The Middle East's rising risk

As the saber rattling continues financial ratings come under pressure

Commentary - Executive magazine

Getting labeled as a high risk country for firms to operate in, or receiving a low financial rating by an agency, is like a movie getting slapped with a XXX rating instead of the General Release investors had hoped for — meaning the mainstream conservatives are going to stay well away. Recently, ratings agency Moody`s downgraded seven state-linked firms in Abu Dhabi by a notch or more due to “no explicit formal” government guarantee to support the companies, and is considering downgrading four United Arab Emirates banks.

This comes as predominantly Western financial analysts are mulling not only higher risk ratings for Middle Eastern and North African (MENA) countries, but the region at large. The recent situation in Yemen, ongoing insurgency in Iraq and Israel’s sabre-ratting on Lebanon’s border are all causes for concern, as is as the potential for widespread conflict if the situation between Iran and the United States/Israel deteriorates into actual war.

On top of this, US regulatory watchdog, the Treasury Department's Financial Crimes Enforcement Network (FinCen), is widening its offensive on the global financial system, from the now well-established anti-money laundering and counter terrorist financing regulations all banks operating with the US have to comply with, to a heightened focus on corruption – the Foreign Corrupt Practices Act (FCPA). This onslaught by Washington and US-based ratings agencies is making life hard for Middle Eastern financial institutions and foreign firms that work in the region, and in particular for raising capital in an already tight lending environment. But while the UAE is being a touch sensitive about the downgrades — after all, British and American banks received lower ratings following the financial crisis and resultant government bailouts — the regulatory side is decidedly political.

Since the creation of the US Patriot Act in 2001, doing business with the “wrong sort” has been taken increasingly seriously. Early last year, British bank Lloyds TSB was slapped with a $400 million fine by a New York court for illegally transferring funds on behalf of clients in Iran and Sudan, both of which are under US sanctions.

The lesson to be learned is clear: if you do business with the likes of Iran, don’t get caught, and if you do get caught, make sure you are making enough profit to pay the fines. Lloyds TSB was slapped on the wrist financially — eventually agreeing to pay $350 million — but the bank was not blacklisted by the US. It is hard to imagine a Middle Eastern bank, caught playing the same game, would be let off as easily.

As for the FCPA, FinCen going after firms using bribes to get deals in the MENA region would open a Pandora’s Box given the rampant and endemic nature of corruption here, as a cursory glance at Transparency International’s Corruption Index shows. British aerospace firm BAE felt this when it was investigated in London for greasing palms in Saudi Arabia to secure multi-billion dollar contracts. While cracking down on corruption is laudable, the case of BAE, like Lloyds, is a relative exception to the rule; corruption is blatantly practiced by Western firms, domestically and internationally.

In any case, a greater focus on corruption and a higher collective risk level for the MENA would not necessarily dampen business or financial confidence; if that was the case, many firms and multinationals would have given the region the cold shoulder long ago. There is, after all, the maxim that big risks equal big rewards. Then there is the classic of “getting around” the rules and the regulations. On the regulatory level, institutions use tactics such as acquiring stakes — silently or not — in local banks and firms to operate in riskier markets. What such international firms need to watch out for is how far down the money trail US regulators may want to go. But unlike in the movies, financial institutions cannot edit or re-write the script where politics is involved; risks have to be faced head on, and it will no doubt come down to who you know.

PAUL COCHRANE is the Middle East correspondent for International News Services and writes for Money Laundering Bulletin

Fixing it on the cheap - Lebanese cars dealers feel the pinch as fake and second hand parts see a surge in sales

Executive magazine

The use of counterfeit spare car parts is a growing phenomenon in Lebanon due to the high number of luxury and used cars on the roads, coupled with the country’s low per capita income.

There are an estimated 1.646 million vehicles in Lebanon, of which 76.5 percent are more than 10 years old and a mere 3.7 percent were manufactured in the last three years, according to data compiled by research firm Information International. While the new car owners are provided with warranties that require them to service at dealerships — or void the warranty — used car owners have an open market to choose from: brand originals, certified parts from original equipment manufacturers (OEMs), cheap but still legal parts and outright counterfeits.

The value of the branded spare parts market is estimated at $70 million to $100 million, with dealerships and retailers dividing market share at 50 percent each, while the OEMs and other legal parts are valued at a further $100 million. Some estimates peg the fake parts market to be worth more than $10 million, while others put the figure at 20 to 30 percent of the market. The cost differences can be startling, with a pair of fake brake pads selling for as low as $11, compared to $66 at a dealership. On average, the price difference between real and fake parts is around 60 percent. But the difference in quality is equally alarming, especially in fast moving products related to safety.

“Everyone talks of pirated DVDs and fake medicine, but on the car side the situation is really gliding out of hand in Lebanon — the danger is high,” said Joachim Zeitler, after sales director at T. Gargour & Fils, distributor of Mercedes-Benz. “Everybody has a copied movie, but it’s not killing anyone. It’s wrong if you can’t cross a road because you’re worried about being hit by a guy who has saved $50 on his brakes.”

In addition to counterfeit, fast-moving products, everything else is available to fit out a car, from windshields and discs to shock absorbers and tires. “There is, amazingly, a lot of fake suspension items, and I even saw a fake hood. It was 1 millimeter less in width, definitely in thickness and maybe 50 percent cheaper,” said Ronald el-Khoury, quality manager at Rasamny Younis (Rymco), dealer for Nissan, GMC and Infiniti. The majority of fake parts that enter via the Beirut port are from China and Turkey, or are transported via the Gulf, where the goods are packaged for distribution throughout the Middle East.

Luxury fake

The Lebanese penchant for luxury cars, even if used, means brands like Mercedes and BMW are particularly affected in spare parts sales. Mercedes is the most popular brand in Lebanon, with more than 309,800 vehicles, or 18.9 percent of the total volume. Next is BMW with some 150,800 vehicles, or 9.2 percent of the total.

“We are selling the most, so that’s why we are affected the most, as Mercedes parts are not cheap,” said Zeitler. “In a market where a large part of the population has a low income yet is driving a luxury car, the risk is higher than elsewhere.”

Zeitler backed up his statement with research carried out by Mercedes in Lebanon, which showed some 60 percent of counterfeits are sold outside of Beirut.

It is not just parts that are counterfeit and increasingly sophisticated, at least in appearance. The quality of packaging has improved in recent years from bad spelling, copied holograms and other minor differences to near perfect copies that only the trained eye can see.

“Counterfeiters are very professional. It used to be easy to spot them, but not now,” said Zeitler. “They are even faking invoices from our company [which show] the parts were bought from us.” While fakes are dangerous, so are used car parts, which are increasingly coming onto the market. “The amount of competition here in spare parts, it’s unbelievable,” added Zeitler.

Rent-a-part

Curbing counterfeits is an uphill struggle, given minimal governmental oversight and insufficient punishment for offenders. “It is a business like organized crime, with a whole supply chain,” said Zeitler. “This is how it should be treated by the police as counterfeiting is highly profitable, but the risk of being punished is minor. Drugs have a lower profit margin, but if you’re caught with cocaine you are in big trouble.”

