Crisis Means Major Changes on the Way in Casino Sector

Cyprus is bracing itself for what could turn out to be the deepest and longest-running recession in its history. Before 2008, the economy of Cyprus was stable, and Cypriots were among the highest earners in the Mediterranean region with a GDP per capita of $30,000. However, the economy moved into recession in mid-2009 and contracted 1.8 percent for the year. The main reason behind the economic slowdown was that the Cypriot banking sector accounted for about five times the size of the nation’s GDP, and Cypriot banks were among the largest holders of Greek debt in Europe. During the global financial crisis, Cypriot banks suffered major losses, many of them on Greek government bonds and through exposure to Greek banks. In 2011, ratings agency Moody’s cut Cyprus’ credit rating, and then in March 2012, slashed Cyprus’s credit rating to junk status.

To avoid financial collapse and faced with the possibility that it would default, the government was forced to turn to the European Union and the International Monetary Fund for help. In March, Cyprus agreed to a €10 billion bailout. In return, the government has agreed to tax hikes, the selling off of some state-owned assets, a raft of cost-cutting measures and a restructuring of its banking sector, including the closure of its second-largest bank, the Cyprus Popular Bank. It is estimated that the government’s cut on fiscal spending will amount to 4.5 percent of GDP and that, as these cuts go into effect, the economy could shrink by as much as 12.5 percent over the next two years. Unemployment also is expected to rise. Now standing at 14.7 percent, the unemployment rate is estimated to increase to more than a quarter of the population as the recession deepens.

In an effort to raise revenues, the government is looking at a number of ways to help pull the island out of recession. One of Cyprus’ strongest industries is tourism, which accounts for about a sixth of the economy. Tourist arrivals hit a 20-year low in January 2011, but in 2012, tourist numbers increased by 10 percent compared with 2011. To improve tourist infrastructure and increase the number of attractions offered, the government is considering something that under previous administrations would have been unthinkable: green-lighting large-scale resort casinos on the island.

Previous governments have adamantly opposed the creation of a casino industry, and this opposition has been supported by the Orthodox Church of Cyprus, which remains a powerful force in local politics. Only in 2009 did former President Demetris Christofias declare, “There will be no casinos in Cyprus as long as I am president.”

Despite opposition, it was revealed in 2012 that the government already was considering allowing five large-scale casinos on the island. In documents published by Greek newspaper Politis, each license would have cost €100 million to raise €500 million to help meet government shortfalls. The newest proposals are part of President Nicos Anastasiades’s 12-point growth plan: a group of measures designed to attract foreign investment to the island.

Casinos have been permitted in Turkish Cyprus since 1975 but never before on the Greek part of the island. Cyprus is broadly divided into two main ethnic communities, Greek Cypriots and Turkish Cypriots, and Cyprus has been divided into two parts since 1947 when the Turkish army invaded the island. The Turkish Republic of Northern Cyprus has been subjected to an international embargo ever since, and all goods in shops and services are provided by Turkey. In order to raise revenue locally, the Turkish government began to promote its part of the island as a tourist destination, and it also began to promote the casino industry locally in Turkish media.

Although growth in the industry was initially slow, casinos in Cyprus were given a huge boost when the Turkish government banned casinos on the mainland in 1996 after it was found that casinos had been infiltrated by organized crime, putting an end to an industry that was then valued at $1 billion. It was positive news for the casino industry in Turkish Cyprus as the ban led to a quick growth with significant investments in the construction of new five-star hotel-casino complexes.
Today the industry in Northern Cyprus is well-developed, and the 25 casinos now operating account for $600 million in annual revenues. Although they are popular with European tourists and Greek Cypriots alike, Turkish players make up 90 percent of the market, with the vast majority of players coming from the Turkish mainland.

Plans for casinos on the Greek part of the island are still at an early stage, and the government is expected to complete a study into the issue at the end of May 2013. For now it is unclear exactly how many casinos will be allowed on the island and how they will be taxed, but because of cash shortages it is likely that any operator seeking to get involved will be expected to pay a significant license fee. According to lawmakers responsible for drafting the new act, its guiding principle will be the protection of citizens from the potentially harmful effects of gambling.

Minister of Justice and Public Order Ionas Nicolaou told the press: “The bill we have drafted meets recommendations made by the Cyprus Tourism Organisation on resort casinos. We have examined legislation used in other countries; we have incorporated strict provisions both as regards its operation and the protection of citizens.” Meanwhile, according to the Minister of Tourism George Lakkotrypis, the government hopes the first casinos will open their doors to the public in the next two years. It is also believed that officials have been instructed to go back to the findings of a 2007 government-run study, which predicted that casinos in Cyprus could bring in €50 million in annual tax revenue.

Aside from its idyllic natural setting, Cyprus holds one significant advantage for any future casino industry: its popularity among Russian tourists. Income from Russian tourists is expected to top €2 billion by the end of 2013. In July 2009, Russia banned gambling nationwide, with the exception of four regional areas, so the new casinos are especially bound to prove popular among Russian visitors.

New gaming laws also could affect the online industry. In July 2012, the government imposed a ban on online casinos and gambling sites and in February 2012, the National Betting Authority (NBA) ruled that users would be blocked from accessing 270 offshore betting sites. The ban encompassed online casino games and exchange betting. The act angered locals because it favored Greek lottery group OPAP, as OPAP’s online lottery products did not fall under regulation in Southern Cyprus because its operations are covered by a bilateral agreement between the governments of Greece and Cyprus. To raise additional tax revenue, the government may soon liberalize the market to offshore operators.

Due to the severity of the current crisis, it is almost certain the government will pass a new gaming act quickly, once the report is published, with very little opposition because the issue of casinos is now considered an urgent matter by the current administration. Although developments are at an early stage, it appears certain that major changes are on the way in Cyprus, especially as the government is looking at paving the way for large-scale resort casinos. The hope is that significant foreign investment in the area will help kick-start the economy and create jobs, and that once the casinos are constructed and up and running, the government will be able to reap the tax benefits of a well-regulated gaming industry.

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