Special Report Lebanese Industry: Outside the box

Executive magazine

To Lebanon’s older generation, Carosserie Abillama is a household name, with ‘Abillama’ stenciled on the back of nearly every truck, tipper, tanker or ambulance in the country. The company, which has been around since 1933, is still at the forefront of trailer manufacturing and other automotive add-ons, although its name does not stand out as much as it used to amid the surge in vehicles and trucks on Lebanese roads over the past few decades.
Lebanon is also no longer the company’s major sales market, selling to 27 countries and approved for its high international standards by leading European companies Scania, MAN, Renault and Volvo. Abillama has even built trailers for Formula 3 racing cars, “which is at a very high level as it’s so image orientated,” said general manager Daniel Abboud.
Last year, however, Lebanon was a significant market, at 50 percent of sales, then dropping to 15 percent in 2012. “In terms of sales, Lebanon has not dropped that much, but exports have risen,” said  Abboud. “This year our biggest market is West Africa, at 45 percent, followed by the Gulf at 25 percent and institutional buyers 15 percent.”
The surge in exports to West Africa was a deliberate strategy by Abillama to anticipate a potential drop in sales due to the crisis in Syria and its spillover to the Lebanese economy. Abboud put a dedicated sales team on the West African market, and “it worked.”
“I think we’re going to have a good year and next year even better. We have a nice order book,” he said, projecting annual revenues at $16.5 million, up from $14.5 million in 2011.
Part of the company’s success over the past 80 years has stemmed from predicting downturns and keeping sales diversified. “For a while, 90 percent of our market was Iraq before the Americans came [in 2003],” said Abboud. “We saw the dangers so stopped taking orders. It was a good approach, as if we’d  stayed we’d have been in bad shape.”
A further key to success is Abillama’s research and development, and bringing out new products to stay ahead of the competition, such as a new cement mixer developed with an American company for whom Abillama manufactures to order, primarily for the Saudi Arabian market. “There is a lot more research and development in Lebanon than elsewhere in the region. In Saudi Arabia, Syria, the Emirates, they just copy others. The ‘Abillama tipper’ has been a generic term in Saudi Arabia for the past 40 years,” said Abboud.
In terms of competition, in West Africa Abillama vies for business with European firms, while in the Middle East, Iraq in particular, the company is facing stiffer competition from Turkey. “High quality Turkish producers were focusing on the European market, but they have lost it due to the economic downturn there so are turning to other markets where quality is important,” said Abboud.

Universal Metal Products

While Turkey poses a competitive threat to Abillama, aluminum tube manufacturer Universal Metal Products (UMP) sees the closure of Syria as a market and transport route for Turkish products to much of the Middle East as a boon for the company. “We are picking up slack not because of Syria so much, but due to Turkish suppliers being out of the market. They are now being restricted due to logistics and political reasons, and that trade link has been broken,” said general manager Nizar Raad.
UMP has experienced a major up-tick in sales to Saudi Arabia this year for the collapsible aluminum tubes it manufactures for the cosmetic and pharmaceutical industries. The situation in Syria, however, is causing logistical problems and heightened transport costs, deriving from export for which overland transport is the most cost effective method.
“We’ve made contingency plans for sea as there is the possibility of Syria blocking the route to Jordan,” said Raad. “We got the cost by sea freight, to Jeddah, and that is okay but the problem is the delays in offloading. Then the goods have to be driven to Riyadh, the main pharmaceutical hub. These time factors and delays are a problem.”
UMP’s exports are not totally dependent on the Middle East though. “We do export indirectly to Europe and the United States, so the lower euro is helping. We also export to Pakistan for special clients,” said Raad. He expects business to be similar to last year, neither growing nor contracting.

Resource Group Holding

Resource Group Holding, soon to be called just RGH, expects to have similar revenues this year as 2011, at over $100 million. But this is not down because of less business in the Middle East and Africa, its core markets, or any loss in trade to Syria. Indeed, RGH’s telecommunications infrastructure arm Serta was granted permission by the United States Office of Foreign Assets Control (OFAC), which oversees sanctions, to sell equipment sourced from the US to Syria this year.
Revenues are expected to hover around the $100 million mark because the group is going through a period of consolidation as well as significant investment, with Chief Executive Dany Eid expecting to see returns next year and for RGH’s revenues over the next five years to grow by more than 100 percent to exceed $200 million.
In Lebanon, RGH is expanding its 4,000 square meter Inkript facility, which handles high-security printing, from checkbooks to lottery tickets, electoral voting cards and bonds, to bank cards and electronic-passports, by a further 16,000 square meters, financed through a subsidized loan from the central bank and the Investment Development Authority of Lebanon. The expanded facility is slated to open by end 2013, and will create further employment, adding to the current 500 working at the plant in South Beirut. Elsewhere, RGH has 200 employees in lottery business Intersektion’s brand Afrijeux in Chad, and 300 other employees in Lebanon and abroad.
In further expansion, RGH bought a factory in Saudi Arabia last year to make mobile phone SIM cards and scratch cards. “We bought the facility to cater to the sizable Saudi market and have proximity to our customer base,” said Eid. “The plant is still in the restructuring phase, so we expect this investment to yield results as of next year.” The group is also involved in the smart phone gaming business through investing in a startup called Game Cooks, which co-produced the hit game Birdy Nam Nam. “With the Arab world as the primary target, games like Run for Peace and Déjà Vu have witnessed over 1 million downloads so far in less than a year,” said Eid.
Eid sees Lebanon’s strength as being able to not only manufacture goods at a high quality, but also to combine development with value-added and follow up solutions. “The future is in value-added and solutions. At a group level, our products are already highly technical, such as printing, and through products that provide solutions, like software for SIM cards. What makes our products hard to compete with is that they are relatively unique, as clients for printing, for instance, are mainly governments and banking sectors, and competition at that level is lower.”

Vresso
For Vresso, a manufacturer of customized stainless steel kitchens and exclusive distributor for 50 food service equipment and laundry brands, the dampened economic climate in the Middle East has slowed sales this year, most evident in Syria with hotel and tourism-related projects on hold. But with exports accounting for 60 to 65 percent of business and selling to over 30 countries, Vresso is weathering an economic downturn in one area and focusing on others. “We are optimistic about the future, especially emerging markets opening up, but I won’t say where because our competitors would be on a plane tomorrow,” said Carl Sabounjian, Sales and Marketing manager at Vresso.

Sales have been surprisingly good for the company, even for stainless steel kitchen units that have a price tag anywhere from $10,000 to more than $200,000. To bolster sales of such expensive items, Vresso has been offering more credit facilities. The tactic has worked. “Business has been very good, quite great in fact, especially for restaurants, super markets and coffee shops, as well as with private villas and wine cellars,” said Sabounjian.
Vresso has 120 employees within the group, and 40 employed in manufacturing stainless steel cabinets, tops and refrigeration units. Steel sheets are bought from local importers, then cut, bent and welded at Vresso facilities, with products manufactured from scratch to customer specifications.
“Next year a lot of new models are coming out, and a lot of foreign franchises — especially internationally renowned restaurants — are coming to Lebanon so we see a good market ahead,” said Sabounjian, forecasting that once the conflict in Syria is over there will be significant business opportunities.

Buy Lebanese, please

Commentary - Executive magazine


A new campaign was launched in September by the Ministry of Industry and the Association of Lebanese Industrialists (ALI) with the slogan “Your industry your identity: Buy Lebanese.” It is aimed at giving the sector a boost in the current economic downturn, given that some 60 percent of industry’s sales are local.

It is a good move, but the sector could have done with greater recognition from the government of its contribution to gross domestic product (GDP), which has gone from 9 percent in 2009 to an estimated 19 percent today. Such a move could have included giving the ministry governing the sector a decent budget and pushing state agencies to actually buy Lebanese products.

The Ministry of Industry’s current budget is a measly $5.14 million, which is barely enough to pay for salaries yet alone have a decent marketing budget to promote Lebanese industry around the world. Indeed, ministerial employees have said that if they want to attend exhibitions abroad, they have to pay for flights out of their own pockets and then hope they get reimbursed.

Other countries have industry budgets in the billions of dollars, and set aside sizable allowances for trade fairs and expos, with dedicated stands to tout the nation’s wares. For instance Jordan’s Ministry of Industry and Trade had a budget of $8.8 billion in 2011, and the United Arab Emirate’s Ministry of Commerce and Industry some $11.2 billion. The small island of Singapore, less than a 10th the size of Lebanon but with a similar population size, has a budget of $3.3 billion for the Ministry of Trade and Industry.
While these countries include commerce or trade in addition to industry, even if you combine the Lebanese Ministry of Economy and Trade’s $21 million budget with that of the Industry Ministry’s, it is still shockingly underfunded.

