports from primarily raw materials to
machinery, equipment, and semimanufactures such as
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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 of the
new Soviet agreement prove satisfactory.
10. Cypriot imports from the Communist countries
were $3.2 million in 1961, exports to them were $2.4
million, and this trade turnover represented 3.5
percent of Cyprus' total foreign trade. By 1967,
Cypriot imports of $11.3 million from Communist
countries and exports of $:.8 million accounted for
8.5 percent of total trade. On the basis of trends
in trade with the Communist countries and the need
to expand markets for poor-quality Cypriot products,
the USSR and Eastern Europe could account for 20 to
25 percent of the island's total trade by 1972. The
UK, currently Cyprus' most important trade partner
(34 percent of total trade in 1967), probably will see
its share of the trade decline.
11. In the past, Cyprus' imports from the Com-
munist countries consisted mainly of fuel oil, timber,
cement, and sugar. Cypriots have shown a strong
preference for Western-made manufactured goods.
The recent bilateral agreement with the USSR, how-
ever, indicates a willingness to shift to some
Soviet-made manufactured goods if necessary. If
pressured by a drain on the island's reserves, the
government probably would not hesitate to impose
controls on imports of Western consumer goods.
12. Imports of manufactures from Communist
countries will be attractive to Cyprus if they can
be paid for with commodities which are difficult or
impossible to market in the West. Communist coun-
tries already absorb a considerable amount of
Cyprus' agricultural exports, as indicated in
Table 3.
* In general these agreements consist of commodity
lists with set quotas that are renewable annually.
Settlements are made through clearing accounts
denominated in pounds sterling. '
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Cyprus: Communist Countries' Share
of Cypriot Exports, by Selec'~ed Commodity
1961 and 1967
Thousand US $
Percent
Commodity
1961
1967
1961
1967
Citrus fruit
862.4
4,286.0
14
34
Eau-de-vie de vin
(Cypriot raisin alcohol)
2,269.2
97
Hides and skins
92.4
354.4
15
61
Leaf tobacco
84.0
229.6
14
99
Orange juice
125.2
89
Potatoes
810.6
8
Raisins
1,164.8
635.2
89
80
Wine in casks
47.6
324.4
4
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Low-quality Cypriot raisins and eau-de-vie de vin
command such low prices in Western markets that
it is unprofitable for the islanders to export
them to 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.
13. The Communist markets provide considerable
scope for stimulating growth and diversification of
Cypriot exports. In the short run, Cyprus could
raise its output of citrus fruit, potatoes, and
grapes for marketing in the Communist countries,
although inadequate water resources would preclude
large increases in the output of these crops for a
number of years . The production of dryfarming crops
such as tobaccos cotton, almonds, and olives can
increase as Cypriot cultivation methods become more
efficient. All of these products, as well as olive
oil -- currently in surplus in Cyprus -- and wool,
are difficult to market in the West because of low
quality, but they probably could be sold in the
Eastern European countries. A few Cypriot manu-
factured goods such as low-quality footwear and
knitted clothing might be marketed in the USSR. It
is also possible that bilateral trade will be stimu-
lated in the future if Communist countries give
Cyprus long-term credits for capital goods. Such
credits, however, have so far been neither offered
nor requested in Cypriot negotiations with Communist
countries.
Prospects
14. In facing its international economic problems,
the Cypriot 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 customs revenues,
a policy of rigid domestic economic controls to
improve the balance of payments would induce an un-
acceptable degree 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,
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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 r 'uired by Cyprus to
overcome its incipient balan .)f payments problems.
15. Soviet interest in expanded trade with
Cyprus probably has mainly a political motivation.
The USSR hopes to have an opportunity to increase
its influence in Cyprus at a time when it is
attempting -Co expand its presence in the Mediter-
ranean. Soviet officials may also hope eventually
to make some arrangements with Cyprus for use of
naval facilities on the island.
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