Fake and substandard parts are also not being checked during a vehicle’s annual roadworthiness test, the “mechanique.” Khoury said that it is easy to pass the test by renting spare parts from vendors nearby the inspection center, which are then returned after being given the green light by the mechanic for another year on the road. “And who is controlling cars driven in places like Faraya?” he queried.

“Only 500,000 cars go through the mechanique every year, so 40 percent or less of all cars on the road,” said Walid Rasamny, chairman and chief executive officer of Century Motor Company, dealership for Hyundai. “The government is being lax in enforcing inspection,” he added.

While enforcement is lackluster, there have been raids of late. Three illegal businesses were shut down, there were 12 nationwide raids on warehouses and mechanics, five shipments containing counterfeit parts were seized at the Beirut port, and 933 windshields and windowpanes were confiscated and destroyed.

“In the last three years there has been progress,” said Zeitler. “The customs has a special department for spotting fakes, and they are really good.”

Affordability vs. safety

“It is impossible to stop counterfeits in a free market – they can be smuggled in, and it can’t be controlled. Car dealers should have competitive prices to have higher customer retention,” said Farid Homsi, general manager of IMPEX, distributor for GM, Chevrolet, Cadillac, Hummer and Isuzu.

Many dealerships share Homsi’s view that lower prices for original parts could drive down sales of fakes, while dealers such as IMPEX buy parts in bulk to lower costs. Dealers are also developing service “menus” for customers with a variety of options and prices.

“We mark down and don’t overcharge,” said Rasamny, who added that fake spare parts had not overly affected the South Korean-based Hyundai brand. “Japanese brands are very affected, as I think they mark down the price of the vehicle and make up the difference in spare parts, by maybe 20 to 30 percent. What’s encouraging the grey market is the fact that distributors mark up; they should be more competitive.”

Luxury car dealers, however, point to the fact that significant amounts of research and development go into manufacturing the original parts, and have embarked on publicity campaigns to inform consumers about the safety risks of fakes.

Revoking a car’s warranty if fake parts are used is another policy.

“The only fighting point we have is to relay to the customer that you have to preserve the warranty,” said Khoury. “But manufacturers must also revise prices. A difference of 20 percent is acceptable, but not 50 or 60 percent.”

Curbing the number of used cars in Lebanon is a further policy that dealers want enforced, which would be a boon not only for sales of original parts but also new car sales.

“Much more serious [than fake parts] are the wrecked cars coming into Lebanon. You have cases of a car with a back-end collision and a car with a front-end collision, and the cars are split apart then welded together. Innocent customers believe they are buying an average used car,” said Rasamny. “Eight year old cars should not be allowed to be imported, as we get all the junk of Europe and the United States, especially as neighboring countries and the Gulf don’t allow imports of used cars,” he added.

Lebanon's automotive sector - The end of the road?

Executive magazine

After two exceptional years, Lebanon's car market may finally begin to slow

In 2008 and 2009 sales of new cars in Lebanon hit record highs, setting the benchmark for annual sales at well over 30,000 units. But over the past five months the sector has slipped a gear, down 12 percent in the first two months of 2010 (compared to last year). This has prompted dealerships to question whether that annual benchmark will be reached for the third year running.

“The best year we’ve ever had was August 2008 to August 2009. From September 2009 onwards the whole market has gone down dramatically,” said Nagy Heineine, general manager of Bassoul Heineine, dealer for BMW, Mini, Alfa Romeo, Dacia and Renault. “In October, the total market dropped by 31.52 percent on 2008; in November, it was down 24.65 percent; in December, it was down 8 percent and down 13 percent in February. It’s a real slowdown in the market altogether, a 17.68 percent drop.”

“The financial crisis hit Lebanon later than other [markets],” he added.

While dealers point to the delayed effect of the global financial crisis for lackluster sales, the other culprit is instability and the potential for regional conflict, which has psychologically dented consumer confidence.

“We are always operating under the specter of war, which is not conducive to business,” said Walid Rasamny, chairman and chief executive officer of Century Motor Company, the dealership for Hyundai. Used car sales are the third factor that is biting into dealership sales, with roughly two used cars sold for every new car. Nearly 67,000 were sold in 2009, up from some 46,600 in 2008. Last year just less than 34,800 new units were sold.

But while overall sales of new vehicles has gone down, this is not the case across the board. For instance, while Honda sales dipped 75 percent and troubled Toyota was down 55 percent in the first two months of the year on 2009 figures, Hyundai spiked 80 percent in the same period and Mercedes-Benz sales were up 13 percent on January 2009.

Hyundai attributes its sales increase to an expanded dealership and the growing rise of the brand, number two in the Middle East and fourth globally in terms of sales. Mercedes’ dealership T. Gargour & Fils however could not explain the uptick in sales, a fairly common answer given the complexities of the Lebanese market.

“Our advertising has been consistent, so I’m not sure why sales are up,” said Negib Debs, brand manager. “I asked myself this question in early 2009, ‘Will the market stay like that of 2008?’ and it did. This year, I’ve no idea. It all depends on what happens in the country; if there’s a war, we’re screwed, but if it is like June 2009 onwards — we’re selling 80 cars a month — we’ll have our best year ever.”

Farid Homsi, general manager of IMPEX, distributor for GM, Chevrolet, Cadillac, Hummer and Isuzu, said he thought 2010 would be a good year for the sector. “Although every year I’m afraid of giving an opinion,” he added.

Back to “normal?”

Homsi said that the sales spikes of the past two years were not normal, jumping from the previous benchmark figure of just more than 19,100 in 2004 — the intervening years were hit by political instability — to some 35,400 units in 2008.

“It was not a normal year; 2008 was a year when frustration went away after the Doha Accord. Logically speaking a wonderful year is 20,000 units but 2008 raised the bar,” he said. “This year, until now, the sector has sold an average of 1,750 cars a month. Multiplied by 12, that is 21,000 units, so I think no more than 25,000 units this year.”

Whether the market will revert to a more sustainable growth rate over the year is unclear, but it appears unlikely to top 2008 or 2009 figures. “It will be very tough to reach this benchmark, judging by the first two months. I think we may reach 30,000 or 31,000 units,” said Heineine.

Such variable swings in the market — from dips to double-digit growth — is making it hard for dealers to plan ahead.

“Every month we forecast for five months. [If we request] too low an inventory then maybe manufacturers will not supply it. After the crisis, they want maximum efficiency and to not have high overheads,” said Homsi. “It’s tough when living in a volatile country and the market changes a lot. We adopt a system of nus wa’ayi, nus majnoun: half sane, half mad.”

While reading the Lebanese market is complex, there is a degree of certainty to be found in the first half of the year. Homsi pointed to the upcoming car show in early April, the first to be held since 2004, after the last two biennial events were canceled because of political instability. With new models on display and automotive events, the 10-day show is expected to bolster sales.

“It will drive traffic and help sales in the second quarter. Shows have an effect for months afterwards,” he said.

Oil’s not the only spoil of Iraq

The US may have lost out on Iraq's oil bids, but there's plenty more to go round

Commentary, Executive magazine

The recent round of oil tenders in Iraq did not turn up trumps for American oil companies, with only ExxonMobil and Occidental Petroleum winning contracts. This has been viewed as a refutation of critics of the United States-led invasion who believed it was a “war for oil.” On the other hand, it has also caused some Americans to feel they’ve been denied their rightful spoils of war.