As an overall percentage of the $14.71 billion budget, the Ministry of Industry’s cut accounts for just 0.035 percent. The sector’s GDP contribution generates significant revenues for the government as well as being a major employer, accounting for an estimated 26 percent of the total 1.48 million Lebanese workforce, according to website Economy Watch. That works out to 370,250 jobs, meaning the ministry’s budget allocates just $13.5 per employee in the sector.

The Ministry of Agriculture has a budget of $59.3 million, while representing a quarter of the GDP contribution of industry, and the Ministry of Youth and Sports — that well known contributor to economic growth and prosperity — has a budget almost double that of industry, at $9.7 million. Tourism, an important economic sector, still contributes a third less to GDP than industry, but has treble the budget, at $14.6 million.

While there is the counter argument that some countries earmark billions for industry and are still not competitive, and others are competitive without much state assistance, it cannot be ignored that Lebanese industry is currently facing a lot of challenges. A higher budget for the Industry Ministry would no doubt help, but so would addressing other stumbling blocks, notably the endemic shortfalls in energy and infrastructure.
Where the government could show true support is by buying Lebanese. But according to industrialists, the government more often than not shuns Lebanese products for foreign brands, believing them better.

This has led to bizarre situations where the government has ordered products from France yet the good is actually made in Lebanon; the winner in this scenario is the middle man and the loser the Lebanese tax payer. One industrialist told how at a recent expo in Beirut, European companies placed orders for specialized products while the Lebanese government queried that same local company’s experience in the order application process — the deal later fell through.

Among the public there is also a certain snobbishness towards Lebanese products. “We export to 30 countries and the image of Lebanese industry is higher elsewhere than here,” said an industrialist. “A Lebanese would buy a Turkish-made product over a Lebanese one, I don’t understand it.”

Whether the new “buy Lebanese” scheme will work remains to be seen, but its effectiveness would certainly be bolstered if there was a bigger ministry budget for marketing, and the government itself began practicing what it preaches. 

Brahimi offers long shot for Syrian peace

Global Times

http://www.globaltimes.cn/content/732898.shtml 

The bodies keep piling up, thousands of people have fled Syria, money keeps pouring in to fund the conflict, and diplomatic efforts are seemingly at an impasse. In short, the Syrian civil war looks like it is destined to spiral further out of control unless a diplomatic solution is somehow achieved.

But for words to work instead of violence, diplomatic efforts have to come from Middle Eastern actors. Any solution imposed by non-regional actors like the US or via military intervention by NATO will only add fuel to an already raging fire.

However, inter-regional solutions to the Middle East's conflicts have been few and far between, with the last success story perhaps the Taif Agreement in 1989, when all parties sat down in Saudi Arabia to hammer out an end to Lebanon's 16-year civil war. This time, Riyadh is not willing to act as mediator, but instead has become deeply involved in backing the Syrian rebels, providing cover for private financiers to arm the fighters, and producing favorable media coverage of the Syrian uprising.

That a man central to ending the Lebanese civil war, Lakhdar Brahimi, has replaced Kofi Annan as the UN envoy to Syria, and is also the Arab League mediator, initially seemed promising given how widely respected Brahimi is and his track record. But already the outlook is not good, with Brahimi telling the BBC last week that attempts to diplomatically end the conflict are "nearly impossible."

Indeed, on one side there is the entrenched regime of Bashar al-Assad which appears bent on stubbornly following the same route as the former Libyan regime, going down with the sinking ship. When Egyptian President Mohamed Morsi spoke in Tehran in late August at the Non-Aligned Movement (NAM) summit of the Syrians' struggle against an "oppressive regime" and his support for a "peaceful transition to a democratic system of rule that reflects the demands of the Syrian people for freedom," the Syrian delegate walked out.

Syria however is not alone. Damascus is supported by Moscow and Tehran, with neither backer willing to give up Syria's geo-strategic position as a warm water port for the Russian navy and its part in Iran's "axis of resistance," while both players benefit politically from opposing US hegemony.

On the other side is a motley crew of rebel fighters, ostensibly working together under the banner of the Free Syrian Army (FSA) to overthrow Assad, that is supported by Turkey, NATO, the US and the Gulf states, in particular Qatar, Saudi Arabia and the United Arab Emirates. Notably, the rebels have appeared to make major inroads lately in their assaults on Syria's major cities. The rebels are not going to back down now and the regime has everything to lose.

One reason Brahimi has a nearly impossible task in Syria is the questionable credibility of the UN, dominated as it is by the Security Council, and that of the Arab League, which expelled Syria in November from the 22-nation club and is unashamedly a tool of the Gulf states.

It is not too late to rise above real-politik cynicism though, especially if Brahimi can tie his policies to the Syria Contact Group proposed by Morsi, to consist of Egypt, Iran, Saudi Arabia and Turkey. Quite remarkably, Morsi managed to get Iran and Saudi Arabia to the table. Riyadh's role in supporting the rebels is clear, and Tehran's support of Damascus is even clearer, but this gives all the more reason to talk of solutions given their respective leverage.

While the recently unthinkable troika of Cairo, Tehran and Riyadh may come up with a solution if the contact group moves forward, it will not succeed without Turkey being in on the talks. Istanbul openly supports the FSA and hosts NATO bases that are providing operational support to the rebels, and has re-buffed the group, barely showing when invited to NAM.

If the contact group can get together to agree on a regional solution, and then send emissaries to Washington and Moscow to secure international backing before turning up in Damascus, "nearly impossible" diplomacy may turn into possible solutions.

NAM in spotlight as global South reemerges

Illustration: Sun Ying

Global Times | 2012-8-27 http://www.globaltimes.cn/content/729345.shtml

Non-Aligned Movement (NAM) summits have typically been treated as non-newsworthy events by Western media. But this NAM summit, which began Sunday in Tehran, has aroused unusual interest.

The attention focused on the 16th NAM summit is not due to the movement's founding principles of peaceful coexistence and standing against Western hegemony and neo-colonialism. After all, such aims are not deemed newsworthy, but are instead considered as rather wishy-washy utopian and naive ideals, if not downright knee-jerk anti-Western rhetoric.

The significance of NAM, set up in 1961 in Belgrade to provide a voice for the Third World and create some political talking space in a bipolar world, has admittedly waned in the two decades after the end of the Cold War and US triumphalism in a unipolar world.

While NAM has struggled to find its footing in a new world order, it has shown that the people of the global South still have a voice and that the desire for equal footing in global affairs is still there. Over the past decade the movement has been given a boost by the economic rise of the BRIC countries (Brazil, Russia, India and China), the political swing against the US and institutions like the International Monetary Fund (IMF) and World Bank in South America, and the gradual shift eastward of economic power since the 2007 financial crisis.

One only has to recall how obsequious former British prime minister Gordon Brown was in 2008 when he went to the Persian Gulf cap in hand to beg for bailouts and financial assistance for the IMF. When the United Arab Emirates and Qatar, both NAM members, stumped up cash, Brown was forced to concede that countries that contributed in this way should have a greater say in the overall governance of the IMF.

While nothing has changed in the IMF's governance, Brown's statement is indicative of potential changes in the economic order. Likewise, foreign creditors of US federal debt has ballooned since 2007, going from $2.4 trillion, or 53.5 percent of total debt, to approximately $5 trillion, or 56.9 percent of total debt in 2011. If change is to happen in the relations between the North and the global South, then it may well come through economic leverage rather than political demands.

But while changing capital flows may make some in the West sit up and take more notice of the "darker nations," this NAM summit is getting attention for political reasons. The recently elected president of post-revolutionary Egypt, Mohamed Morsi, snubbed an invitation to visit Washington in favor of a visit to China and then to attend NAM.

While this is diplomatically significant, the main reason for the renewed focus on NAM is that it is being held in a country the West has tried to isolate for three decades, recently slapped on tough economic sanctions, and is threatening conflict over its alleged nuclear weapons program. Unsurprisingly the US and Israel have condemned the summit, with the US State Department stating Iran was not "deserving" of being the host. Both countries have urged UN Secretary-General Ban Ki-Moon to not go to Iran.

However, the place for the head of the UN is certainly at a gathering of leaders that represent the majority of the world's population. It would in fact go against the founding principles of what the UN is supposed to be about, uniting nations, for Ban to not be there.

What riles the US and Israel is that the summit may undermine their efforts to isolate Tehran at this time, that there has been overwhelming support among NAM members for Iran to develop nuclear power for peaceful purposes, and that NAM supports a nuclear-weapon-free zone in the Middle East.

That Iran will try to maximize its position as the host and next leader of NAM to bolster its international standing is a given, but what member states will decide upon is another matter. Indeed, Tehran will try to rally support for its ally Syria at the summit, but this may prove hard to do, with 70 out of the 119 NAM members in favor of a UN General Assembly vote in early August condemning the Syrian government's violence against its people, and only eight voting with Syria, Iran, China and Russia.

