The Iran Dilemma

  "Iran in final stages of nuclear weapon" (Maariv, Israel, April 25, 1984)

International pressure on Iran is at white hot levels over its alleged nuclear weapons programme. The United States and the Europe Union have implemented tougher sanctions, and Israel is itching for conflict, not willing to lose its nuclear supremacy in the Middle East, especially to its arch nemesis. The world has been thrust into two camps, pro or anti-Iran, and it has left China in a difficult position, Paul Cochrane in Beirut reports for International Link (Hong Kong)

“No smoking gun”

Claims that Iran is just “years away” from possessing a nuclear weapon have been repeatedly stated since 1984. Indeed, in 1992, the US House Republican Research Committee claimed that there was a "98 percent certainty that Iran already had all (or virtually all) of the components required for two or three operational nuclear weapons." Rhetoric has only increased since then.

Under international law, Iran is allowed to develop nuclear power and is a signatory to the Nuclear Non-Proliferation Treaty (NPT). Tehran has stated its nuclear efforts are for peaceful purposes, but the United Nation's International Atomic Energy Agency (IAEA) has found the country in breach of agreements and is accused of a “pattern of concealment.” The latest IAEA report, on 8 November, 2011, noted the “possible existence of undeclared nuclear facilities and material in Iran,” and was swiftly picked up as “proof” by US politicians and the mainstream media that Iran is developing a nuclear weapon. It soon led to additional US sanctions on Iran's banking system and oil industry. The European Union (EU) followed suit with new sanctions at the beginning of December.

However, critics have noted that the IAEA report presented “nothing new” in its assessment of Iran's nuclear capabilities while analysts have noted that recent acts of sabotage against Iranian facilities and the killing of nuclear scientists by unknown assassins have set back Tehran's plans. “Many centrifuges were taken off line because of the virus put through Iran's nuclear research facilities, and scientists have been bumped off. It is a real problem for Iran, and made them more paranoid,” said Professor Anoush Ehteshami, Head of the School of Government and International Affairs at Durham University in England, to International Link.

China has responded warily to the IAEA report. In a commentary, the Xinhua news agency said the UN agency still “lacks a smoking gun,” adding “there are no witnesses or physical evidence to prove that Iran is making nuclear weapons.”

Doubts about Iran's nuclear aspirations have also come from unexpected quarters, notably the United Arab Emirates, which is considered a close ally of the US and has long been wary of Iran's ascendancy in the Middle East. Sheikh Mohammed bin Rashid, the leader of Dubai and Vice President of the UAE, told CNN in early December that he doesn't believe Iran is developing a bomb. “What can Iran do with a nuclear weapon? For example, will they hit Israel? How many Palestinians will die? You think if Iran hits Israel, do you think their city [sic] would be safe? They’d be gone the next day,” he said.

Such an argument does not hold with the Israelis, paranoid that their undeclared position as the only nuclear power in the region – Israel has an estimated 200 warheads - would be undermined if Tehran develops a nuke. Anti-Iranian governments in the Middle East, particularly the monarchies and the Gulf countries, are also against Tehran upsetting the current balance of power, giving rise to fears of a regional nuclear arms race. Indeed, there have been unconfirmed reports that Saudi Arabia helped bankroll Pakistan's nuclear programme in the 1990s with the understanding that if Iran gets the bomb, then Islamabad will station a warhead in the kingdom.

Iran's motivation to have nukes would be to ensure the survival of the regime by preventing a possible invasion, as occurred with its two neighbours, but not to the West's other “rogue state,” North Korea, which has a nuclear arsenal.

“Real men go to Iran”

Whether Iran has or does not have nuclear weapons capability has become essentially irrelevant to the anti-Iran camp. While the “doves” in the US are tightening the noose economically around Iran's neck, the hawks are keeping the military option open.

“No options off the table means I am considering all options,” said President Barack Obama in early December. It does not matter to Washington, London or Tel Aviv that Tehran denies it is seeking a nuclear weapon, the Emir of Dubai saying he doesn't believe it, or experts pointing out the flaws in the IAEA report. The mantra is that Iran is developing the bomb and the Western public has long been prepped for a showdown, with mainstream media having banged on about the threat Iran poses to the world since the Islamic Republic was established in 1979, and rhetoric taken up a notch in the decade since America launched its so-called “war on terror.”

The push for a conflict, whether via nuclear bunker buster bombs to destroy Iranian facilities or all out war, is spearheaded by the Israelis and neo-conservatives in the US, picking up on the line of former US diplomat to the UN, John Bolton, who said during the lead up to the war on Iraq, “everyone wants to go to Baghdad, but real men go to Iran.”