“They’re opening [the oil fields] up to other companies all over the world,” said US oil tycoon T. Boone Pickens at the Congressional Natural Gas Caucus last year. “We’re entitled to it. Heck, we even lost 5,000 of our people, 65,000 injured and a trillion [or] $500 billion… We leave there with the Chinese getting the oil.”

However, both Pickens and the peaceniks are being overly simplistic, overlooking America’s modus operandi for invasion and conquest and the fact that many American businesses have been war profiteers.

Historically, US military adventurism has been less about securing contracts for the boys back home than spreading the ideology of American-style capitalism, with corresponding knock-on benefits for US businesses and multinational corporations.

America’s involvement in Germany and Japan following the end of Word War II demonstrated its interest in the stability of the global economic order, even if it meant heightened competition down the road. In Iraq, the war has cost US taxpayers an estimated $1 trillion, but has earned billions for the military industrial complex, with companies such as Lockheed Martin — in the red prior to the invasion — now firmly back in the black.

Private military contractors (PMCs) have also cashed in. The US Department of Defense in Iraq allocated some $76 billion from 2003 to 2007 to PMCs. In 2007 and the first half of 2008, contracts for the 113,000 PMCs in the country were worth approximately $25 billion, according to a US Congressional Research Service report. Then there are the reconstruction contracts, where nearly all of the large projects awarded since 2003 have been to US companies. For instance, Halliburton and its former subsidiary KBR — once run by former Vice President Dick Cheney — have won contracts of over $24 billion since the war started.

And while US oil companies may not be winning many tenders for Iraqi oil fields, US firms keep piling into Iraq to rebuild the country’s dilapidated infrastructure, repair thousands of kilometers of oil pipelines and build new oil terminals — Iraq needs some $300 billion in infrastructure investment and an estimated $50 billion in the oil and gas sectors. Courting such contracts are Houston-based oil services companies Halliburton, Baker Hughes, Weatherford International and Schlumberger Limited. Meanwhile, firms KBR, Bechtel, Parsons, Fluor and Foster Wheeler are after construction and engineering projects.

“I think you see everybody trying to establish a base there, and we’re no exception,” said David J. Lesar,

Halliburton’s chief executive, in October 2009. “Clearly, [there is] a great future there and one we will participate in — in a big way.” So, while the major US oil companies are not benefiting, associated industries are. Some analysts suggest the oil firms are sitting it out until they can buy into Iraqi and other national oil companies, and become involved in the country at a later date. Indeed, Russia’s second largest oil producer, Lukoil, which won a bid to develop Iraq’s giant West Qurna Phase Two oil field in December, is 20 percent owned by America’s third largest oil company, ConocoPhillips.

One of the war’s chief proponents also appears to be profiting from the post-invasion environment. Former British Prime Minister Tony Blair has come under criticism of late for receiving $1.55 million per year to be an international advisor for the United Arab Emirates’ investment firm Mubadala, which derives 80 percent of its revenues from the energy sector and is actively bidding to be part of a consortium to develop the Zubair oilfield in southern Iraq.

So, while the war in Iraq may not have been about weapons of mass destruction and seemingly not oil per se, the invasion has been big business. And, lest it be overlooked, it will be Iraqi oil revenues that will pay for the reconstruction tenders to contractors, be they from Houston or Beijing.

Libya's oily numbers

Commentary, Executive magazine

When sanctions against Libya were lifted in 2004, international oil companies (IOCs) viewed the former rogue state as the El Dorado of black gold, and clamored to be the first to exploit the country’s riches after a 30-year hiatus. But five years later, IOCs are reining in their enthusiasm as doubts arise over how much oil Libya really has.

As international relations thawed, Libya’s National Oil Corporation (NOC) embarked on a global campaign to attract IOCs, offering competitive bidding rounds to explore and develop the country’s energy reserves. Part of the enticement was an oft repeated statement that 70 percent of the country was yet to be explored for oil and that Libya had 39 billion barrels in proven reserves.

These ‘facts’ are still doing the rounds, with the “BP Statistical Review of World Energy 2009” and the United States’ International Energy Agency (IEA) stating Libya has 43.7 billion barrels of proven oil reserves. At face value, this would mean Libya has the fourteenth largest reserves in the world and the largest in Africa, ahead of Nigeria’s 36.2 billion barrels.

But Libya, like the majority of oil producing countries, has been playing it thick and fast with their figures. A leading petroleum geologist familiar with Libya, who asked for anonymity so he could still work in the country, told me: “[The reserve] is nothing like that, it is a third to half of that figure.”

That would mean anywhere between 14 to 21 billion barrels, placing Libya second in reserves in Africa, ahead of Algeria’s 12.2 billion barrels. And as for 70 percent of the country being unexplored, that figure is “nonsense; it is very well explored,” said the source.

The geologist added that the amount of reserves that Libya actually has are evident at the NOC’s technical conferences, where diagrams are shown that indicate less than half of the official government figure — if you know what you are looking for. When the presenters are questioned in public, “they squirm,” the source said, but when queried in private on a technical basis they agree that Libya doesn’t have the reserves it claims.

There was further indication that Libya has been inflating the figures when the NOC last year revised their production capacity target of 3 million barrels per day by 2015 down to 2.3 million barrels per day.

The exploration licenses Libya granted to IOCs are also indicative of there being less in the ground than hoped. Out of the 90 wells drilled after the country’s most recent exploration and production sharing arrangements — the EPSA-4 acreage, launched in 2004 — only five discoveries have been made. International oil and gas exploration and production company Occidental has had a zero success rate, drilling 18 dry wells.

IOCs are now banking on the Sirt, Ghadames and Kufra fields to turn up trumps, but even if there are sizable finds they are unlikely to boost the reserve’s figure to 43 billion barrels. The NOC’s current policy is to focus on developing existing fields — there are an estimated 60 to be tapped — rather than offer IOCs expensive tenders to explore territory that may well draw a blank.

So why is Libya cooking the books? One reason is that it attracts more foreign direct investment (FDI) and interest from IOCs, similar to how countries like to boast of huge FDI inflows yet fail to mention that however-many billions of dollars is over 10 years or has been ‘pledged’ in investment — very different from actual annual inflows. Secondly, it puts Libya in a better bargaining position within the Organization of Petroleum Exporting Countries (OPEC) when it comes to oil quotas.

“It isn’t acceptable within the NOC to question [the] numbers because [they are] given for political reasons, for political advantage within OPEC,” said the source.

But why would BP and the IEA back up the Libyan figures? Well, the British oil giant is operating in Libya and presumably doesn’t want to ruffle any feathers. As for the IEA, its credibility came under fire last November when a whistleblower said the agency was deliberately underplaying an impending global shortage over “fears that panic could spread on the financial markets if the figures were brought down further.”

The game that Libya is playing is dangerous and, alas, one that it is not playing alone. Saudi Arabia, the world’s largest oil producer, has never been transparent with its reserve figures, nor are the majority of OPEC producers.