What is certain is that under Iran's leadership, NAM is likely to be more vocal on the world stage than it has been for decades, and because of that may very well garner more media coverage outside of the global South.

Lebanese clan denies it planned to abduct Emiratis

The National newspaper, Mohammed N Al Khan and Paul Cochrane

DUBAI AND BEIRUT // A sectarian clan in Lebanon that kidnapped 20 people in two days has denied a suggestion by a family member that it planned to abduct Emiratis or other Arabian Gulf nationals to use as leverage.
On Wednesday, the Meqdad clan based in Bekaa began rioting and kidnapping in retaliation for the capture by the Free Syrian Army (FSA) of a clan relative, Hassane Salim Al Meqdad.
The FSA claims Mr Al Meqdad is a member of Hizbollah and a staunch supporter of the president Bashar Al Assad's regime. Hizbollah and his family deny the claims.
In reaction to the violence, the UAE and several other Gulf countries issued stern travel advisories to citizens. Bassam Etani, from the UAE Embassy in Beirut, said the travel warning would remain in place for the next few days.
"Today it's been very quiet here; tomorrow we'll just have to wait and see," Mr Etani said.
There are about 40 Emiratis in Lebanon, mostly on business or for medical reasons.
A Meqdad spokesman yesterday said the clan would cease abductions because they "have a sufficient number of Syrians linked to the Free Syrian Army" in custody.
He also denied that they had planned to kidnap GCC nationals, saying only Turks and Syrian rebels had been their targets.
"Regarding Saudis, Qataris and Gulf nationals, they are not targets for the Meqdad clan," Maher Al Meqdad told Reuters from southern Beirut.
The UAE, Saudi Arabia, Qatar, Bahrain and Kuwait all issued travel warnings to citizens, with Sheikh Abdullah bin Zayed, the Minister of Foreign Affairs, tweeting: "This is the third warning from the Ministry of Foreign Affairs.
"Unfortunately, the situation in Lebanon is extremely dangerous. I urge my fellow nationals to take this warning with all seriousness."
Mr Etani said the UAE embassy in Beirut remained on high alert.
"We are ready to assist anyone who might need help," he said. "Our offices are open around the clock and we have made arrangements should anyone need immediate flights back to the UAE.
"At the moment we've not had anything more than calls from people just checking in to see how things are."
The Lebanese government has ordered more military on to the streets to keep the situation under control and the prime minister, Najib Miqati, said Wednesday's "developments will not be repeated".
Despite such assurances, Syrians fear further kidnappings and attacks. An obscure Lebanese group calling itself Mukhtar Al-Thaqfi Brigade claiming it had also kidnapped members of the FSA.
Such news has prompted Syrians on holiday or taking refuge in Lebanon to move to safer areas, such as the mountains and Jounieh – Christian areas where they feel more secure.
One Syrian visitor to Beirut has not stepped outside since the kidnappings.
"After what happened I was warned by Lebanese friends to stay off the streets. So, I stayed in Wednesday night and today, and I'm not going out until it is safe," said Munir Abdulghani, who works as an engineer in Saudi Arabia.
The kidnappings had an immediate effect on hotel reservations in the capital.
"Because of what happened we have had a lot of cancellations for Eid," said Michelle Naaman, the director of marketing for Monroe Hotel in Beirut.
"I think basically a lot of people were waiting to see if the situation improved so they could come for the holiday, but I'm sure they've now changed their minds.
"One Qatari man was supposed to fly in on Friday but was called [by the Qatari government] and told he couldn't travel. He was given no choice."
Pierre Ashkar, head of the Hotel Owners Association, played down the effect of the ban, pointing to earlier travel warnings by GCC states in May and June.
"It is a real minority [of tourists] – a question of a few hundred, not a few thousand people," Mr Ashkar said.
But it is business as usual for local airlines, and Etihad Airways has said its flights will continue to operate between Abu Dhabi and Beirut as normal.
"Passengers with tickets purchased on or before August 16, 2012, with travel up to and including August 31, 2012, can [subject to availability of the same fare] change their flight dates at no cost to no later than September 30, 2012, or cancel the ticket and have it refunded," the airline said.
A spokesman for Emirates Airline said it was also operating normally.
"The current unrest has not caused any disruption to Emirates flight operations," he said. "Emirates continues to monitor the situation closely."

newsdesk@thenational.ae

* Paul Cochrane reported from Beirut. Additional reporting by Reuters and Associated Press

Everybody stay cool

Commentary - Executive magazine

Modest changes in power usage could save enough to let us all sweat less

Lebanon is going through one of its worst energy shortages in years. Even the most electrified part of the country, central Beirut, is experiencing more than the usually standard three-hour outages. Tires have been burnt in protest and people's tempers are rising along with the mercury.

While wrangling at Électricité du Liban (EDL) over contract workers has caused interruptions of late and the state electricity provider has undoubted culpability in the chronic shortages, the rise in energy demand is also to blame. Last year, EDL produced the same amount of electricity as now — some 1,600 megawatts (MW) — while demand rose to over 2,300 MW. And what has caused more frequent and longer blackouts this summer is not the tourism season, weak as it is, but a surge in the use of high energy usage appliances.

One of the biggest energy guzzlers are widescreen LCD televisions, which have become so affordable to be almost ubiquitous, glaring away in so many homes, offices, restaurants and stores. For instance, a 40-inch LCD TV uses 240 watts per hour, and a 50-inch screen 400 watts, compared to 42 watts for a 28-inch LCD, and 87 watts for a conventional TV of the same size. While such wall-dominating screens are a drain on energy, watt usage rises again when coupled with air conditioning (A/C) units, which have risen in popularity in Lebanon as in much of the world, with global sales up 13 percent in 2011 on 2010. There are no accurate local figures, but in neighboring Gulf countries A/C accounts for a whopping 70 percent of annual peak electricity consumption and is expected to triple by 2030 to require the equivalent of 1.5 million barrels of oil per day to power.

In Beirut demand for A/C is driven in large part by what is called the “urban heat island effect,” where buildings retain heat and warm up the surroundings, which then increases humidity. On average, A/C units use 900 watts per hour, although more energy efficient ones use around 800 watts when initially turned on, then consumption drops to 600 watts and can drop to less than 80 watts if set at a high temperature. By comparison, a ceiling fan, at full power, uses just 75 watts per hour.

So what to do about this surge in energy demand? Widescreen TVs can of course be turned off or watched selectively, but turning off A/C in the height of summer is not an option for most, especially if there actually is electricity. Pleas for people to turn off A/Cs and use fans instead will no doubt fall on deaf ears — even though fans can make the temperature feel four to eight degrees cooler — as once people have made the switch to A/C it is hard to go back. But more efficient usage of A/C is possible, as was demonstrated in Japan a few years ago when the prime minister, expecting energy demand to spike in the summer months as A/C usage rose, suggested workers don more practical summer outfits, of short sleeved shirts over suits and ties, and set A/C units at 26 to 28 degrees instead of the temperature of a warmish spring day of 16 to 18 degrees. Although it is hard to judge the success of the initiative, according to one government survey, 43 percent of employees did lighten up on the office A/C. Another technique called district cooling, using available sea water, could also offer a cheap and affordable option to knock off as much as 30 percent of consumption during peak hours. 

Lebanon, however, is not renowned for successful collective efforts ‘for the good of all’. Even if the president, prime minister and speaker of the house all gave a joint press conference uniformly dressed in short sleeved shirts, shorts and sandals with a message to encourage people to turn off the widescreen and set their A/Cs at 28 degrees, it would be unlikely that people would follow suit.
But the private sector could be encouraged to adopt a summer uniform and lower the A/Cs. One, it would reduce overheads through lower electricity bills; two, companies could tout such a move as part of a “going green” policy of corporate social responsibility; and three, staff will be more relaxed in the office. Even a partial reduction in energy use would help to keep the lights, fans and yes, even A/Cs on for just a bit longer in what is going to be a hot and humid few months ahead.

Book review - Carbon Democracy: Political Power in the Age of Oil

Executive magazine

The oil industry’s manipulation of governments and the economies of countries to secure and increase profits has been happening almost since there was an industry to speak of. In Timothy Mitchell’s book “Carbon Democracy,” he highlights how through much of the early 20th century big oil companies worked to contain supply — in particular by preventing the emergence of an oil industry in the Middle East — to keep oil prices up, and consequently bolster profit margins.

Last year, the profits of the Big Five international oil companies (IOCs) — BP, Chevron, ConocoPhillips, ExxonMobil and Shell — were up 75 percent on 2010, at a record $137 billion, yet production was down by 4 percent. And rather than invest heavily in production or job creation, these companies sunk $38 billion, or 28 percent of annual net income, in repurchasing their own stock, therefore boosting investor returns.