However, it is widely thought that Israel will not act, especially unilaterally, until it has expanded the deployment of its $1.4 billion anti-missile defense shield, known as Iron Dome, which would be needed to shoot down rockets fired in retaliation in the event of an attack on Iran, such as by Iranian-ally Hizbullah in Lebanon. Furthermore, there seems to be little appetite for war by the American or European publics, given the current fiscal crisis and how overstretched the US military is globally.

“I don't think war is on the horizon yet but it can't be ruled out,” said Ehteshami. “I don't believe in a 'surgical military strike', as once done in anger, it is war. And by the very nature of war, it would not be what is expected either, as it would involve the use of non-state actors, so it could go from a cold to a hot war very quickly. Everyone recognises that, except for Israel.”

Unbreakable ties?

The standoff over Iran has put China in an awkward position with the so-called “international community” and the US government. China has deep ties with Tehran, and consistently opposed US policy initiatives directed at Iran until 1997, when, after 13 years, Beijing agreed that foreign assistance to the Iranian nuclear programme should end. In 2006, when the US pushed for sanctions at the UN, China opposed but did accept symbolic sanctions. Since then, Beijing has opposed any further sanctions against Iran, and has sought a multi-lateral, diplomatic solution to the crisis that emphasizes offering Tehran a carrot, rather than threatening with a stick, to be transparent with the IAEA.

“China is aware that the US has deep issues in the region and doesn't want, or have the political will, to get too heavily involved, while it is also a supporter of non proliferation,” said Dr Kerry Brown, Head of the Asia Programme at Chatham House in London, to International Link.

But China is increasingly in the minority in carrying out what Brown said was a “a studied neutrality.” Out of the 35 nations voting at the IAEA on the Iran file, 24 voted in favour. While significant that Russia did not vote against Iran – and also opposes the new US sanctions – Moscow has a different relationship with Tehran than Beijing: it is not dependent on Iranian energy.

China accounts for 22 percent of Iran's oil exports while Iran is China's third-largest crude oil supplier, shipping 20.3 million tonnes in the first nine months of 2011, an increase of nearly a third on the same period in 2010, according to Chinese data. Bilateral trade is also booming, worth an estimated $30 billion a year, and the Iranians are hopeful this will increase to $100 billion in the future, cementing China's position as Iran's leading economic partner.

“At the core are economic interests, there is a lot of Chinese investment and it sources a lot of oil from there, so China doesn't want to jeopardize that or be isolated,” said Brown. “The Iranians always try to push China for a bigger commitment, and have some due to energy supply.”

Tehran however is wary about China's continued support following India voting against Iran at the IAEA, in 2005, 2006 and 2011. Iran accounts for nearly 13 percent of India's oil imports, and relations have been strained, made worse by India delaying payment of up to $6 billion, which has been further complicated by US banking sanctions against Iran.

“I think deep in their hearts the Iranian's don't trust the Russians or the Chinese, as they are pursuing their own interests,” said Ehteshami. “Iran was very badly stung by India's support for the first round of sanctions as they thought India was the champion of the non-aligned movement.”

China will also have to balance ties with its top oil partner, Saudi Arabia, and other Gulf countries vis a vis Iran, which Tehran is only too well aware of. “The Saudis and Emiratis are not happy about what Iran is doing, and China is a major military partner. The Chinese have to manage those tensions,” added Ehteshami.

Responding to conflict

As the expanded US sanctions take effect, oil companies and financial channels for oil payments to Iran will come under fire from Washington and could be blacklisted from operating internationally. The US is banking on this having a similar effect on China as it has with India. The sanctions will certainly present problems for China's state owned companies, which would be forced to set up complicated holding companies to circumvent the sanctions, as happened in the late 1990s during the UN oil embargo on Iraq.

How China handled Iraq is indicative of how Beijing may deal with the Iran crisis if the situation boils over into war. China opposed the invasion of Iraq in 2003, initially losing its oil investments but has since re-entered the Iraqi oil market.

“I think China would do the same as with Iraq and sit on the sidelines,” said Ehteshami. “No war with Iran will occur unless there are guarantees from other oil exporters for the loss of Iranian oil, and they will try and keep prices around $100 a barrel.”

However, any diplomatic deal ensuring alternative oil supplies would mean negotiating before an attack, placing China in a vulnerable position over the outcome of a conflict, with Iran as well as the global hegemon, the US. “Diplomatically this is possible, but leads to a deep conviction in China that America is active all around it. That is becoming a pre-occupation and Beijing is feeling very contained,” said Brown.

The escalation with Iran equally has to be put into the context of the uprisings in the Arab world over the past year, which caught China unprepared for the changing dynamics in the region, notably in Libya, which had been the country's ninth largest oil supplier.