If we can’t take oil reserves at face value and trust them, then how much oil is there? If you subtract 20 odd billion barrels from Libya’s ‘proven’ reserves, and so many billion barrels from, say, Saudi, Algerian and the United Arab Emirates’ reserves, among others, then the total global oil reserves would be substantially less than claimed. It’s time Libya — and everyone else — starts telling it like it really is or the financial markets could be in for yet another turbulent ride.

PAUL COCHRANE is the Middle East correspondent for International News Services and writes for Petroleum Review

PHOTO CREDIT: PAUL COCHRANE

Secrets of the stones

An investigation into the murky world of Lebanon's jewelry sector
Executive magazine
By Paul Cochrane in Beirut

It is easier to walk into the Lebanese Parliament than gain access to the higher echelons of Lebanon’s jewelers, given the amount of security, how frequently top jewelers travel and their secretive nature.

To visit the offices of a jeweler is akin to entering Fort Knox: beyond the usual security to an office block there are multiple bulletproof doors to be buzzed through — including a holding room — until you’re sat in a padded leather arm chair of the ‘old world’ style.

When you keep merchandise worth up to $80 million on the premises, as some of the top jewelers do, such security measures are understandable. Yet while carrying out a heist on these jewelry fortresses would be difficult, just as challenging is getting interviews with members of what is arguably the country’s most secretive industry.

The sector, which by dollar value accounts for an estimated 30 percent of Lebanon’s total trade and exports, is so devoid of transparency that accurate figures are hard to come by and no companies are willing to open their books to external scrutiny.

“Around 90 percent of sales are not declared,” said one jeweler in a rare off-the-record disclosure.

Getting jewelers to talk is like getting blood out of a stone; they tend to clam up when it comes to figures, market variables and projections. Indeed, some jewelers are so tight lipped that half-hour interviews yielded just a few lines of useful information and usable quotes.

While Lebanon is well known for its banking secrecy, the jewelry sector should be equally — if not as infamously — renowned, particularly given its economic significance and export clout. According to the Syndicate of Expert Goldsmiths and Jewelers in Lebanon (SEGJL), Lebanon is the leader in jewelry and gold production in the Middle East (excluding Turkey), employing 8,000 people with 2,000 qualified jewelers and experts at some 60 major workshops.

According to the country’s other jewelry-related body, the Syndicate of Lebanese Jewelers, the sector employs 5,000 people. By comparison, the banking sector employs some 20,000 people.

Judging by the Lebanese Customs’ records, jewelry exports were valued at $707 million from January to September 2009, equivalent to 28.8 percent of the country’s total exports. Imports on the other hand were 4.2 percent of total imports, valued at $505 million in the same period.

However, domestic sales are not reported or listed by the Ministry of Economy and, as stated, much of what is sold and exported is not declared. According to SEGJL, approximately 80 to 90 percent of Lebanese jewelry is exported to the Gulf, Europe and North America. But the syndicate did not make clear whether that amount includes undeclared exports or not, and presumably much of what is actually exported is not disclosed, either by customers or by jewelers themselves travelling on sales trips.

When a single four-part set of jewels can sell for $4 million, “clients don’t want the value [of their jewelry] to be mentioned because of thieves and ransom threats,” said Gerard Tufenkjian, managing director of Beirut-based jeweler Tufenkjian.

One jeweler recounted that when he goes abroad for exhibitions he may take $3 million to $4 million worth of merchandise, but may only sell $2 million, so he will not declare the amount on arrival or departure. As Tufenkjian related, “Our business is in a bag, we come and go with one or two Samsonites [suitcases] to do our business.”

Patrick el-Khoury, head of publishing and events at Arabian Watches and Jewellery magazine, said he had heard rumors circulating within the industry that the sector was worth some $4.5 billion, which would be equivalent to a staggering 16 percent of Lebanon’s gross domestic product. “But this figure is not confirmed,” he stressed. Neither the syndicates nor jewelry companies would offer another figure.

The annual exhibition Joaillerie Liban 2009, however, stated on its website that “Lebanon has become one of the top five jewelry producers in the world,” with “60 percent of [the country’s] $1 billion production in jewelry and designer jewelry sold in Lebanon to visitors or importers from the region, Europe, the Far East and the Americas.”

Given the discrepancies of up to 90 percent between the SEGJL’s export figures, Khoury’s and Joaillerie Liban’s figures, the true value of the sector and the size of exports is essentially anyone’s guess. It is certainly one of Lebanon’s more successful sectors, but given its lack of transparency, a sizeable amount of money is not being disclosed and consequently, minimal revenues are going into government coffers.

Taxation is one reason the sector is opaque. Under Lebanese law, jewelers pay the standard income tax on employees’ salaries, but not on the value of precious metals or stones. For sales, taxation is 0.8 percent — a policy introduced in 2004 by the late Prime Minister Rafiq Hariri.

“We don’t impose this tax on the customer,” said Hovig Yessayan, marketing manager of Yessayan, adding that 95 percent of his firm’s sales go abroad to the Gulf and Lebanese expatriates.

Diamonds are deception’s best friend

Another reason for the sector’s secretive nature is the diamond trade (see page 31). Lebanon exported 2.45 million carats in 2008, estimated at $48.47 million, according to the latest figures from the global regulator, known as the Kimberly Process Certification Scheme (KPCS) (see chart below).

But according to Partnership Africa Canada’s “Diamonds and Human Security Annual Review 2009,” more than 97 percent of all diamonds leave Lebanon soon after they arrive, with 85 percent arriving in the country certified as industrial diamonds — used in drill-bits, saw blades and abrasives. Curiously, however, “some 250,000 more carats leave as gem quality diamonds than arrive — worth 36 times their import value,” the report stated.

With the average diamond imported into Lebanon at $19.67 per carat (among the lowest rates in the world), if exported at 36 times this value they would be worth some $708 per carat; carry this over 250,000 carats and there would be a $177 million differential between the value of diamonds entering and exiting Lebanon.

This math is only a guesstimate, however, as the value of diamonds per carat can vary widely depending on the specific stone; the global average price per carat stands at around $95, while the highest quality diamonds can reach up to $4,000 per carat.

According to KPCS figures, there is a difference of just $1.6 million between Lebanese diamond imports and exports.

“The most common explanation of where diamonds are misclassified is tax avoidance, or some kind of [money] laundering scheme within a trading company,” said Annie Dunnebacke, a campaigner at the natural resource focused rights group Global Witness, based in London.

Quite clearly there are a lot of diamonds knocking around that are not being declared — at least in true worth — and so far, the KPCS has not investigated such discrepancies in Lebanon (see facing page).

When asked about why the sector is not better regulated, Hovig Yessayan said: “When [you are] making money for the country, no one cares.”

Keep it in the family

Among the factors allowing the sector to remain so hidden from scrutiny is that it is dominated by family run firms.

Leading companies such as Tufenkjian, Nsouli, Antoine Hakim, George Hakim, Azar and Gemayel have been in the business for more than 100 years. And families tend to not like their laundry — clean or dirty — aired in public.

“It is a closed sector, much like banking,” said Yessayan.

The cutthroat competition between the high-end jewelers over designs also emphasizes secrecy.