However, a major difference from the first half of last century is that IOCs are not able to negotiate quite the same profitable agreements with oil producing countries, or delay development, as before. This is reflected in the 2011 oil export revenues earned by members of the Organization of Petroleum Exporting Countries (OPEC), which for the first time exceeded $1 trillion. At the same time the OPEC results were announced last month, the Fraser Institute’s 2012 Global Petroleum Survey indicated that Middle Eastern countries have higher barriers to investment in hydrocarbon exploration and production than anywhere else in the world. There is a clear correlation here, as OPEC members have had to learn the hard way about who takes what for the extraction of underground riches; the IOCs have responded to this through the modes they still have influence over to retain profits.

In Carbon Democracy, Mitchell’s focus is the relationship between hydrocarbons and political institutions, tracking the changes from the industrial revolution all the way up to the so-called “Arab Spring” and how revenues from hydrocarbons are connected to democracy and economic development. Without oil, Mitchell argues, the current economic model of unlimited growth would not be possible, while the management of economic growth provided modes of regulation to govern carbon democracy.

Controlling supply is clearly a way of influencing prices and means of governing. This is one reason why there is a distinct lack of refineries in some oil producing countries, as delaying refining can artificially restrict the amount of oil that flows to the markets. But another reason is to drive a wedge between production and transportation, which helps prevent strikes and disruptions to the flow of oil by not overly centralizing the value chain and thus not have large concentrations of workers. This is a crucial point in Mitchell’s revealing book, as it was a deliberate government policy in the West in the lead up to World War One to switch from coal to oil to nip-in-the-bud further strikes by miners that had brought economies to a standstill. After all, miners’ strikes had led to the adoption of better working hours and conditions, welfare, healthcare and more democratic rights.

The chapters on the Middle East are particularly revealing, along with his debunking of conventional historical accounts — namely the discovery of oil and delayed exploitation — and what is misleadingly called the “oil crisis” of 1973, which was a pivotal event in transforming international finance, national economies, flows of energy and in placing the weakened carbon democracy of the West into a new relationship with the oil states of the Middle East.

Rather than being a black and white textbook case of supply and demand at work, of OPEC members cutting oil supply to pressure the United States over its unequivocal support for Israel during the October 1973 war, Mitchell shows that it was difficult to know how much oil prices went up due to a cut in supply or even how much supply was actually cut. For while Saudi Arabia and Kuwait reduced exports, other countries increased production. Furthermore, unlike today, there was no ‘market price’ for crude oil, so no one could know what ‘the market’ actually was, while OPEC’s decision to raise tax on oil production by 70 percent at the time was somewhat coincidental, having been decided before the war broke out.

Mitchell’s book ends by considering the impact of supply constraints due to the rising demand for oil, and how climate change impacts market conditions in a post-oil world where alternative forms of energy will affect how people and economies are governed. How and when we might emerge into the post-oil world is, however, a question that remains to be answered.

Srinagar under curfew in late June

Global Times (China), July 16

http://www.globaltimes.cn/NEWS/tabid/99/ID/721409/Fragile-peace-barely-holds-in-tense-Kashmir.aspx

All it took was an electrical short circuit that reduced a mosque to ashes to make Indian-controlled Kashmir resemble the bad days of 2010. Late last month, the over 200-year-old Sufi shrine of Peer Dastageer Sahib in the capital Srinagar was set ablaze in what officials said was a wiring issue.

But this was considered suspicious by most Kashmiris, distrustful of the Indian state and convinced it was an act of arson given there was a power cut at the time and that when the fire brigade eventually showed up, most trucks had no water onboard.

As always in conflict zones, rumors travel fast and help turn up the heat. Protesters swarmed onto the streets, stones were thrown, and the military responded with day long curfews and by putting separatist leaders under house arrest.

To Kashmiris, this brought back the memories of the weekly shutdowns and demonstrations in Srinagar in 2010, when protesters and the military faced off in the worst year of violence since the 1990s, leaving 112 Kashmiris dead.

Then a week after Srinagar's second most holy shrine burned down, a rumor started spreading that a Shia mosque on the outskirts of the city was in flames, also attributed to an electrical wiring failure.

Although it turned out later that the mosque and a Quran were desecrated and there was no fire, the incident was enough for shops to shut, the streets to empty and for people to remain on edge.

How the fire at the Sufi shrine started is under investigation, but no statements from the authorities have been forthcoming.

The popular consensus is that some organization, some hidden hand, wanted to make Kashmir boil again, nearly two years to the day that protests started on June 11, 2010, when the Indian army shot unarmed demonstrators.

The events of 2010 are barely evident now. The slogans of "Go India, Go Back" and "Indian dogs go home" that were chalked on streets have been washed away and those on walls painted over, but demands for Azadi, freedom, remain.

According to a survey by London-based think tank Chatham House published in 2010, the first of its kind, 43 percent of the total adult population want independence, particularly in the Kashmir Valley Division, between 75 and 95 percent, and 82 percent of those polled in Srinagar.

Yet New Delhi has refused to offer a referendum, despite UN resolutions dating back to 1948 to do so.

As long as there is no viable resolution to the dispute in Kashmir, one of the world's longest running conflicts that has left 70,000 Kashmiris dead since 1989 and remains one of the most militarized places on earth, any small spark could trigger a return to 2010 and a renewed call by Kashmiris for freedom.

While there have been no further incidents, the fire and the attack on the mosque highlight how fragile the relative peace has been in Kashmir since the situation calmed down in early 2011.

Tourism, which accounts for an estimated 15 percent of gross domestic product (GDP), had returned, but the curfews prompted cancellations and are bad publicity.

Kashmir's geographically strategic location is of course a stumbling block to any solution, whether in terms of greater autonomy or independence. But around half of India's 1.3 million strong army is deployed in Kashmir alone. They are there to keep the Kashmiris check rather than to patrol the Line of Control with Pakistan or the sparsely populated mountainous areas.

The international community has ignored Kashmir, and Kashmir is portrayed rather simply in the Indian media as a problem of Islamic militancy rather than conveying many of the deep seated issues prevalent in the state.

Kashmir remains a global flashpoint, and a potential trigger for conflict between two nuclear powers.

International bodies should give extra impetus to effort to maintain the  relatively quiet situation in order to get talks going again.

Otherwise, it will just take another short circuit for Kashmir to descend into chaos once again.



Photograph by Paul Cochrane

Turkey's New Commercial Code: Open for Business

Accountancy firms are fishing for more business after the new commercial code was passed.

Accountancy Futures

After 10 years in the making, the new Turkish Commercial Code will be given a warm welcome by both businesses and multinational accountancy firms

The development of commercial legislation in Turkey has failed to keep pace with the country’s economic growth over the past decade. While structural economic reforms have been carried out, a foreign investment law passed, and GDP levels more than tripled since 2002, Turkey has been slipping down the ranks in the World Bank’s Ease of Doing Business report. A key factor has been Turkey’s outdated Commercial Code, which was enacted in 1956, and the fact business has been kept waiting for a new 1,535-article Code drawn up over the past 10 years. Fortunately, this was finally approved by the Turkish parliament in January 2011 and will come into full force in 2013, and has been warmly welcomed by the private sector and its advocates, notably the multinational accountancy firms.

With Ankara inching towards European Union (EU) membership, over 90% of foreign direct investment (FDI) in the first half of 2011 originating from the EU, and with Turkey seeking to triple FDI from US$12.1bn in 2011 to an annual average exceeding US$30bn over the next decade, a new Commercial Code was long overdue. ‘For the past 10 to 15 years corporate governance has been affecting entities and companies, but there was nothing (legally binding) in the state code, so the new Commercial Code was needed on the demand side,’ says Professor Recep Pekdemir FCCA, a faculty member of the Istanbul Business School at Istanbul University.

The new Commercial Code is designed to mesh Turkish commercial regulations with EU legislation. It adopts International Financial Reporting Standards (IFRS) and auditing principles, and introduces concepts such as transaction auditing, penalties for non- compliance and mandatory company websites for posting financial data.

‘The most notable aspects of the new Commercial Code are the transparency of companies, corporate governance public oversight, accountability and quality assurance,’ says Nail Sanli, president of the Union of Chambers of Certified Public Accountants of Turkey (TÜRMOB). ‘The new Code is built upon the concept of transparency. Companies are required to have financial reporting complying with international standards and independent auditing of companies’ financial statements according to international standards. With the adoption of the corporate governance concept by companies, transparency will be achieved.’

With the new Code impacting all companies in Turkey there is a transition period before the law goes into effect. Implementation of a revised official set of Turkish Accounting Standards will occur on 1 July, but the provisions relating to IIFRS conversion, independent auditing and website requirements will not come into effect until 2013.

For the accounting sector to get up to speed with the new Code, training sessions have been underway for the past year at the country’s 30 leading auditing firms. ‘The accounting sector has always had very intense training programmes, but it has become more important because of the Commercial Code and we’ve implemented special compulsory training programmes,’ says Sanli.