“China has been playing catch up in the region, as most governments have. That China was the last of the P5 (at the UN Security Council) to recognize the Libyan revolutionaries, after Russia, shows how its foreign policy actors were taken aback and catching their breath,” said Brown. “The last thing China wants is a massive threat, like internal unrest, or ominous signs of an attack, led not necessarily by the US but could be Israel. In that case it wouldn't want to be caught out on a limb like in Libya, it would need to be quicker in its responses.”

The question now is how Beijing will juggle the Iran issue as the crisis mounts, ensuring oil supplies at the same time as hedging its position on the unknown outcomes of a possible war, which would certainly have major economic ramifications globally and could alter the balance of power in the Middle East in more ways than one.

Bahrain’s colonial flashback

Commentary - Executive magazine

It is perhaps a cliché to say history repeats itself, yet this saying seems to have held true over the past year in the Middle East, particularly in Bahrain. Uprisings have happened before, and been successful or crushed through counter-revolutionary forces. But it is in behind-the-scenes developments that there really is a flashback to the past.

Last month, Bahrain appointed two men — a former Miami police chief and John Yates, the former assistant commissioner of London’s Metropolitan Police — to oversee the reformation of the state’s police force, which was found in an independent inquiry to have committed systematic human rights abuses and used torture to crush the 2011 pro-democracy uprising. (See the following info - http://original.antiwar.com/rannie-amiri/2011/12/28/the-bahrain-uprising-in-numbers/ and http://www.bahrainrights.org/en/node/2408)

By virtue of their nationalities and their countries’ strategic involvement with Bahrain, both former “top cops” are dubious choices. Yet Yates in particular stands out, as he was forced to resign from the Metropolitan Police in the summer over a newspaper phone-hacking scandal. Moreover, his appointment reeks of the colonial past. Britain set up Bahrain’s security force prior to independence in 1971, and the General Directorate of State Security was run from the mid-1970s until 1998 by former British policeman Ian Henderson.

Amnesty International documented widespread torture under Henderson’s leadership, and he forcefully put down protests in the 1970s and early 1990s, earning him the sobriquet “the butcher of Bahrain”. It is the second such nickname for Henderson, who was a senior policeman in British-occupied Kenya in the 1950s, playing a role in the brutal suppression of uprisings and becoming labeled “the butcher of the Mau Mau”. In 1986 he was awarded the title of ‘Commander of the Most Excellent Order of the British Empire’ for his services.

(Watch a 2002 British TV documentary, "Blind Eye to the Butcher" -http://video.google.com/videoplay?docid=8071454558391784977)

Although a Jordanian has headed Bahrain’s security force since Henderson retired, the modus operandi has remained the same, as last year’s events document. Furthermore, Henderson, who still lives in Manama, is believed to have provided advice to the authorities during the crackdown.

While Yates may not be cut from the same colonial cloth as Henderson, his mindset is not radically different. “Bahrain’s police have some big challenges ahead, not dissimilar to those the United Kingdom itself faced only a couple of decades ago,” Yates was quoted as saying in The Daily Telegraph newspaper. But what exactly is Yates referring to? When were there “pro-democracy” uprisings in Britain in the past 20 years? Or any protests suppressed by putting tanks and soldiers on the streets? Perhaps he is referring to the Brixton riots in London in 1980 and 1995, which, in any case, were widely attributed to racist policing methods and high unemployment. Yates appears to have fallen for the official Bahraini line that Iran is primarily to blame for inciting the uprising and the demonstrations had nothing to do with political repression or a minority Sunni monarchy ruling a Shia majority country.

The appointment is also curious when one considers the role of the Metropolitan Police in the riots in London and other English cities last August. A joint study by The Guardian newspaper and the London School of Economics into the causes of the riots published in December, identified “distrust and antipathy toward police as a key driving force.”(See - http://www2.lse.ac.uk/newsAndMedia/news/archives/2011/12/riots.aspx)

Such findings do not brook a great amount of confidence in appointing a senior London cop to overhaul Bahrain’s police force. Neither is there any mention of reforming the police by including more Shia, who currently account for just 2 percent of the force. But then, reforming a police force without reforming Bahrain’s political system, by giving the opposition seats in government and addressing the root causes of the uprising, will not change much either. As Saeed Shahabi, a campaigner with the Bahrain Freedom Movement, said of the appointments: “This is not the first time that foreigners have come from the West to upgrade the security services… The government cannot survive without suppressing freedom of expression; only a democracy can tolerate protest.”

The appointments are therefore just a veneer of reform, with Bahrain too strategically important to the West — especially with rising tensions over Iran’s alleged nuclear weapons program and Bahrain’s accommodation of the American Navy’s Fifth Fleet — to allow for substantive democratic change or dissent. By appointing one cop from the former colonial power and another from the current global hegemon, it seems that history really does repeat itself.