“Secrecy is very important in this business, there are lots of designers and outsourcing cannot be recorded,” said Khoury.

As Lebanese jewelers’ reputations continue to grow around the world, the opaque nature of the sector is only likely to increase. Lebanese jewelers can export to the United States tax free, and are expanding their presence in Europe, the Gulf and Asia, whether through showrooms or attending exhibitions and fairs.

Setting standards

Competition comes from the Far East, but Lebanon has the upper hand on design and quality for regional sales.

“The quality of the jewelry that is [made] in Hong Kong or China is not as good as Lebanon’s, it is thinner; Arabs are used to bulky jewelry,” said Yessayan. He added that jewelry is 15 to 20 percent cheaper in Lebanon than in the Gulf. “So if you are buying a set of jewels for $500,000, it is worth flying over; even Sheikhas take a private jet here and we close the whole building down as we want total privacy for royal clients.”

Lebanon’s designs and highly skilled craftsmen have also placed the sector on equal footing with Europe.

“The standards we have here are comparable to Swiss or French jewelry, and we’re very picky about our staff,” said Karim Hakim, one of the four brothers who run George Hakim, based in downtown Beirut.

“The designs, the model making, the execution of the casting process in all its five stages, the setting, electroplating, polishing and so on, all are taught here in our country and [produced] uniquely by Lebanese craftsmen,” said Berge Arabian, a senior member of the SEGJL.

Lebanese jewelers have weathered well the financial storm of the past year and a half, particularly the high-end stores, on the back of wealthy customers moving some of their money into hard assets due to concerns about banking stability, inflation and the depreciation of the US dollar.

The regularity with which regional clientele buy jewelry, compared to Europe or the Americas is keeping sales buoyant. “In the West, people will buy [new jewelry] once every 10 years, but Arabs will buy…something new every two to three years,” Yessayan said.

There has been a slight downturn, evident in a drop in regional advertising expenditure, but this has not prevented jewelers from expanding in the region. Yessayan, which saw 20 percent growth in 2009, plans to open a showroom in Saudi Arabia, while companies are working on developing their own brands and identity by increasingly moving into retail.

Branching out

“There has been a big shift away from wholesale. You sell more and you get cash, you don’t wait for payments and it is better for the brand too,” said Yessayan. “We are heading into branding and creating an identity for ourselves, including a watch brand, Scala.”

Bejeweled watches are a growing segment for the sector, similar to how fashion and car brands started to bring out their own line of watches over the past decade. The jewelers team up with Swiss horologists to manufacture timepieces that are then imported to Lebanon to be turned into a watch.

“The Lebanese are starting to compete with international designers, and Lebanese jewelers have excellent design, execution and prices. The combination of the three is quite unique,” said Khoury.

Yessayan said the demand for such bejeweled watches predominantly comes from the Gulf, with prices reaching $100,000 for a diamond-encrusted offering. The Gulf will remain the sector’s primary export market for the foreseeable future, given the Gulf’s status as the fourth largest diamond market in the world.

Lebanon's devious diamond trade

The shady business of diamond dealing in Lebanon
Executive magazine
By Paul Cochrane in Beirut

Lebanon has as dubious a reputation on diamonds as it does for exporting hashish. Both have been linked to funding for militant groups during and after the Lebanese Civil War, while the diamond trade put Lebanon in the international spotlight when the country was removed from the Kimberly Process Certification Scheme (KPCS) in 2004, which meant other KPCS countries were barred from trading rough diamonds with Lebanon.

The KPCS’ fundamental tenant is to ensure the diamond trade does not fund violent conflict, and it does so by imposing requirements on member countries to certify shipments of rough diamonds as ‘conflict-free’. Lebanon was dropped from the KPCS for failing to enact such standards. Draft legislation that would have made Lebanon KPCS compliant was vetoed by then-President Emile Lahoud, whose justification was that parts of the bill were unclear.

“The rejection, however, follows a deal reported in the Russian media in 2003, between the Russian mining giant, Alrosa, and a hitherto unknown Beirut company called Horizon Development,” reported Other Facets, a publication of the African development forum Partnership Africa Canada, in June 2004. “Horizon, owned by Bahaeddine Hariri…reportedly struck a deal to buy $500 million worth of Russian diamonds. Lebanese press reports say that the 2004 bill may have been vetoed by Lahoud in order to foil the burgeoning Hariri diamond operation.”

Lebanon was reinstated into the KPCS in 2007, but was since designated “a major diamond laundering route” for Guinean diamonds in 2009. An estimated 60 percent of the West African country’s diamonds leave destined for Lebanon, yet they are exported at less than 10 percent of their actual value by being certified as “industrial” rather than “gem-quality” stones, according to Annie Dunnebacke, a campaigner at non-governmental organization Global Witness in London. At the same time, “some 250,000 more carats leave [Lebanon] as gem-quality diamonds than arrive — worth 36 times their import value,” noted Partnership Africa Canada’s “Diamonds and Human Security Annual Review 2009.”

“The pre-carat value of diamonds leaving Guinea is vastly lower going to Lebanon than to other places, which is very odd,” added Dunnebacke. Furthermore, 72,632 more carats were exported than imported in 2008, according to the KPCS’ latest figures (see page 29).

“A member of [KPCS] should do spot checks on stock piles of traders, but that is something not always done,” said Dunnebacke. “The confusion over figures in Lebanon is a prime example of why certification needs to be done, of how diamonds come in illicitly and are then exported legally, [with traders] saying it is from their stock pile.”

But a year after the reports surfaced that Lebanon is flouting certification rules, the KPCS is still only asking “polite questions and getting very little from Beirut in return,” according to Partnership Africa Canada, a non profit organization that focuses on African development..

No questions asked

The Lebanese have been a fixture of the diamond trade in Ghana and Sierra Leone for decades, but as the trade changes and the KPCS tries to tighten regulations — particularly over conflict diamonds — a number of Lebanese traders have moved to places such as Guinea, the Republic of Congo, and more recently Zimbabwe, which is flouting the Kimberly Process.

With Zimbabwean diamond exports being monitored, the rough diamonds are smuggled across the border to neighboring Mozambique where they are then transported to the major diamond hubs.

“Zimbabwean diamonds have a brown base, and people with experience know they’re from Zimbabwe, so they send these diamonds illegally to Dubai, Thailand or Lebanon, and re-certify them in Antwerp to make them legal, turning black into white,” a Lebanese-Armenian diamond merchant in Antwerp told Executive under condition of anonymity.

“Zimbabwean diamonds are diamonds not to touch. All diamonds can be traced if still in their rough structure and they are known from the density of the color,” he explained.

However, while a diamond’s origins can be traced, getting around the KPCS is not a difficult task.

“You give diamonds in an empty slip to the diamond organizations here in Antwerp and say, ‘Can you please certify them.’ You need membership and an office so they know who you are. They certify them no questions asked — not where they come from, that’s it. It is easy, and they put a price on them,” the source said.

