Marios Charalambides on why flexibility is crucial to diversification

In conversation with Marios Charalambides, Partner and Head of Financial Services at RSM Cyprus, we delve into economic diversification, the importance of speed in decision-making and balancing the benefits of the headquartering boom.

Let’s kick things off with the importance of economic diversification, especially in light of recent macroeconomic shocks. What does it mean to have a diversified economy and how can it help cushion the blows from such shocks?

I’d like to stress the paramount importance of economic diversification, which plays a crucial role in enhancing resilience to both external shocks and internal inconsistencies. However, simply pursuing diversification on a broad scale is not sufficient. Take, for example, the expansive financial services sector, which encompasses banking, asset management, fintech and electronic money institutions, to name just a few. It is equally vital to diversify within the specific components of each sector. Diversification should also extend beyond geographic boundaries. Historically, professional services in Cyprus predominantly focused on Russia and its surrounding regions. However, events in Ukraine have highlighted the need to reach across various economies and regions. It is now evident that investors from Israel and the Middle East are showing interest in Cyprus and, while progress may not be as swift as desired, we are taking steps in the right direction. You also mentioned economic diversification’s role in mitigating external shocks. Indeed, it is necessary to have an economic backup plan in place to absorb such shocks. So, flexibility is another crucial aspect of diversification as it allows for adaptation and pivoting in response to macroeconomic changes.

While smaller economies should find it easier to pivot, this isn’t generally the case in our country, is it?

We find ourselves in an era when speed plays a pivotal role in virtually every facet of our lives. Just imagine the possibilities if we shed the burdensome regulatory constraints of the past and, in their place, implement a more streamlined oversight framework that necessitates careful consideration of the fundamental pillars underpinning our economy’s well-being. How efficiently could we respond to challenges then? With the capability to swiftly implement changes, we would create more job opportunities and bolster economic resilience.

We have received several reputational blows recently, from the Cyprus Investment Programme to Russian-related sanctions. Do you see them hindering our ability to expand our reach to other regions so as to attract foreign investment?

Well, reputation is the cornerstone of success; without the ability to establish ourselves as a reputable financial centre, we will miss valuable market opportunities. Over the past decade, Cyprus has unfortunately suffered from a tarnished reputation. Whether you watch a documentary on Netflix or read articles from abroad around money laundering, Cyprus frequently finds itself in these conversations.

However, I’m inherently optimistic and I believe we can view this as an opportunity. It’s a chance to address the challenges head-on and demonstrate through our actions that we are committed to positive change and moving in the right direction. We have several avenues to explore. Firstly, we can take the lead in adopting EU policies that tackle money laundering, enhance transparency and improve reporting standards. We can be bold and ensure that both government and private sector reports are presented with full transparency, leaving no room for ambiguity or unanswered questions. Moreover, we must recognise the pivotal role played by regulators in any reputable financial centre. By equipping them with the necessary resources and specialised personnel, we can make a significant contribution to our ongoing efforts. We must respond with tangible actions rather than mere words.

Switching gears, the funds industry in Cyprus has experienced serious growth in the past few years. In Q1 2023, assets under management amounted to some €10 billion, compared to €7.7 billion in 2019. Is there more room for growth, considering the small size of our economy, or does the true potential lie elsewhere, such as building a service hub for the industry?

This space offers a multitude of opportunities. I see your point of positioning Cyprus as a prime service hub for funds and fund managers. A recent illustration of this trend is the arrival of MUFG Investor Services to the island. Now, fund management, as the core of asset management, places the fund manager at the nucleus of decision-making. These individuals determine crucial aspects such as the choice of administrators, investment destinations, risk assessments and more. In any industry, there are tier-one, tier-two, and tier-three entities. Given Cyprus’s unique attributes, strategically targeting middle-tier managers simply makes sense. Incentives like a 50% tax reduction for executives can attract them and strengthen Cyprus’ asset management industry. Convincing large institutions like JP Morgan to establish a presence may be challenging but smaller managers can benefit from the existing infrastructure. They can also help us develop local expertise, since specialisation in asset management is still a growing area in Cyprus. Attracting and nurturing these professionals can build critical mass, eventually making Cyprus an ideal destination for larger managers.

Cyprus is doing well in another segment of financial services – a host of fintech companies have recently set up shop on the island. What is driving this heightened interest?

Several factors contribute to this equation. Without a doubt, government incentives stand out prominently. For instance, the 2.5% rate in the IP regime is a significant boon. Additionally, the tax incentives aimed at executives play a pivotal role in this context. And while it may not be the primary focus, the favourable weather conditions also constitute a notable advantage.

We don’t need to sign a petition to see the sun!

It simply adds value.

This headquartering influx, though, has corroded the purchasing power of locals. How can we fix that?

I believe we should establish a mechanism for quantifying the impact of the headquartering boom. Take, for instance, rental prices. While they may remain competitive for foreign businesses, they are becoming prohibitively expensive for our local market as demand surges. Similarly, these incoming individuals will inject money into our economy by patronising restaurants, flower shops and schools, which may drive prices up again, affecting affordability for locals. Also, in the event of business sales, which could involve the sale of shares, there would be no taxes incurred within Cyprus, ultimately benefiting our economy. So, what remains are components such as employment opportunities, rental income and increased economic activity – all significant. Monitoring the economic impact of this influx will enable us to adjust incentives, maintaining a delicate equilibrium between the benefits accruing to the local economy and those arising from the establishment of headquarters.

Let’s wrap up with a discussion on ESG. What strategies, from a policy perspective and at corporate level, will deliver tangible outcomes?

Imagine that during ongoing discussions to revamp our tax system, a carbon pricing mechanism is introduced. Companies actively engaged in reducing their carbon footprint would be eligible for tax reductions. Such a policy not only bestows a competitive edge on Cyprus but also elevates our global standing as a jurisdiction that takes tangible steps toward environmental responsibility. This simple yet impactful idea can make companies more appealing to investors, with the resulting investments ultimately boosting consumption and benefiting the entire economy. It underscores the importance of taking concrete action rather than remaining in the realm of theory. As companies in Cyprus, we can adapt our policies, such as appointing individuals within the organisation to calculate carbon emissions, enhancing suppliers’ assessment scoring tools to include ESG compliance matters, etc. Such practical measures will significantly contribute to the overall wellbeing of our economy.

(Photo by TASPHO)

This interview first appeared in the October edition of GOLD magazine. Click here to view it.