Finance for thought

Executive magazine, January 2012

Reviews of four books that challenge and elucidate the most pertinent economic topics of our times

In the years since the credit crisis erupted in 2007 there has been a steady flurry of economic and financial books published claiming to tackle the root causes of what some have dubbed ‘The New Great Depression’, offer alternatives to the current financial system or provide warnings of the inherent dangers still facing the world economy. With the beginning of a new year that has dark storm clouds still crackling with lightning and thunder over the global economy, Executive has selected four of the most thought-provoking economic books printed in the past year to prime the reader for the challenges ahead.

Debunking Economics

Revised and Expanded Edition: The Naked Emperor Dethroned?

A book by Steve Keen

‘Debunking Economics’ has been a critical and commercial success since it was published in 2001, largely due to Australian economist Steve Keen’s withering critique of the neo-classical economic theories that have dominated policy since the 1970s. His claims are also given more weight by the fact that he predicted the 2008 financial crisis well in advance.

In a newly revised edition, Keen hammers the point home that mainstream economists, as well as central bankers, deserve no credit for the boom years prior to the crash but should shoulder the blame for the crisis and its aftermath. Through a pioneering explanatory statistical model, Keen argues that classical economic thought has little to contribute to what is known as Reality Economics, which is more cause-and-effect than assumption based. He argues that the near hegemonic adoption of a narrow-minded approach to economics in academia, which is then carried into professional life, is at the core of the problem, with those supposed to be implementing a cure still theoretically blinkered, evident in counterproductive solutions such as bailing out the banks and quantitative easing.

Keen’s historical and economic analysis of what went wrong are worth delving into, yet it is his alternatives that will interest the reader mulling options to get us out of the current maelstrom. He proposes radical changes, such as reducing or wiping out private debt through a widespread amnesty and, heretical though it may sound, the temporary nationalization of the American financial system.

It is doubtful whether Keen’s voice will be heard amid the hullabaloo, particularly as the United States enters an election year; as John Maynard Keynes pertinently remarked in 1935: “The difficulty lies, not in the new ideas, but in escaping from the old ones.”

The Quest

Energy, Security and the Remaking of the Modern World

A book by Daniel Yergin

Daniel Yergin is renowned for his Pulitzer Prize-winning ‘The Prize’, which charted the rise of the world’s insatiable thirst for black gold as far as the first Gulf War in 1990. ‘The Quest’ picks up where he left off and ventures into the “Great Game” for energy following the break-up of the Soviet Union, the emergence of national oil companies from emerging markets like India and China and the dirty world of oil politics in the twenty-first century. He tackles the effects of the United States’ invasions of Afghanistan and Iraq on energy security and assesses the twisted reasons for the oil price spike between 2004 and 2008. As in ‘The Prize’, ‘The Quest’ shows why understanding the geopolitics of energy is essential to comprehending the world today, and where we may be going next. He discusses how new technologies and high oil prices are making previously untappable oil reserves accessible, although at significant environmental cost. Such ramped up output in the US, Canada and Brazil — each to some 3 million barrels per day by 2020 — could well change the ‘oil world order,’ particularly the West’s problematic reliance on the Middle East, he argues. And while Yergin is no believer in the ‘peak oil’ theory — arguably a flaw in his analysis — this does not stop him discussing at length the need for alternative energy sources, and how potentially disruptive technologies could be game changers in global politics and security.

Poor Economics

A Radical Rethinking of the Way to Fight Global Poverty

A book by Abhijit Banerjee and Esther Duflo

‘Poor Economics’ focuses not on Wall Street and the problems of the financial markets — the “1 percent” as the Occupy Wall Street protesters have labeled them — but rather the poorest of the world’s poor; not the three billion people that live on less than $2.50 a day but the billion surviving on less than a buck.

The focus is on how the poor respond to aid strategies, based on empirical research in 49 countries carried out over 15 years. What is radical about their work is that Abhijit Banerjee and Esther Duflo draw their findings from actually listening to and understanding the needs and behavior of the poor. Why, for instance, do people buy a TV and go hungry, or prioritize the education of one child over the rest of their offspring?

Moreover, their research is into what has worked in development economics and what has not: micro-finance is not the cure-all it is championed to be and higher rates of literacy and schooling do not necessarily equate to economic development and prosperity. As the inequality gap widens, addressing global poverty is a pressing issue for governments, development agencies and businesses. Banerjee and Duflo tell us where our attention needs to be, and it is no wonder their book won the Financial Times and Goldman Sachs Business Book of the Year Award for “the most compelling insight… into modern business issues.”

Currency Wars

The Making of the Next Global Crisis

A book by James Rickards

We are in the early stages of Currency War III, according to veteran financier James Rickards. The first currency war (CW) was between 1921-1936, and CW II took place from 1967, beginning in the lead up to the end of the gold standard in 1970 and culminating in the 1987 stock market crash.