With diamonds much smaller than other precious commodities like gold, stones are a common way to launder money for organized crime, drug dealers and, according to the United States authorities, for funding groups such as Hezbollah. Unsubstantiated reports have also linked part of the illicit trade in diamonds to Lebanese honorary consuls, who use diplomatic channels to bypass customs in West Africa and Lebanon. However, given the levels of corruption in places such as Guinea, greasing a few palms gives any carrier VIP status.

“There are some things in this business which make me think twice about being in the diamond trade,” said the Antwerp diamond trader. “But while Lebanon was a big hub, and [one] could pay off people, now Dubai is and the authorities there are closing their eyes to a lot of things. Lebanon is a relatively small player on the global diamond scene.”

Israel – financial insecurity

Money Laundering Bulletin

Following the September 11, 2001 terrorist attacks on the United States, Israel was quick to come out and identify itself with the ensuing US-led 'war on terror'. This was not surprising, given the Arab-Israeli conflict and the attacks Israel has sustained from militant Palestinian groups. But while the US ramped up its counter terrorist financing and anti-money laundering legislation through the Patriot Act, Israel has been rather lackadaisical in applying international regulations and domestic compliance in the financial sector, despite MONEYVAL saying the threat of terrorist financing and money laundering is 'considerable', writes Paul Cochrane.

In 2000, Israel enacted a Prohibition of Money Laundering Law (PMLL), but for being uncooperative in the fight against money laundering the Financial Action Task Force (FATF) placed Israel on its blacklist. By 2002, Israel was off the blacklist and on the FATF monitoring list until 2003.

“For many years, Israel was the last Western country which wasn’t fighting money laundering,” Hebrew University law academic Guy Harpaz was quoted as saying in Forward magazine in July, 2009.

The PMLL enacted the establishment of the Israeli Money Laundering Prohibition Authority (IMPA) under the Ministry of Justice as the country’s financial intelligence unit (FIU) in 2002.

In the years since, Israel has amended, updated and added to regulations on anti-money laundering (AML) and counter terrorist financing (CTF). In 2004, the prohibition on terrorist financing (TF) law 5765-2004 was adopted and went into effect in August 2005. Under Israeli law, the Israel Security Agency (more commonly known as Shin Bet) is responsible for investigating TF offenses, while the Israel Tax Authority handles investigations originating in customs offenses. To ensure cooperation between Israeli government bodies, a ruling was put in place to transmit information between the IMPA, the Israeli National Police and Shin Bet.

But despite tighter regulations, a 2008 report by MONEYVAL stated that the overall threat of ML and TF in Israel is “considerable,” with more than USD$5 billion in illicit proceeds generated through illegal drugs, gambling, extortion, fraud, and human trafficking. The report estimated illegal gambling profits at over USD$2 billion per year and domestic narcotics profits at USD$1.5 billion per year. Political corruption is a further area of concern, with several high profile cases probed over the years. Indeed, Israel has not ratified the UN Convention against Corruption and last year, Israel ranked 33 out of 180 countries in the Transparency International (TI) 2008 Corruption Perceptions Index, a lower ranking than 2007's 30 out of 180 countries. Meanwhile, 82 percent of Israelis believe the public sector to be extremely corrupt, according to a study by TI published June, 2009.

“Israel is affected by its fair share of corruption,” said Robert Mitchell of World-Check, a British company that maintains a database on politically exposed persons (PEPs) and high and heightened risk individuals and entities. “There is always another ML probe and corruption probe. Whether it is merely a change of government and a backlash against incumbents or knives out for politicians, it is difficult to tell.”

It is a similar case when it comes to money laundering. “There seems to be no domestic policy regarding ML. Very few individuals are sentenced,” said a banking source familiar with Israel that wanted to remain anonymous.

“The Israelis are very good at saying US and British banks finance terrorism, that's bad, but they don't look at their own patch. They are on the front line for TF but need to do so much more in terms of education. The amount of fines the US government has given of late is unbelievable,” he said.

One of the biggest cases involved Israel Discount Bank (IDB) in 2006. The US Treasury, the Federal Deposit Insurance Corporation and the New York State Banking Department penalized the bank for USD$12 million to settle charges that its AML procedures were lax, specifically the transfer of billions of dollars of illicit funds from Brazil to IDB’s New York offices. The IDB was also fined by the New York District Attorney's Office, in December, 2005, this time USD$8.5 million for failing to adhere to Bank Secrecy Act requirements and filing suspicious activity reports.

In mid-July, the FBI arrested 44 people in New Jersey on charges of laundering millions of dollars through charities controlled by rabbis that were linked to Israeli charities.

According to court documents obtained by The Jerusalem Post, one of the rabbis used a source in Israel to supply money through “cash houses” in exchange for a 1.5 percent fee. The FBI stated that the rabbis earned between five to 10 percent per transaction. Prosecutors also charged a rabbi for acquiring and trading human organs that were 'donated' in Israel for $10,000 and sold in the US for up to $160,000.

In a separate incident in August, Israeli police broke up an Israeli-American crime ring specializing in tax fraud and ML. According to the police report, the US internal revenue was defrauded of tens of millions of dollars that were deposited in Israeli bank accounts.

In July, 2009, the Federal Reserve Board and a Florida financial regulator ordered a Miami branch of Bank Hapoalim to overhaul its AML program within 60 days, particularly due diligence. In 2005, some USD$400 million was frozen and 22 employees arrested at a Bank Hapoalim branch in Tel Aviv for failing to report irregular multi-million dollar money transfers.

Other Israeli banks have been fined, this time by Israel's Banking Sanctions Commission (BSC) for lax ML compliance. In 2007, Bank Leumi was fined USD$98,000 for violations of ML regulations, including the know-your-customer (KYC) process, lack of protocol regarding beneficiary statements and the maintaining of identification documents. In 2008, the BSC fined the First International Bank of Israel USD$936,000, and the Poalei Agudat Israel Bank USD$535,000 for infringing ML regulations.

In December, 2008 the BSC ordered IDB to pay nearly USD$1 million in fines over the institution’s inadequate ML controls. The BSC can fine financial institutions up to NIS 2 million (USD$535,000) for every violation it finds.

“There are three things Israeli banks don't want to have an issue with: the US Treasury, US Department of Justice (DOJ) and the Israeli Ministry of Defence (IMOD). Those three in that order. How many screen against the Office of Financial Assets and Control (OFAC) list, nearly all now, but how many screen against US DOJ lists? Only one Israeli bank I am aware of,” said Mitchell.

“A lot of the larger banks have adopted FATF's 40+9 Recommendations. However, some are woefully unprepared. In Israel the regulation is to screen against an IMOD list, say supplying the Palestinians. World-Check had entities like InterPal for six or seven years before hitting the IMOD list, and there are loads of groups and front companies listed by World-Check before getting on the IMOD list,” he added.

In the European Committee on Crime Problems' 2008 MONEYVAL country report, Israel was advised to apply Article 12 of the European Union AML Second Council Directive on the Extension of AML Obligations, similar to FATF Recommendation 20. “Israel has so far not taken steps to meet this obligation of the Directive,” the report states.