But not all firms will have to invest in the same level of training. ‘Out of the top 500 companies, about 75% are owned by international investors, banks and insurance companies. These large-scale entities already apply international reporting standards, but it is different for the rest of the economy as they have not needed these kind of requirements,’ says Pekdemir. ‘Big foreign and local auditing companies will be expanding as more auditing is needed due to the Code, and they will increase their market share from auditing for large-scale entities to include small and medium-sized enterprises.’

Yet while the accountancy profession is stepping up its efforts, there will have to be improvements at a governmental level for the new Commercial Code to have full effect. As the US think-tank the Heritage Foundation notes on Turkey in its 2012 Index of Economic Freedom: ‘Property rights are generally enforced, but the courts are overburdened and slow, and judges are not well trained for commercial cases. The judiciary is subject to government influence. The intellectual property rights regime has improved, but infringement remains high.’ 

Further amendments 

Meanwhile, Turkish business has to contend with the fact that the Code may yet be amended still further. While 631 meetings were held over five years to draft the new Code, with ‘development, discussions and approval taking nearly 10 years’, says Sanli, further amendments are likely this year.

‘Before these two milestones are reached, in July and at the beginning of 2013, I expect there will be more changes to the law, such as implementation, amendments, guidelines and disclosure,’ says Pekdemir. ‘The Turkish Accounting Standards Board has the authority to make changes, while the finance ministry, which can be considered quite conservative, will want to make some amendments to hold back the powers of the big accounting firms.’ That said, given the efforts needed to get the Commercial Code passed, ironing out the practicalities is to be expected. For now, companies and foreign investors see the harmonisation of the new Commercial Code with the Corporate Income Code, Civil Code and Penal Code as a boon for business.

Turkey aims to become world’s 10th biggest economy

Turkey’s economy has been on a roll for the past decade, with its GDP more than trebling to reach US$735bn at the end of the 2010 fiscal year. With a population of 75 million and ideally situated at the crossroads between east and west, Turkey has built up a strong manufacturing-based economy. While a major exporter to the EU, Eastern Europe and the Middle East, domestic demand is strong, accounting for 70% of GDP. Turkey registered economic growth of 9.6% in the first nine months of 2011, the second fastest after China among the major economies, although it is forecast to slow to 4% this year. Nonetheless, Turkey aims to be the 10th biggest economy in the world by 2023 – it is currently 17th. 

Photograph by Paul Cochrane

SYRIAN BANKING SECTOR: Doors close across the border

Expansion plans unravel as Syrian crisis deepens

Executive magazine

 

Lebanese banks with operations in Syria are caught between the proverbial rock and a hard place. The uprising that kicked off last spring has forced banks into survival mode as the Syrian economy has weakened and profits have been slashed. Some banks have considered exiting the country, expansion plans have been put on hold, and all players have set aside millions of dollars in provisions.
While Lebanese bankers are used to operating in crisis mode, the international sanctions against Syria — by the United States, the European Union and the Arab League — have presented further operational challenges and the specter of reputational risk. Although Lebanese banks are not legally obligated to comply with the sanctions — and operations within Syria are essentially unaffected — the sector has pledged to do so. The US Treasury in particular has breathed heavily down the necks of Lebanese bankers to comply with the sanctions and for Lebanon to not be a conduit for Syrian cash.
Such internal and external pressure has impacted the bottom lines of the seven Lebanese banks with Syrian affiliates, both within the affiliate itself and at group headquarters in Beirut. For while Lebanese banks only entered Syria from 2004 onwards, the market was under-banked and ripe for growth, with the banks attracting $6.79 billion in aggregate assets by the end of 2010.
“Before the uprising the banking sector was on a fast track and expanding throughout Syria. Profits were good and it was a virgin market that needed everything,” said Samih Saadeh, managing director of Banque Bemo, which has a stake in Banque BEMO Saudi Fransi (BBSF) in Syria.
At the end of 2011, aggregate assets had dropped by 17.2 percent to $5.8 billion. As Saad Azhari, chairman and general manager of BLOM Bank put it, “Syria was the (sector's) second most important market after Lebanon.”

The pull of gravity
Indicative of the impact of the uprising on the banking sector is BLOM's affiliate, the Bank of Syria and Overseas, where loans to Syrians dropped 60 percent over the past year, from $650 million to $250 million. As Jihad Yazigi, editor of the financial publication, The Syria Report, remarked: “Nobody is investing, nobody is spending, and companies are closing. Whole areas are out of business entirely. I think gross domestic product will decline 10 to 12 percent this year.”
To cover bad loans and banks’ exposure, provisions are being hastily put aside (see table). “All Lebanese banks are taking profits as collective provisions,” said Alain Wanna, head of Group Financial Markets Division at Byblos Bank. “In Syria the decision was for all profits made in Syria to act as collective provisions, as we don’t know how long (the instability) will last.”

Last year, Bank Byblos Syria's profits slumped 26.8 percent to $3 million. Wanna conceded that internally, the bank's management discussed exiting Syria on several occasions, but in the end decided to reduce its exposure to the country. 

Most affected by the Syrian crisis has been Bank Audi Syria (BAS), with profits down 83.20 percent to $2.1 million, attributed to problems with their portfolio (BAS' management turned down Executive’s interview requests). Less affected have been the newcomers, BLF's Al Sharq, First National Bank's Syria Gulf Bank, and Fransabank Syria, which saw profits, assets and customer deposits actually increase. BLF's general manager, Walid Raphael, put Al Sharq's 72.2 percent growth in assets, from $161 million in 2010 to $284 million in 2012, down to its recent start and a focus on commercial rather than retail banking, adding a new branch that opened in May. However, that has been the exception rather than the norm.
BBSF, the largest private bank in Syria with 40 branches, has put on hold plans to open three new branches in Damascus and one in the conflict-ridden city of Homs. “We are not looking for more business, but our strategy is to stay there and no branches have closed except in the hot areas,” said Saadeh. Profits at BBSF dropped 1.2 percent last year, to $11.8 million, but in the first quarter of 2012, with BEMO holding 22 percent of BBSF and profits down, the Beirut arm “got zero,” said Saadeh, which negatively impacted BEMO's net profits, dropping 53.57 percent on the first quarter of 2011, to just $1.45 million.
Causing further headaches for the sector was a requirement by the Central Bank of Syria (CBS) initiated prior to the uprising, for banks to increase capital from $100 million to $200 million. “There was a list of banks and a schedule for each to reach (in phases),” said Byblos’ Wanna. “Ours was in August last year. We tried to negotiate with the CBS to say the balance sheet was down but they insisted on the increase.” Currently Byblos Syria’s capitalization is $120 million for a balance sheet of $700 million. BBSF has also reached the first phase of the higher capital requirements.

Looking ahead
The banking sector has proved remarkably resilient in the face of the conflict. The limited run on the banks last spring by depositors was a “panic move,” said Saadeh, while deposits and withdrawals have “balanced out” since then. Bank share prices on the Damascus Stock Exchange (DSE) have also not plummeted as some might have expected, although they have been somewhat artificially salvaged by only 3 days of trading  a week, and stock only being allowed to decline by just 1 percent a day and increase by 5 percent. Nonetheless, the DSE has slumped by 40 percent since the uprising broke out, according to figures released by the International Monetary Fund.

“We’ve not seen any banks go under in Syria yet, and that is a positive thing. People haven't withdrawn all their money and I see it as a stabilizing factor,” said Ayham Kamel, a Syria expert at risk consultancy firm, Eurasia Group, who formerly worked in the Syrian financial sector.
Yet with the economy expected to contract further this year, more sanctions slapped on Syria by the EU in May — including on the CBS governor Adib Mayaleh — and operational costs higher due to the crisis amid a slump in business, the outlook for Lebanese banks in Syria could not be described as peachy.
“There is a risk for Lebanese banks at some point, as I'd expect them to hit the red zone and become unprofitable,” said Kamel. “To me, it is not a question of if but when, given the current trajectory in Syria. They are going to find it very hard to manage the books and have profitability towards the end of the year or in 2013.”

Sand Storm: UAE real estate

Estates Gazette

After a rocky four years, property developers in the once-booming desert cities of Dubai and Abu Dhabi are facing increased pressure to merge. Paul Cochrane reports

It has been a tough few years for property developers in the once-booming desert paradises of Abu Dhabi and Dubai. Having expanded rapidly in the boom years, prices in some areas crashed by 60% since 2008, and projects have been cancelled or delayed.

In some cases, partially constructed developments have been torn down. The government-backed developers that dominate the market have been left struggling to refinance debts. State-backed Emaar, Dubai Holding, Aldar and Sorouh have so far managed to ride out the storm, alongside private developer Damac. Conglomerate Dubai World last summer transferred ownership of developers Nakheel and Limitless to a new Dubai government entity.