Rickards argues that the United States has instigated CW III through the Federal Reserve’s quantitative easing policy — printing dollars to boost base money supply to get the economy out of recession. But by doing so, “the Fed has effectively declared currency war on the world” and the result is stagflation — stagnant growth and high inflation — and the world going deeper into financial crisis.

According to estimates, the US dollar comprises 61 percent of identified official foreign currency reserves, while the euro represents 26 percent. What happens to the dollar is of prime importance and the trends are worrying. The dollar’s position has declined from 71 percent in 2000, and stands to fall further as American power is challenged, confidence in the greenback weakens and more countries change their reserve currencies, as Russia and others have threatened to do.

Rickards uses possible scenarios — as played out at a Pentagon-organized financial war game — to highlight what a currency war entails and it is eyebrow-raising reading. The end result could be the dollar joining a crowd of multiple reserve currencies (MRCs), although all major currencies have recently devalued in parallel against gold, and in fact MRCs could exacerbate rather than alleviate the currency war. The other alternative is the International Monetary Fund pushes for greater adoption of its “world money”, Special Drawing Rights. The final possibility is the dollar will be “rejuvenated by gold or descend into chaos with both redemptive and terminal possibilities.”

Rickards suggests a return to the gold standard to retain stability, of money backed by something tangible, not paper or digits on a screen. Yet, however this currency war plays out Rickards warns that it “is the most meaningful struggle in the world today — the one struggle that determines the outcome of all others.”

Saudi Arabia looks worldwide for nuclear collaborators

World Nuclear News - International News Services
By Paul Cochrane, in Beirut

Saudi Arabia’s failure to secure a wide-ranging atomic energy treaty with the USA, continues to push the oil-rich country into the arms of other nuclear suiters, experts on the kingdom have argued. The Saudi's plan is to invest USD112 billion over the next 20 years to build 16 nuclear power plants (NPPs) to offset rising domestic energy demand and retain its position as a leading hydrocarbons exporter.

A memorandum of understanding on nuclear energy was signed with the US in 2008, but the two countries have yet to sign Section 123 of the US Atomic Energy Act, essentially a prerequisite for nuclear cooperation between the US and other nations.

“(The lack of a 123 Agreement) could affect their plans, but Saudi Arabia could go for a European or Asian deal. However there is scope for American technology in many of these technology solutions and I'm not sure how far (French nuclear power company) Areva could go it alone,” said Samuel Ciszuk, senior Middle East and North Africa energy analyst at IHS Energy.

According to an industry source in the US, preliminary talks between the Saudi and US governments to discuss the 123 Agreement were slated to take place, “but even those preliminary talks didn’t happen and, as best we know, nothing further is scheduled at this time.”

Meanwhile, in February, Saudi Arabia signed a bilateral cooperation treaty with France to develop nuclear energy, including electricity production and water desalinisation. This was followed in April with Riyadh announcing it would seek a nuclear cooperation agreement with China.

Meanwhile, Saudi Arabia has been courting nuclear energy operators in Europe and Asia as well as the USA, announcing a joint initiative in mid-2010 with Japan’s Toshiba and American firms the Shaw Group and Exelon to build and operate two NPPs. Last year the kingdom also hired Finnish engineering consultancy Pöyry to study its nuclear energy options. Pöyry however declined to comment to World Nuclear News.

Saudi Arabia is looking into alternative energies, from solar to nuclear power, to wean power generation off oil, with the kingdom already using 320 million barrels of crude per year. This is to triple by 2032 when power capacity is expected to reach 121,000MW, according to Saudi Arabia’s Electricity and Co-Generation Regulatory Authority (ECRA). Some USD140.3 billion is to be spent on conventional electricity projects over the next decade, according to ECRA, to provide an extra 3,000MW of electricity generation per year. A fifth of power generation is expected to come from nuclear power and renewable energy by 2020.

Two NPPs are slated to come online over the next decade, and then two more NPPs are to be operational per year until 2030, according to a statement by Abdul Ghani bin Melaibari, coordinator of scientific collaboration at the recently established King Abdullah City for Atomic and Renewable Energy (KA-CARE).

“Saudi Arabia is still at an early stage, and they are looking at different technologies to be introduced to them and are signing cooperation agreements with as many countries as possible to exchange and gain access to information,” said Ciszuk. “They don't seem to have settled on any technology yet.”

Banking on diplomacy

US Secretary of State Hillary Clinton talks with Lebanese PM Najib Mikati. Lebanon playing ball with the US and EU sanctions on Syria were at the top of Clinton's agenda.