In terms of compliance with FATF Recommendations, the report noted that for legal systems, ML offenses were 'largely compliant', ML offense mental element and corporate liability 'compliant', and confiscation and provisional measures, 'partially compliant'. In preventative measures, Israel was 'compliant' and 'largely compliant' in all fields bar customer due diligence (CDD) obligations for real estate agents, dealers in precious metals and stones, trust and company service providers, and independent legal professionals and accountants. Notably, CDD, PEPs, and unusual transactions were rated 'partially compliant'.

While AML oversight of Israel's precious stones sector is still lacking, particularly in the sizable diamond sector,with USD$6.24 billion of polished diamonds exported in 2008, an amendment to the PMLL has been proposed that will extend the AML regime to cover the sector. The amendment, drafted in 2007, is still awaiting approval by the Knesset, the country's legislative body.

But while Israeli institutions clearly needs to ramp up AML and CTF compliance, there has been progress. According to the Tax Authority, 28 decisions taken in the first half of 2008 resulted in NIS 744,000 (USD$199,000) in fines. Total criminal assets seized by the police in 2008 were reportedly USD$3.2 million, although this was a marked decrease from previous years, according to the US State Department's International Narcotics Control Strategy Report 2009. In 2008, IMPA reported approximately 100 arrests and 10 prosecutions relating to ML and/or TF. In 2008, IMPA received 17,152 suspicious transaction reports, and some NIS 7.7 million ($2 million) was frozen or forfeited in AML/CTF-related actions.

However, the source questioned the number of STRs the FIU had received. “It is defensive reporting, the FIU jumping up and down about reports being low, and not enough done about it. You can read a lot into STRs. Banks were just flagging transactions above a certain amount. 'What about buying a house?' I asked bankers. 'There you go',” said the source. The IMLPA did not reply to questions sent by Money Laundering Bulletin.

Mum's the word on Saudi wars

Smoke billows over Mecca in November 1979

Commentary, Executive

The veil of mystery that hangs over Saudi Arabia's biggest military operation since the Gulf War in Yemen does not come as a surprise. When it comes to security issues the kingdom has a particularly poor record of letting us know what is going on, while trusting in censorship and petrodollars to make sure that whatever collective recollection remains is kept hushed up.

But such lack of transparency regarding how crises are handled by Saudi Arabia – the region's most powerful country and its largest economy – belies how serious the situation is in the Arabian Peninsula and how events can get out of hand, usually with longterm ramifications.

This has widespread security and economic concerns for the Gulf, given the peninsula's geo-strategic importance as an energy provider. And the Gulf can ill afford more destabilization on the coattails of Dubai's debt debacle.

Curiously, the cusp of 2010 signals a macabre 30^th anniversary of a political-religious event that has ramifications connected to the current situation in Yemen and beyond, due to Riyadh's draconian management style.

In late November, 1979, the Great Mosque of Mecca was seized by hard-line Islamist gunmen bent on overthrowing the Saudi monarchy and introducing a new redeemer – the mahdi – on the day marking 1,400 years of Islam. No word was given to the outside world about the seizure for two days, yet the siege shook Saudi Arabia's foundations for two long weeks, challenged the kingdom's position as the guardian of the two holy cities of Islam, triggered a Shiite uprising in the east of the country, and unleashed forces that led to the rise of Al Qaeda.

Then, less than a month after the Saudis' disastrous handling of the siege – amid botched attacks the use of artillery and armored vehicles wrecked the Great Mosque while several hundred were killed – the Soviet Union invaded Afghanistan on December 24. This created the spark for a Machiavellian strategy hit upon by the United States and Saudi Arabia for the kingdom to export its “bad boys” – the hard-line Islamists – to take on the Soviets. And we all know where that led.

But back in late '79 the truth was far from clear, as it is now in regard to Riyadh's involvement in attempting to crush the Houthi rebellion in Yemen.

Blame for the siege was first leveled against the fledgling Islamic Republic of Iran, then labeled an American-Zionist plot to strike at the heart of Islam. Indeed, Washington DC had to beg Riyadh to say the United States had nothing to do with it as US embassies came under attack across the Muslim world, with the embassy in Pakistan burned to the ground.

Some people today still believe the Iranians were behind the siege, as it has been so hushed up in the history books and documentation outright banned in Saudi Arabia. In fact, there is only one book on the subject, bar dissident Saudi literature - Yaroslav Trofimov's “The Siege of Mecca”. This would be comparable to a modern history of the US not mentioning the 9-11 attacks.

What is at risk now is a repeat of 1979, with no coherent story coming out of the Arabian Peninsula about what is happening given all the propaganda at play.

Iran is being mentioned as one of the backers of the Houthis. This could well be true, yet a fact that Tehran denies as vigorously as Riyadh denies it is operating in Yemeni sovereign territory or the allegations of US involvement in advisory roles to the Saudis and Yemenis. On top of this, for a deeper understanding of the current conflict the fallout from '79 needs to be understood.

The regular 'terrorist' attacks that occur within Yemen have come from splinter groups of the Islamists sponsored in the 1980s by the Sanaa government, the US and Saudi Arabia to counter the Marxist south – just as in Afghanistan in the '80s. These bankrolled Islamists, along with returnees from Afghanistan, were later used to fight the Houthis in the north, a policy that continues until today.

The Houthis, meanwhile, are fighting against this Islamist trend in the Yemeni establishment that was so successfully nourished during this period, and to oust President Ali Abdullah Saleh - who came to power in 1978 - rather than end the federal republic of Yemen per se.

Saudi Arabia's involvement is similar to Afghanistan, with the war on the Houthis another Saudi proxy war that is “not a war” - it has not officially been declared - despite reports of Saudi armed forces bombing within the borders of the kingdom and in Yemen itself, as well as the navy operating along the Yemeni coastline.

Given Saudi Arabia's track record, pressure should be exerted on the kingdom to give a clearer indication of how all of this may play out. No one wants the kind of blowback that the world has endured for the past 30 years for the sake of maintaining Riyadh's veil of mystery.

PAUL COCHRANE is the Middle East correspondent for the International News Services Photograph - AFP

Slower sales seen as Lebanon's automotive industry cools

Executive, by Paul Cochrane in Beirut

Car sales in the Gulf dipped by an estimated 27 percent this year in the wake of the financial crisis, but Lebanon, like Syria, has had a second successive year of burgeoning sales, defying the tumultuous 16 months car manufacturers and dealers have faced in most of the world.

However, while growth in 2009 met and in certain cases exceeded 2008’s record year, the sector has not been immune to the global financial crisis. Dealers have had to adjust to restructuring at mother companies, American brands have had to handle their manufacturers’ brush with near bankruptcy, and marketing budgets have been constrained.

On top of this, there has been a surge in imports of used luxury and sport utility vehicles (SUV) from impacted markets in the United States, Europe and Japan, due to excessive inventories and dealership downsizing. Currently two used cars are sold for every one new car bought in Lebanon, up 10 percent from an estimated 60/40 split in 2008.

These used high-end vehicles foster the perception that the transportation of choice for the Lebanese is in the luxury range, whereas in terms of actual volumes of new cars sold it is the less flashy mid-range cars — the Nissan Sunnys, Renault Clios, and Hyundais — that account for the lion’s share of sales in the Lebanese market.

