Island Lovin': Chasing Revenue in Cyprus, Falklands

No pina coladas for you I'm afraid. On today's blogging menu are--can you believe it--tax cheats and squid. In the past I've enumerated the generic ways island nations or protectorates generate revenues:

1. tourism
2. tax havens (paradis fiscaux)
3. offshore gambling sites
4. flags of convenience
5. nationality for sale

How it managed to get into the EU despite unresolved conflicts between its Greek and Turkish parts aside, there is not much of a mystery about what is happening in Cyprus. Like that of Greece which it highly resembles, Cyprus has few competitive advantages. What's more, after the global financial crisis, it has not been able to take much advantage of traditional revenue-generating measures listed above. End result? Ho-hum, another Eurozone banking crisis.

What is notable here however is the EU's apparent willingness to destroy a pillar of the Cypriot, erm, "economy": its status as a tax haven for wealthy Russians. Alike Iceland, the creation of an outsized financial industry relative to the "real" economy did not bode well when global economic conditions turned sour. Sure it does the touristy and shipping stuff as well, but its bread and butter has really been (dodgy?) finance. With the EU-IMF bailout in place, things will change drastically in this respect:

The overall impact will be a dramatic change for Cyprus’s economy. Over the past 30 years, since the fall of the Berlin Wall, the island has banked on its ability to attract money from Russia and elsewhere as an offshore center. Oversight has been tightened up since Cyprus joined the E.U. in 2004, but it remains relatively lax by international standards, and foreign companies pay a flat tax rate of just 10%. For a while the strategy seemed to work well; Cyprus built up a gargantuan banking industry, which is currently about five times the size of its total economy, according to Standard & Poor’s.

About one-third of the $88 billion in deposits in those banks are from Russians, who have increasingly used the island’s banking system as a tax-sheltered conduit for their financial transactions worldwide. Indeed, Cyprus shows up in international statistics as a huge investor in Russia itself, as a result of “round-tripping” by Russians who didn’t entrust their money to their own national banking system. According to European Central Bank statistics, more than 40% of the deposits in Cyprus banks are in excess of $650,000

Estimates vary as to the Russian portion of deposits in Cyprus; another source says it's more like 40% for a total of $32 billion. Whatever the source, the EU-IMF brokered deal is going to inflict a massive haircut on deposits over EUR 100,000 not covered by insurance since (a) the losers are not EU citizens anyway and (b) the European Union has been cracking down hard on tax havens anyway after the global financial crisis to shore up member states' revenue losses. There was some loose talk about how Russia might offer an alternative (read: more attractive) bailout package to the Cypriots, but it has not materialized.

So, to pile on more woes, Cyprus needs to find another way to make ends meet now that the EU has effectively scuttled its status as a tax haven.

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Another island economy which is having some challenges making ends meet are the Falklands. Obviously, it does not have many natural trade partners in South America since it's not only the Argentines who regard its British rule as an imperial-era throwback but nearly everyone else in the Southern hemisphere. Apparently, the list I prepared above was incomplete since the Falklands have been relying on fishing licenses for squid for revenues:

Squid licenses have provided about half the Falklands government's revenues over the years, ever since it showed it meant business by chasing an unlicensed Vietnamese shrimper all the way to South African waters, and firing into its hull along the way.  

That said, the Falkands conflict has created difficulties for this potentially lucrative activity insofar as both the British and the Argentines are suffering from the presence of a huge flotilla of illegal fishing vessels in search of squid that is said to be of largely Chinese origin. And speaking of their conflict, Argentina's navy hasn't fully recovered from the Falklands War, making it even more difficult to deter poachers:

Argentina pulled out of a fisheries management organization it had shared with Falklands in 2005. The lack of cooperation has left both sides ill-equipped to deal with the fleet scooping up squid just beyond their maritime boundaries, and sometimes within. "It's like the Wild West out there," said Milko Schvartzman, who campaigns against overfishing for Greenpeace International. "There are more than 200 boats out there all the time," and many routinely follow squid into Argentina's economic exclusion zone, he added. "Unfortunately the Argentine government doesn't have the naval capacity to continually control this area."

The Falklands are defended by British warships, planes and submarines, giving the fisheries agency considerable muscle to enforce licenses in its waters. But Argentina's navy has never recovered from its 1982 war against Britain for the islands, and its coast guard has just eight ships to cover more than 1 million square miles (2,800,000 square kilometers) of ocean, said its chief of maritime traffic, Mario Farinon.

Farinon says the lack of seizures doesn't mean Argentina isn't trying. The coast guard always has at least one enforcement boat monitoring the squid fleet," he said, and "the important thing is not capturing them, but preventing them from coming in." Still, the problem is so big that it can be seen from space: Images of the Earth at night, taken by a NASA satellite last year, show darkness at sea the world over, except for this spot in the South Atlantic. There, 200 miles from the nearest coasts, the lights of this renegade fleet shine as brilliantly as a city.

As literally a common pool resource, both the Falklands and Argentina are harmed by the latter's inability to prevent overfishing as squid stocks diminish. After all, why pay for a fishing license what you can get for free in Argentina's supposed area of jurisdiction? It's interesting how formal Argentina-China economic cooperation in currencies is set against the backdrop of the latter being unwilling to discourage this kind of rampant poaching.

Make no mistake: island life ain't one of permanent vacation. Go ask the Cypriots or the Falklanders.