But the repercussions are still playing out. Last week, state-owned investment vehicle and sovereign wealth fund, Mubadala Development Company, which was left owning 49% of struggling Aldar Properties after a recent government bailout, said it would transfer a 14% stake in the developer, worth around AED700m (£100.2m), to Abu Dhabi Commercial Bank in return for a loan facility.

Mubadala said the 579.1m shares will revert to it in April 2013 when the facility matures, or earlier if repaid ahead of schedule – although it refused to say how much the loan would be for. It was the latest in a long line of financial measures aimed at refinancing the developer behind some of the emirate’s biggest schemes, such as Abu Dhabi’s partially completed Central Market and the luxury Al Raha beach resort.

The property company has been bailed out by the Abu Dhabi state twice in two years for a total package worth almost AED36bn (£6.1bn). In March, it announced it was considering a merger with fellow state-backed developer Sorouh Real Estate, the developer behind the 23-storey Al Murjan Tower in Abu Dhabi and the 5.5m m2 Lulu Island mixed-use resort But agents in the emirate remain sceptical about whether the merger will go ahead because of the political nature of the deal and the prestige attached to these prominent state-backed developers.

“There has definitely been a consolidation of real estate players in line with government policy to cut back supply,” says Craig Plumb, head of research Middle East-North Africa at Jones Lang LaSalle in Dubai. “They’ve realised there are too many developments, so are trying to improve the financial viability of developers.”

The staff of developer Limitless, for instance, are now working under Nakheel on its infamous artificial archipelago, Palm Jumeirah. He adds: “Sorouh and Aldar are talking about merging, but it may not go ahead. There was the same discussion in Dubai (in 2009) to merge Dubai Holdings and Emaar, although it didn’t go ahead at the end of the day. But consolidation is going on, and there will be fewer but bigger players that are largely state controlled, either 100% owned or with a degree of government control.” 

Ben Waddilove, a chartered surveyor who works closely with real estate companies in the Gulf through his role as director of recruitment consultancy Macdonald & Company Overseas in Dubai, agrees: “They will probably review it for three months and then review again. I wouldn’t put money on it happening. From a business view it makes sense, but from a political view it could be more difficult to implement as there is pride and influential owners to consider. However, I suspect there might be more [merger] moves on the cards.”

“The survivors are the big giants, but in a sense they are becoming bigger, and more and more powerful,” says the infamous Porush Jhunjhunwala, head of Better Commercial, the commercial arm of property research company Better Homes. And Jhunjhunwala points out that tough times are set to continue for the remaining big developers in the region, perhaps increasing the appeal of further consolidation.

According to Better Homes, 2.3m m2 of office space has come onto the Dubai market since 2009, and by the end of 2011 there was a total office stock of 5.9m m2. At the same time, occupancy stands at 3.1m sq m2. The majority, at 57%, is located in onshore locations, and is available only to companies licensed by the emirate’s department of economic development, while the remainder is in Dubai’s special tax status free zones. Within the next two years, a further 1.4m m2 is expected to enter the market, while in neighbouring Abu Dhabi, the 1m m2 slated to be handed over in 2012 and 2012 will result in “excess supply”, says Jhunjhunwala. “I assume this will add to the current vacancies in the market, and might double pressure on rent, with the prices coming down in the short term.”

However, Mat Green, head of research and consultancy at CBRE in Dubai, says that, if developers can just hold on that little bit longer, he sees signs of the market stabilising.

“This year has mostly been about stability,” says Green. “We have not seen much growth and it is pretty flat for the whole Gulf market. It is down to individual products, even in a specific location, and it is very fragmented. One property may be empty, while next door there’s demand.”

And while institutional investors remain wary about investing in the GCC region, Dubai has benefited from the instability elsewhere in the Middle East and North Africa over the past year. Agents speculate that the trend may well benefit the recovery in the UAE property market – and its struggling property developers.

“There has been more regional money coming in with people looking for a more calm place,” adds CBRE’s Green, “and that is definitely Dubai at the moment.”

BOX: Desert Space

In Abu Dhabi, Doha and Qatar, the oversupply of commercial space has resulted in government departments renting offices in prime locations – as much as 25% of office space in Doha’s West Bay – to help bolster the market, as well as to appease local developers and prop up state-owned developers.

According to CBRE data, the average rent per m2 in Abu Dhabi has fallen from AED3,500 (£55.46 per sq ft) in 2008 to AED1,400 (£22.11 per sq ft) at the end of 2011. In Dubai, while there has been an uptick in demand for office space in the central business district leading to a stabilisation in rents over the past six months at around AED150 (£25.58) per sq ft, the oversupply in secondary areas has led to rents lower than the city average of AED90 (£15.35) per sq ft.

The outlook for the Dubai residential sector is equally mixed, with prime real estate in well-established locations seeing improved performance in 2011. In the majority of locations, however, rents and prices have declined.

“We are starting to see that, within each sector, some prices are increasing and others unchanged, and others are falling, which will continue to be the case over the next 18 months,” says Craig Plumb, head of research Middle East-North Africa at Jones Lang LaSalle in Dubai.

According to JLL, around 13,000 homes – 90% flats – were completed in 2011, a rise of less than 4%, bringing residential stock to 336,000 homes in Dubai. Some 38,000 homes are due for completion this year – an increase in stock of 11% – but JLL forecasts only 60% of scheduled stock, or 23,000 homes, will be completed in 2012.

With so many flats available, and few projects under way, there is an increasing focus on property management. “The big trend is away from asset creation to asset management, as there still needs to be more emphasis on maintenance and property management,” says Plumb.

“There is going to be big growth in such services in a market where there is too much supply.” Improving maintenance is not only a rental issue but one that has plagued investors, with owners hit with unexpectedly high service fees by developers, as occurred on the Nakheel- developed Palm Jumeirah, where charges were raised by 50% last year. The lack of transparency in what is included in property prices is considered a potential impediment for investors and has been a cause for legal battles in Dubai courts.

Meanwhile, Strata laws that pass responsibility for building maintenance from developers to tenants’ associations, introduced last May, have still not come into full force.

“I hear from legal acquaintances that, at the courts, there is a backlog of potential cases to be resolved,” says Mat Green, head of research and consultancy at CBRE in Dubai. “Investors want as much information as possible about what they will actually pay. There is not yet full disclosure on how money is spent and that really needs to change. Unless these problems are ironed out, the market will be constrained.”

FATCA: The long arm of Uncle Sam

Executive magazine

America throws its weight around in Lebanon

With the United States’ debt having surpassed 100 percent of gross domestic product, at over $15.7 trillion, the Internal Revenue Service (IRS) has launched an aggressive worldwide campaign to try and curb the deficit by bringing in tax revenues from US citizens abroad.
While the Foreign Account Tax Compliance Act (FATCA) is not to go fully into effect until 2014, it has already caused waves in the international banking community and within Lebanon, as it will require all banks to essentially act as agents of the IRS by listing US citizens holding accounts. In Washington DC, a new building is under construction that will be devoted to handling FATCA files alone, given there are an estimated 117 million Americans abroad — including Green Card holders — and that the IRS assumes it may be able to repatriate upwards of $100 billion in taxes.
“The US is not looking at Lebanon as a place to hide money but rather at Singapore, Lichtenstein and Switzerland,” said Fadi Osseiran, general manager of BlomInvest Bank, in reference to the world’s major tax havens. “We are involved for a stupid reason, as some Lebanese have dual nationality.”
Anecdotal evidence suggests there are an estimated 22,000 people in Lebanon holding US citizenship, although the US embassy declined to confirm this. While FATCA concerns earnings above $100,000, banks will nonetheless have to require customers to declare whether they have a US passport, Green Card or were born in the US. As Lebanon has banking secrecy, a client can refuse to disclose such information. In such a case, the bank will refer the individual to the Central Bank’s Special Investigation Commission.
The risk for banks is that if they do not comply with FATCA they could be designated as non-compliant and international banks, especially in the US and Europe, will refuse to deal with them. To make sure US citizens do not try to evade the upcoming act by transferring funds or changing account holdership to non-US citizens, the IRS can go back several years through accounts. And if someone gives up their citizenship, they will have to pay taxes for five more years.
“The IRS is calculating this kind of evasion, although it is worth little compared to the revenues they’ll have,” said Paul Morcos, founder of the Justicia law firm that provides legal consulting for the banking sector. However, all is not yet clear on full disclosure. “This law will lead to confusion and gray areas, like for example cases where we have a joint account between a Lebanese father and a son who has been naturalized in the US. Does a bank have to report on this or not?” added Morcos.
Who will report to the IRS is a further issue; whether it will be Banque du Liban (BDL), Lebanon’s central bank, or the individual banks is currently being hammered out in a bilateral agreement between Lebanon and the US. “The BDL could be the agent for all Lebanese banks but I don’t know if the IRS will agree,” said Samih Saadeh, managing director of Banque BEMO.
Bankers deny that FATCA will be a nail in the coffin of banking secrecy as it only concerns US citizens, but it could be the beginning of the end of such a service if there are further amendments to FATCA and if Europe and other jurisdictions follow the US lead with an act of their own, similar to how the US’ recent emphasis on enforcing the Foreign Corrupt Practices Act was repeated by the British government with its Bribery Act.
“From my point of view, banking secrecy is less and less important,” said Osseiran. “For me, we don’t need banking secrecy. The only reason to do it is a culture of privacy for customers, but to avoid taxes or launder money, it shouldn’t be the case.”
What is curious about FATCA is that tax evasion is not illegal in Lebanon, meaning that the US as a foreign fiscal authority has gained influence over the country.
“It is extra-territorial, being a law implemented beyond frontiers. We are witnessing the supra-national effect of the law, starting with the US Patriot Act and now FATCA, and I’m afraid of FATCA II and FATCA III,” said  Morcos. “I wonder if FATCA II or III will be more aggressive or much clearer, but I think it will be more extensive and will bring about new practices in the finance and banking industry to enhance monitoring and reporting through foreign channels.”