Commentary - Executive magazine

It has been a difficult year for the Lebanese banking sector. While deposits are only marginally down on 2010, Arab uprisings have affected banks’ regional operations and the Lebanese economy is feeling the ongoing global financial crisis. But by and large, these are the sorts of issues Lebanese bankers are used to handling; risk management is a hardwired Lebanese specialty. What has presented unusual concern this year is the black cloud lingering over the sector following the listing in February of Lebanese Canadian Bank (LCB) by the United States Department of the Treasury as a “financial institution of prime money laundering concern.”

The designation left LCB’s reputation in tatters and, after a limited run on the bank, shareholders opted for LCB to merge with Société Générale de Banque au Liban (SGBL) rather than to appeal the charges. For the banking sector, the LCB designation was a well-aimed kick to the nether regions. Banks are still “paranoid” 10 months later, a senior member of Banque du Liban (BDL), Lebanon’s central bank, recently told me.

The concern is that other banks could find themselves in the US Treasury’s sights — a worry compounded by the apparent political motivation of Washington’s decision, as LCB was accused of laundering money on behalf of Hezbollah, the steward of the current Lebanese government and designated as a terrorist organization by the US. The US decision looked on the surface to be a warning to the banking sector — and Lebanon generally — to play ball. Not helping the sense of paranoia is the failure to release results of the investigation into any wrong-doing on the part of LCB by either Washington or BDL.

There was an upside from a regulatory point of view, however, to the taking down of LCB. Due diligence has suddenly taken on special importance, compliance officers’ voices are better heard in the board rooms and those in need of screening software to detect suspicious transactions have quickly placed orders. Rumors of further LCB-style designations have persisted, while additional pressure has been heaped on Lebanon following multiple rounds of US and European Union sanctions on Syria in response to Damascus’ crackdown on protestors. For the sanctions to have bite, Lebanon cannot be a financial conduit for the Syrian regime; Lebanon is not required to abide by US and EU sanctions — only United Nations resolutions are binding — but it has pledged to cooperate.

With around 60 percent of Lebanese banks’ deposits in American dollars, and the lira pegged to the greenback, Lebanon, as the BDL source put it, is effectively part of the US financial system -- Beirut must respect US decisions whether it likes them or not. Indeed, Beirut’s compliance on this matter is so crucial that it was the first item on the agenda in talks between Prime Minister Najib Mikati and US Secretary of State Hillary Clinton in September. In November, Daniel Glaser, the Treasury Department’s assistant secretary, visited Beirut to push the issue further. Yet while bilateral meetings were underway in late September, another black cloud loomed on the horizon. A second bank — which shall go unnamed — was suspected of money laundering, according to sources in the financial sector and within BDL, although officially BDL would neither confirm nor deny this.

Yet what seems to have happened behind the scenes is an arrangement whereby in exchange for Lebanese cooperation on Syria there would be “no more LCB surprises,” as the BDL source put it. Beirut is in a form of “partnership” with Washington, and BDL is under pressure to deliver by making sure no money laundering or terrorist financing (by American definitions at least) is occurring within the banking sector. If another bank is in the firing line, the US may point its finger, and BDL will investigate rather than merely getting a day’s warning from Washington — as happened with LCB.

Some may call it a Faustian pact, and it goes against the grain of supposed transparency in the financial sector that is being pushed worldwide, but as a diplomatic move it suits both Washington and Beirut nicely, for the time being at least. Lebanese banks are right to be paranoid and to keep in line with US regulations in order to avoid the devastating blow to the sector’s credibility that an LCB redux would mean.

PAUL COCHRANE is the Middle East correspondent for International News Services, and a regular contributor to Money Laundering Bulletin

Mixed Fortunes: Lebanon's automotive sector

Executive, year in review 2011

The industry’s players have been dealt differing hands in a year of duress

With the International Monetary Fund forecasting the Lebanese economy to grow by just 1.5 percent in 2011, it is no surprise that the automotive sector has not had a stellar year. As of October, sales were down by 5 percent, with 27,473 new cars sold, compared to 28,404 in the first 10 months of 2010, according to the Association of Car Importers in Lebanon.

The year started off badly, with consumer purchasing behavior negatively affected by political wrangling over the formation of a government and given a further hit by the Arab uprisings. The plunge in the number of tourists to the country also affected sales to rental car companies, down 49 percent to 1,646 units as of the end of September, compared to 3,238 units in the same period last year. As one car dealer remarked, it was the worst first quarter the industry had experienced in a decade.

“For us, the year was tough January to June due to the domestic political situation, and then we were impacted by the regional situation and the global economic crisis. Nothing helped us in fact,” said Farid Homsi, general manager of IMPEX, distributor for GM, Chevrolet, Cadillac, Hummer and Isuzu. “But, as of July sales started to pick up.”