Dominating the sector is Rasamny Younis Motor Company (Rymco), dealer for Nissan, GMC and Infiniti, with 6,182 units sold as of October, the bulk in Nissan sales at 5,638 units. This is up 8.57 percent from the 5,193 Nissan units sold in the same period of 2008.

Last year, the car sector had an “exceptional year, the best year ever,” said Cesar Aoun, manager of the Chrysler Car Group of Chrysler, Jeep and Dodge, with the sector up 45 percent from 2007, increasing from 20,082 registered new units to 35,416 new units in 2008. As of October 2009, new car sales totaled 26,664 units, down by 2.48 percent on the October 2008 count of 27,341 units, according to the Association of Car Importers in Lebanon.

Last year set a new benchmark for the sector, said Fayez Rasamny, vice chairman of Rymco, adding that while 2009 may not be as strong a year, “it is a good indicator for the auto sector that the market has increased considerably.”

That new benchmark is now between 31,000-35,000 new units a year. But back in January, few dealers expected a successive year of strong sales, thinking that consumers would be wary about purchasing in the uncertain world financial climate and ongoing political turbulence of Lebanon.

“We started 2009 pretty weak and I don’t know what happened, but June, July and August were fantastic. We are projecting 2009 sales will be up 9 percent on 2008,” said Negib Debs, brand manager of Mercedes and Smart dealership T. Gargour & Fils.

BMW was also caught off guard, said Nagy Heneine, general manager of Bassoul-Heneine, dealer for BMW, Mini, Alfa Romeo, Dacia and Renault.

“Nobody expected the market to be as strong as it was,” he said.

Riding market fluctuations

While sales have defied expectations, Rasamny expects cumulative sales for 2009 will be “a bit less” than 2008. Profit-wise however, 2009 will not be as good as last year.

“The margin on sales has definitely deteriorated because of promotions and inventories,” Rasamny said. “Even if Lebanon has not been affected by the recession, consumers are well aware that they can bargain for prices and purchases. All companies have campaigned to liquidate stocks. Companies are really scared to have large inventories,” he added.

Dealerships have been offering a slew of incentives to entice customers, from low interest payments to subsidized interest, trade-ins, lotteries and assorted gifts. But it is loans from banks that have been crucial to keeping sales buoyant at a time when financial institutions elsewhere have reined in lending.

“At the beginning of the year banks were a bit cautious about lending, but from June to July onwards [it was] back to aggressive competitive offerings and it helped the sector not be affected by the financial crisis,” said Aoun.

The summer boom appears to have tided the sector over given the slow start to the year, with the fall months seeing a downturn in consumer purchasing.

“We started seeing from September onwards that the market was slowing down, like the crisis had hit Lebanon with some delay,” said Heneine. “October and November have been weak and did not meet sales expectations, but we’re confident we will hit 1,000 cars this year.”

It is sales to rental companies that have been the real boon for the sector, as firms had held off purchasing new cars on a mass scale after being stung in 2006 during the July war between Israel and Hizbullah, with rental companies having significantly expanded their fleets in the expectation of a bumper summer. The following year witnessed reduced demand for rentals, rising again in 2008 and this year. Bolstering demand was the legal requirement for rental companies to buy new cars every three years.

“Every year something happened [politically in the country], so rental companies didn’t buy until they had to,” said Heneine.

But such unexpected demand has presented problems for dealerships in regard to inventory, cagey about ordering too many in case there is insufficient demand, yet given the time lag for delivery, wanting to meet consumers immediate needs.

“It’s like juggling with fire,” said Debs. “You need a lady with a crystal ball because sometimes you hold onto stock too long, then suddenly in three months you’re empty and need more. The hardest thing to do is inventory.”

“We don’t have anything to hook onto and say, this is sustainable when you have 60 percent growth in one year – who would’ve expected that? And is this a new trend? We hope so,” he added.

A dime a dozen

The biggest struggle for new car importers has been the flood of used cars into the country, with used car dealers and individuals taking advantage of the glut of cheap, secondhand cars on sale in the US from Americans selling up and downsizing. This is in addition to the thousands of dealerships affected by forced closures, with GM eliminating up to 40 percent of its US dealers and Chrysler closing 789 dealerships this year.

“Any individual has the right to import cars from the US and sell them under their house, it’s a joke, and control is starting to be a joke, despite the “mechanique” [required road safety tests at authorized mechanics],” said Debs. “We are not only competing with used car dealers, but with doctors and lawyers who have friends in the US. When the euro went up, all used car dealers rushed to the US. Some dealers have so much stock there is no space in their parking lots, so there are cars for sale even out on the streets.”

Heneine said that used car sales have risen from 60 percent of the market to 70 percent.

“I don’t want a war with the used car dealers, but they’re waging a war on us,” he said.

Damaged goods

Dealers say that the used car sector needs to be better regulated, as it is not only affecting the sales of new cars, which pay higher taxes to the government, but it also results in inefficient vehicles entering the country, cars that would not be allowed on roads in other countries. One dealer highlighted this with an anecdote about an acquaintance that bought a used car and had the vehicle checked with a key reader, which can assess mileage.

“When we checked the key reader, we found that the car should have been put out of circulation,” he said. Other dealers related accounts of cars that were flooded during hurricanes in the US being on sale in Lebanon.

“There should be a government strategy to improve the quality of vehicles on the roads of Lebanon, and a correlation in duties between new and used cars,” said Aoun. “To change this, to have safer and more ecological cars, needs a whole strategy between ministers.”

“You can still import cars from 2001, and the majority come with high mileage that are changed here, or they are damaged and then fixed here,” he added. “I don’t understand how it’s open for everyone to import and compete with a registered company that employs people, pays taxes and has proper representation.”

“The government should apply a lot of laws, and be strict on the flow of cars, such as those from the Gulf as many people bring luxury cars, don’t pay customs or VAT and profit in the long term at the expense of dealers and the government,” he said.

Car importers have lobbied the government to bolster regulations, with scarce results.

“We will always try, but we didn’t succeed in the past,” said Rasamny. “If the tax on new vehicles was dropped by 5 percent, income for the government would go up by 50 percent. When you decrease taxation you promote sales of new cars and take out all the used crap, as used cars are not as environmentally friendly. What’s happening is the recycling of a whole industry,” he added.

A mixed forecast

Dealerships are upbeat about the year ahead, although they realize that sales may not reach the same levels as this year, due to inventory expansion in the rental car sector, as well as after effects from the financial crisis. Nonetheless, with new models being launched, dealerships are banking on new inventories to keep sales buoyant.

“We expect growth again in 2010 from new models, and 2011 even more volume due to new vehicles,” said Aoun. But with a new benchmark set for the sector in 2008 and 2009, any decrease in sales will be difficult for the sector to handle, particularly when reporting back to mother companies expecting such strong growth.

“At the beginning of 2008, we thought maybe we’ll reach 500 units, but we closed near 600. Now it is difficult to go back to these [lower] figures,” said Debs.

Rasamny expects a good year ahead, albeit with a need for cautious optimism.

“I think 2010 will be similar to 2009, but we need to increase margins, be smart about inventories and focus on after sales to sustain the market,” he said. “But if in 2009 we sell 32,000 units, it doesn’t mean 2010 will be the same, we need to be careful.”