Arms, drug smuggling and kidnapping combine in the Algerian Sahara

Commercial Crime International (UK's International Chamber of Commerce)

Commercial crime may not be as omnipresent in North Africa as in some other parts of the world, but companies operating in the region still have risks to contend with. Corruption is rife, smuggling across the borders with sub-Saharan countries is a major activity, and terrorist groups such as Al Qaeda in the Islamic Maghreb (AQIM) are in the ascendancy. Kaci Racelma in Algeria and Paul Cochrane in Lebanon take a detailed look at these problems.

“Corruption is systemic in all of the Maghreb, and that is not likely to change,” said Dr Geoff Porter, a political risk and security consultant specialising in North Africa. “We’ll have to see what happens in Tunisia. It was a cesspool of corruption under the previous government and while the new one seems to have a zero tolerance policy to corruption, it has not been in power long enough to gauge its effectiveness,” said Dr Porter, founder of US-based North Africa Risk Consulting.

Furthermore, the region is in a state of turmoil following the uprisings that overthrew the Tunisian and Libyan regimes in 2011, with an estimated 250 militias still armed in Libya and reports of some 20,000 surface-to-air missiles having gone missing during the conflict.

Dr Porter added that one of the biggest operational costs to international companies that do not have major contracts with governments comes from corruption at the customs level. “One of the over arching problems that affects all of North Africa is corruption within customs and border control. If one enters the civil service in Morocco, Libya or elsewhere, the opportunity for graft is the largest in customs,” said Dr Porter. “Larger scale corruption is at the ports where import permits can be voided.”

Operational risk is also high along the southern borders and in the sub- Saharan nations of Niger and Mali, where kidnappings for ransom have occurred. The most high profile case was in 2010 when seven employees of French nuclear energy companies Vinci and Areva were kidnapped by the AQIM in northern Niger. While three of the hostages have been released, four remain in captivity. With AQIM particularly active in Niger and Mali, “companies should be concerned about this,” said Dr Porter. These problems are also apparent over their northern border with Algeria, where business visitors were alarmed by the kidnapping of a 56-year-old Italian tourist last year. These fears were intensified by a travel warning issued this January by the French government, which told French travellers not to visit southern Algeria. Furthermore, the Algerian government has closed the Tassili mountains to visitors over an increase in the presence of terrorist groups and smugglers following the Libya civil war and unrest in northern Mali.

Algerian security services have devoted resources and launched targeted missions to reduce these threats across the south of their country: road blocks have been reinforced and police assigned to protect travelling foreigners. Even so, the flow of visitors has decreased to a trickle – there have only been 10 European tourists daring to visit southern Algeria since September 2011, said one travel agent in the regional centre of Tamanrasset.

This spike in crime and terrorism has the Algerian government concerned over its impact on money laundering and terrorist financing, especially as police allege a connection between drug traffickers and terrorists involved in the kidnapping of foreign tourists. The Saharan area of Tamanrasset in southern Algeria is considered to be the hub of Algerian money laundering, fuelled by active hawala networks in the city. As part of the fight back, Tamanrasset security services in 2011 arrested 1,367 people, launching 1,027 judicial prosecutions.

Algeria’s intention to cut funding for terrorism dates back to 2005, when the government decided it would tighten rules against dirty money flows in general and terror finance in particular. Since then there has been a steady flow of anti-money laundering regulations introduced. These culminated in an attempt in April 2011 by the authorities to oblige any person or legal entity to justify the origin of any payment of an amount in excess of Algerian dinars DZD100,000 (USD$1,345).

Meanwhile, the overthrow of Muammar Gaddafi’s regime in Libya has undermined security in neighbouring Algeria, Niger, Mali and Chad. It has destabilised the region of Tamanrasset because countless weapons have been transported to northern Mali from the Libyan conflict. Smuggled weapons including assault rifles, machine guns, mortars and rockets have been traded and for organised crime, combining this with drug trafficking has generated much wealth.

Algeria’s fight against these increasingly powerful networks has provoked a significant response: a bomb attack on March 3 targeted the Tamanrasset headquarters of the national gendarmerie. This, Algerian security forces sources said, was considered retaliation to the successful efforts to choke off funding and recruitment to terror groups in the region. Indeed, two multi-national conferences were held in the Algerian capital during 2011, and Algeria has established a committee of staff joint operation command centre in Tamanrasset. This committee of joint military chiefs includes officers from Mali, Mauritania and Niger and they have been charged with clamping down on terrorist recruitment in southern Algeria, and monitoring organised crime groups who funnel potential cadres to terror groups. The Algerian security services have also been particularly active since a regional governor was kidnapped in Illizi in January 16.

Smuggling a major problem

Despite this influx of security services, smuggling has continued apace in the region. In a visit to Tamanrasset in January 2012, the director general of Algeria’s customs organisation Mohamed Abdou Bouderbala said the government would develop new customs control facilities in southern border areas. “With the suitable equipment the Algerian authorities will succeed to keep the pressure on traffickers. These new structures will be equipped with appropriate controls to customs activities and provide good working conditions for customs,” said Bouderbala. He inspected various departments, visiting to the region of Aïn M’guel (130 km from Tamanrasset), the headquarters of the country’s mobile customs brigade (Brigades mobiles des douanes), which patrols the desert zones that serve as an unfenced border between Algeria and its southern neighbours.

Meanwhile, there is widespread concern that the democratic process in Algeria is being subverted by smuggling groups. On March 8, activists of the political party, Democratic National Rally (DNR), surrounded the office of their party in Tamanrasset to protest about its local list of candidates standing for the Algerian parliament. Demonstrators demanded the withdrawal of the names of candidates they claimed were associated with organised crime. “We never accept to be represented in the parliament by people involved in the smuggling and the acquisition of dirty wealth,” one activist told Commercial Crime International.

The Eurozone debt crisis and China

International Link - Hong Kong

The Eurozone debt crisis (EDC) is a tangled web of complexities. How the crisis will unravel may shake the European Union to the core, with the possibilities of two Eurozones developing, even the end of the Euro/EU if the European public have its way, and the spectre of a double dip if there is a run on the $3 trillion in holdings in Eurobanks. Amid such doom and gloom, the EU is seeking inflows from China at the same time the IMF is forecasting China's growth to halve this year, writes Paul Cochrane in Beirut.

The EU-27 is China's biggest trade partner. What happens economically in the EU is clearly of crucial importance to Beijing. Indeed, the IMF lowering its growth forecast for China is an indication that the Eurozone is on shaky ground. It is no surprise therefore that the EU looks to China to aid in resolving the debt crisis by buying up Eurobonds from the PIIGS – Portugal, Italy, Ireland Greece and Spain – and investing in EU economies. That was the aim of the China- EU Summit held in Beijing in February, which drew a degree of press attention but from which nothing substantial was concluded.

"There were a lot of nice words but it was hard to see anything concrete. Europe needs someone to lend that cannot repay the debt, and China is not willing to take on that role," said Michael Pettis, professor of international finance at Beijing University.

There were signs that it would be a PR show to bolster global economic sentiment and placate the markets even before the summit was held, with the China Investment Corporation (CIC) brushing aside a call by German Chancellor Angela Merkel to buy European government debt, saying such investments were "difficult" for long-term investors. On the other hand, the Governor of the People's Bank of China, Zhou Xiaochuan, echoing comments by Premier Wen Jiabao, said: "China will always adhere to the principle of holding assets of EU sovereign debt...We would participate in resolving the euro debt crisis."

Such opposing statements reflects the Catch-22 that China is in – the Eurozone needs to recover for China to export and the economy to remain buoyant, yet sinking money into EU sovereign debt and companies is arguably not the most savvy financial move, particularly as other foreign investors are not willing to make the same gamble.