The lower sales are indicative of a financially squeezed middle class that in the past purchased vehicles in the $22,000 to $60,000 price bracket. That segment has dropped by 25 percent this year, often in favor of cars priced between $9,000 and $22,000.

“Increasingly in Lebanese society both parents are now working. It means there is need for a second car, especially in the absence of public transport, whether a new, used, big or small vehicle,” said Nabil Bazerji, managing director of GA Bazerji and Sons, dealer for Suzuki, Lancia and Maserati. “It is not fuel consumption that is the concern, as distances are short, so there is little difference between a 1.2 liter and 1.6 liter engine, but what makes the difference is the monthly installment to pay off the car.”

The primary beneficiaries of the economic slump have been Korean brands Kia and Hyundai, experiencing their third consecutive year of double-digit growth by offering affordable cars with monthly installments as low as $200. Korean brands’ market share has increased from 31.01 percent in 2010 to 42.26 percent this year.

“The surge in Korean cars is due to the fact that the Lebanese consumer is poorer and looking for a cheaper product; in both cases it means economic crisis. So it is not that the Korean brands are taking from others, just that [Lebanese] purchasing power is lower,” said Bazerji. “If Korean brands were not available with cheap cars, the market would have returned to 2007 levels when 20,000 units [were sold].”

On top of low purchasing power, foreign currency exchange rates have also played a role over the past few years, with a high yen and euro against the dollar impacting prices. Between 2010 and 2011, Japanese brands’ market share has dropped 8.5 percentage points, as the number of vehicles sold contracted from 11,148 units to 8,125.

European brands, typically the cars of choice for the middle and luxury segments, have seen their market share whittled down by 4 percentage points since 2008, from 25 percent to 21 percent in 2011.

Japanese car dealerships have also been hit by events this year in the Far East. The devastating tsunami and the disaster at the Fukushima nuclear power plant affected exports and then in October heavy flooding in Thailand, a major source of parts for the likes of Toyota and Honda, resulted in disruptions to production.

“After what happened in Japan this year we expected the yen to get weaker but instead it got stronger.” said Negib Debs, brand manager of Infiniti and Kawasaki motorbikes, part of the Rasamny Younis (Rymco) dealership. The yen has strengthened from ¥93 to the dollar at the beginning of 2010 to ¥76 in November 2011.

The downsizing trend

What has retained sales volumes in the market is the downsizing trend. “I feel the mini and compact segments are growing in size; they are the value makers today. In fact the compact, sub-compact and compact-plus are a big category all together,” said IMPEX’s Homsi. “I also think that while people have the means for a bigger car, they are moving downwards not only due to the fuel economy, but buying small due to traffic congestion. The real advantage is you can park anywhere.”

Indeed, the number of smaller vehicles on the roads is visually evident, while there are fewer of one of Beirut’s urban icons, the 1980s Mercedes “service” taxi, curb crawling in search of passengers. They are increasingly being replaced by more compact cars, with drivers trying to make the most out of a LL2,000 ($1.33) ride as fuel prices have risen, with 20 liters of 95-octane graded fuel selling for LL33,300 ($22.20).

“The fuel price, the price of the car itself, the yearly ‘mechanique’ vehicle test, plus better re-sale value, have led to a demand for smaller cars,” said Debs. “The upper luxury segment is down, and even then based on the smallest engines in the category. Sports Utility Vehicles (SUVs) are still selling but the trend is also down.”

Last year, SUVs accounted for 17 percent of the overall market at 4,898 units, dropping to 4,540 units or 16.53 percent of the market this year. The largest decrease was for American brands, dropping from 35.8 percent market share in 2010 to just 26.6 percent, while Japanese brands fell from 20.4 to 19.3 percent. However, SUV sales have picked up for certain brands, with European SUV sales up from 18.4 percent to 20.2 percent. Yet it was the Koreans again that saw the biggest boost, up 40 percent on last year. In 2010, 802 Korean SUVs were sold, 11.5 percent of the market, but that number has jumped to 1,332, or 20.5 percent market share so far this year.

With dealers’ margins tight and competitive prices ever more important, they are welcoming manufacturers’ moves toward smaller engines and models as a result of higher fuel prices and the economic crisis.

“I don’t see any strategies for boosting sales other than reducing prices and offers. I’m not a fan of doing so, but when the market is down you have to,” said Debs. “But I think Infiniti sales will catch up within two years because the creation of the Infiniti was for the American market, which is not into four-cylinder engines, whereas now the aim is to get into the European market, so Infiniti is developing four-cylinder engines.”

As for Cadillac, a compact model will be introduced late next year. “It gives us a lot of hope of competing with the BMW 3 Series and the Audi A4, which is important as the luxury market also wants compacts,” said Homsi.

