Loss of 1.5% to 2% of Cypriot GDP due to a ban on Russian flights

Cyprus could lose 1.5% to 2% of its growth rate this year if the Cypriot airspace (under EU sanctions) to Russia remains closed for the whole of 2022, estimates the rating agency DBRS Morningstar, noting that despite the negative impact, the war in Ukraine will not derail the medium-term prospects of the Cypriot economy.

In a comment released today, the Canadian credit rating agency notes that the imposition of sanctions against Russia after its invasion of Ukraine, as well as Moscow's sanctions, "have increased the downside risks to the otherwise strong medium-term economic outlook of Cyprus".

According to DBRS Morningstar, the risks come from tourism revenues and higher energy prices.

"DBRS Morningstar estimates that Cyprus could lose 1.5% to 2% of GDP in 2022 if the airspace closure is maintained for the whole year," it said, noting that "the impact will be much smaller if the restrictions are lifted before the summer season or if Russian tourists find alternative routes to Cyprus".

Because the Russian market is the second largest for Cypriot tourism, the company adds that the ban on flights could reduce tourist arrivals by about 20% to 25% in 2022, although it believes that the Cypriot tourism industry will attract tourists from other markets, including the United Kingdom.

It also pointed out that even if the sanctions on flights are short-lived, the arrivals of Russian tourists in Cyprus are expected to be seriously affected by the large impact of the sanctions on the Russian currency and economy.

"It is clear that the tourism industry may face short-term pressures due to the setback in Russia, however, the comparative advantage of Cyprus in relation to the attractiveness of tourism will remain supportive this year," it added.

DBRS Morningstar is of the opinion that the benefits from the improving situation in relation to the coronavirus pandemic in Europe and the stimulus measures provided by the EU will mitigate the risks and continue to support the economic recovery of Cyprus. "DBRS Morningstar continues to believe that the medium-term prospects of Cyprus remain solid and the country is in a good position to manage and adapt to the situation, depending on the duration and depth of the crisis."

DBRS also noted that "the European Commission's forecast for a growth rate of 4.1% in 2022 now looks optimistic after the stronger than expected recovery in 2021, despite the importance of the tourism sector in the economy, which based on data of the World Travel & Tourism Council corresponded to 13.8% of Cypriot GDP in 2019."

In addition to the potential impact on tourism from Russia, the rapid and significant increase in oil and gas prices will raise energy costs for the Cypriot private sector, says the rating agency.

According to the data, petroleum products accounted for 90% of total available energy in Cyprus in 2019 and the main risk is associated with higher prices rather than supply disruption, as Cyprus imports about 1% of its energy needs from Russia.

While Cyprus's dependence on Russian energy sources is low, households and businesses face significantly higher costs which burden real incomes and at the same time war uncertainty is likely to affect confidence and delay business decisions.

Finally, the report noted that exports of financial services from Cyprus to Russia have increased in recent years and amounted to about 7% of GDP in 2020. However, it added that this amount may be significantly inflated by the presence of Special Purpose Entities, which have limited links with the domestic economy.