"At the height of the EDC when (then French president Nicolas) Sarkozy called Beijing, cap in hand, the Chinese were miffed that they were viewed as the the rich patron, so the request got nowhere. In a way the Chinese are between the proverbial rock and a hard place. There is a desire and perceived need to be financially engaged with Europe, and where Europeans are in a situation to buy Chinese made goods, but they are not sure what is happening and how safe their money is," said Jean-Pierre Lehmann, Professor of International Political Economy at the IMD Business School in Switzerland.

Moreover, the EU does not need capital. It is the banks that lent to governments, particularly the PIIGS, that need capital to stay afloat, tied up as they are with debt exposure.

"Europe doesn't need capital. That one of the most capital rich places in the world needs capital from China is silly," said Pettis. "I don't think the EU needs China. It needs someone foolish enough to pay and China is not willing to play that role. It is silly for EU politicians to think of foreign capital as it worsens the trade balance; they don't need liquidity but growth."

Indeed, in August and September, 2011 alone, over $25 billion was withdrawn from emerging market funds to head back to Europe, and a further $85 billion of portfolio inflows went into the Eurozone, with balance of payment statistics showing a large share went to France, according to data from the Bank for International Settlements.
EU companies are seeking to reduce portfolio liabilities and ease cash flow issues as the banks are making life tough for businesses when it comes to stop-gap loans. An example is a French company, which shall go un-named, that manufacturers water purifiers, pumps and the like. It is well established with clients around the EU, as well as in India and China. Manufacturing a needed product, orders keep coming in, but the issue is that past customers - which include public entitites - are not paying up on time. Yet with $500,000 of salaries and overheads to be met every month, will banks step in to keep the company afloat? Very reluctantly, depsite banks pledging to the governments that bailed them out in 2007 and 2008 that viable small and medium sized enterprises (SMEs) would be extended a financial hand.

Similar experiences are occurring throughout the EU, as well as in the US and globally. The result is a vicious circle – another business folds, putting more burden on government revenues, more debt that needs to be written off, and another brake is put on economic recovery. But rather than forcing banks to bolster the economy by aiding businesses, the EU is acquiesing to the banks and big corporations, of which few pay taxes, with 99 of Europe's 100 largest companies, including banks, using offshore subsidiaries and tax havens, which hold the equivalent of over one-third of the world's gross domestic product (GDP) while more than half of world trade passes through these fiscal paradises.

The United States is of course implicated in the EDC. The US Federal Reserve's quantitative easing policy – printing dollars to boost base money supply to get the economy out of recession – has meant, in the words of Jim Rickards in his book, “Currency Wars: The Making of the Next Global Crisis,” that "the Fed has effectively declared currency war on the world." The result is stagflation – stagnant growth and high inflation - and the world going deeper into financial crisis.

"There is definitely a currency war being waged. Everyone is doing the same thing to grab a bigger share of global demand through a trade war," said Pettis. "In the US, we are starting to see debt levels come down. In Europe we are not seeing that, and in China it is going up. We are still not out of the crisis."

Furthermore, financial moves in the US could trigger a double dip that scuppers economic recovery and leads to a new global financial shock. US money market mutual fund holdings of Eurobank assets are estimated at $3 trillion. As they are in extremely short-term liabilities, which are similar to deposits but not insured, any problem with the Eurobanks could cause significant loses to US funds, but unlike in 2007 and 2008, the US government will not step in to guarantee such holdings, as the Dodd-Frank Act disallows such intervention. "The appearance of a problem among eurobanks could bring down that whole market—which is about twice the size of the US sub-prime mortgage market that brought on the global financial crisis last time," wrote Randall Wray in Real-World Economics Review.

The leadership crisis

EU leadership has not risen to the challenge presented by the EDC, and not acted in accordance with the EU's esposed democratic principles, instead dictating to the likes of Greece what they can and cannot do fiscally. For Germany, which is in the driving seat of the Eurozone cargo train, it is the PIIGS that are the pressing problem.

"The problem is no one wants to lend money to the PIIGS. China doesn't have problem buying Eurobonds issued by Germany. What Germany needs is someone to buy Spanish bonds," said Pettis.

It is no surprise therefore that how the EDC is being handled is coming under heavy criticism, and that sentiment among Europeans towards the EU and the Euro is at an all time low, with Eurobarometer surveys showing less than half of those polled support the EU. In Spain, one of the countries hit the worst by the EDC, 62 percent of Spaniards "tend to distrust" the EU, against 30 percent who "tend to trust" it.

"One of the things that very rarely appears in discussions is that the mood in nearly all of Europe is very anti-European. Many are in favour of disengaging from the EU and I am not aware of any country where Euro sentiment is strong. If treaties needed to be ratified and go to referendum, I think they will be strongly rejected," said Lehmann.

Such sentiment has led to a flurry of speculation on the future of the EU and the Euro, from the relatively optimistic, such as "How to Save the Euro" by George Soros in the New York Review of Books, to historian Walter Lacquer's grim forecast in his new book, “After the Fall: The End of the European Dream and the Decline of a Continent. ”

"We are seeing an implosion. Sarkozy and Merkel are calling for a greater degree of unity but pushing it the other way, toward dis-unity. Countries are talking about ending the Schengen Agreement and limiting the movement of people. I cannot think of anything currently holding Europe together," said Lehmann.

There have been suggestions that two Eurozones may develop, a northern, core EU of founding members, and the southern and eastern blocs, although the East is not such a possibility, given German and Austrian financial influence in the Baltics, Czech Republic and Hungary. Such an occurrence would be tantamount to writing off the PIIGS debt, which is being avoided at all costs, as it could signal the demise of the Euro.

As the world's second reserve currency, at 26.6 percent, this is unlikely in the near future, if at all. But with European banks likely to offload 3.5 trillion euros of assets to meet tight new capital rules, few saviours are in sight. Even the IMF has stated that the Eurozone needs to increase the size of its permanent rescue fund, the European Stability Mechanism that is set to go into operation in July, from Euro 500 billion to Euro 1 trillion, a stance which Beijing supports.

The dragon in Europe?

So, is it prudent for China to try and help disentangle the debt web, or will it get stuck in it? Last year, China's foreign direct investment into the EU surged by 95 percent on 2010, but was still just $4.3 billion, according to Ministry of Commerce data. By contrast, last year, in terms of actually utilized value of foreign capital investment in China, European countries ranked seventh to tenth respectively, with the UK the top EU investor ($1.61 billion), followed by Germany ($1.136 billion), France ($802 million), and the Netherlands ($767 million).

What is important to note is that Chinese companies' forays oversees have not always proved too stellar. According to data complied by the Heritage Foundation in the US, China's failed foreign forays totalled $32.8 billion in 2011. From 2005 to the middle of 2011, "China has seen 70 business deals each worth $100 million or more partly or completely fall through, with an aggregate value of $165 billion, such as by Chinalco, CNOOC, CDB, and Huawei," stated the foundation's report. Such failings, said Lehmann, "are partly due to insufficient understanding of the softer side of overseas investment, as human skills are not so good."

There have however been some success stories, such as the China Ocean Shipping Company (Cosco), which has operated two terminals in Greece since 2009, and bolstered exports to China by 50 percent. In February, car manufacturer Great Wall Motors opened an assembly line in Bulgaria, enabling the company to qualify for a "Made in Europe" label, a move that other Chinese manufacturers may follow.

When it comes to sovereign debt, China is hesitant to mix up its current foreign reserve spread, which is primarily in US dollars, at 60 percent, versus 26 percent in Euros, according to IMF and Woodsford data. But perhaps more crucially, appetite in China for investment in the EU seems elusive. "Clearly what we've seen is public opinion counts more and more in China. And opinion raises questions when so much money goes abroad as Chinese think they need the money at home to develop the country," said Lehmann.

Internal issues will also dictate any readiness to invest abroad if the Chinese economy contacts this year. "I think this will be devastating, and that is the political risk," added Lehmann.

Global instability is a further reason why the BRICs (Brazil, Russia, India, China) are not getting ensnared in the EDC web. The surge in outflows of capital from China is equally indicative of the degree of confidence in the Chinese economy and policies, evidenced by the inflows of capital to Hong Kong and the buying up of real estate, as well as further afield to onshore and offshore financial havens.

"The rich Chinese are placing more and more money out of China, and very significant sums, in real estate and tax havens. What is very interesting is that this is the kind of data that should be looked at as it reflects confidence of the people in economic prospects," said Lehmann.

While China is economically interdependent with the EU, any major financial forays into the Eurozone outside of the more stable economies – and those are export driven – may prove disingenous if not painful in the short to medium term. As for sinking money into Eurobonds connected to the PIIGS, China is likely to get stuck in the sticky EDC web.

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