For Rymco, dealership for Nissan, the second biggest brand in the country for the past two years, sales have been driven by compact models Tiida and Sunny and further bolstered by the launch of the b-segment vehicle, the Micra, last September. “We’ve had great success with the Micra, with the model quickly running out of stock due to high demand,” said Fayez Rasamny, vice chairman of Rymco. Seven new Nissan models are to be introduced next year.

Tactical maneuvers

In the face of cheaper models and Korean competition, European, American and Japanese car dealerships are keen to emphasize differentiators such as their heritage, technology and value-added options in an attempt to lure potential Kia or Hyundai buyers.

“Our strategy is to go niche. If you want value go for a Tiida or Kia, but if you want something unique go for a Mazda or BMW,” said Anthony Boukhater, deputy general manager of ANB Boukhater, dealer for Mazda and Piaggio motorbikes. “The brand value of Mazda is high, as is the image perception, and Mazda are produced in Japan while (Nissan’s) Micra is made in India, the Sunny in Korea and Tiida in Mexico.” Like other dealerships, Mazda is also banking on a new showroom and what Boukhater calls the “best service in town” to attract and retain clients.

T. Gargour & Fils, distributor of Mercedes, Smart, Chrysler, Jeep and Dodge, has restructured over the past year, building a new showroom and repositioning their sales tactics. “Our strategy for Mercedes was to reposition ourselves to be more sporty-looking while keeping the existing customer base of over-50-year-olds,” said manager Cesar Aoun. “This is mainly through price strategies, product packaging and options to target a wider segment. Our successful strategy led to market share going up, while we released four new models this year.”

The company has also revived the ‘Smart’ car to tap into the compact segment. “The Smart Fortwo is a compromise between a motorbike and a big car, as it is convenient for Beirut and you can drive 250 kilometers to 300 kilometers for 20 liters,” added Aoun.

For Chevrolet, which rose up a rank to fourth most-sold brand in 2011, the expanded model range has helped bolster sales, notably the compact Spark automatic. “With what is happening today you need to be tactical. Price talks but other segments want value and technology. People want a compact [car] but not to sacrifice on style, comfort, safety and good handling. Not too long ago, a compact was a bit boring, but not anymore,” said Homsi. “What we are focusing on is the heritage of Chevrolet, which is celebrating its 100th anniversary, so we plan to build on iconic models. With all due respect, Korean brands have not had a model winning Le Mans, like the Corvette, or the World Touring Car Championships.”

Korea’s rise

Like rival manufacturers, non-Korean dealerships are clearly rattled by the country’s global growth, with the Hyundai Kia Automotive Group ranking number four worldwide in sales volume this year. Indeed, in Europe, Kia aims to bolster sales of its three-door Picanto by 70 percent by 2013. Rival dealers are keen to suggest it is the smaller models that are selling the most, emphasizing the low price. But the Korean dealers give a different perspective.

“Many people think Korean cars are low cost. That is no longer the case for me,” said Assaad Dagher Hayek, general manager of Natco, dealer for Kia, Peugeot and Citroen. “Only one car is, (India’s $2,000) Tata Nano. A Kia Picanto is $9,000 to $12,000 — that is not low cost, you could get a Peugeot or a Citroen for the same price. And we don’t really have a single best-selling model, although number one is the Sportage (an SUV). Some think it is Picanto, but they’re wrong as they only see the old Picantos on the roads.”

The country’s best-selling brand, Kia, outpaced its closest rival, Nissan, by over 2,000 units this year, gaining a 25.8 percent market share. Hayek puts Kia’s success down to three factors. “Firstly, we’ve a full range of cars, from 1 liter to 3.8 liter engines. Second, the designer, Peter Schreyer, is ex-Audi. Third, and most importantly, we offer a five-year warranty and the quality is the best in the world. We could have sold more if I had more in stock.”

For a car manufacturer that had to be bailed out by the Korean government in 1997 and was later acquired by Hyundai, Kia has certainly made startling progress. Yet in terms of percentage growth Hyundai leaped ahead this year, although unlike Kia, sales are dominated by smaller models, with 45 to 50 percent the i10, and 20 percent the Accent.

“While the market went down by 5 percent, we managed to grow by 32 percent, the highest of any car company in Lebanon. Why? I attribute it to Hyundai launching four beautiful models in 2010 and 2011. Another factor is the brand image has really improved tremendously,” said Walid Rasamny, chairman and chief executive officer of Century Motors, dealership for Hyundai. “And why are we not number one in sales? The reason is simple; we have back orders of 2,500 units at present; all Hyundai dealers are facing a shortage of supply. Seoul is working on it but didn’t expect such success worldwide. We don’t have one Tucson or Elantra to sell.”

European and Japanese dealerships said they think that the Korean brands will lose their momentum and edge next year, although several dealers said the same thing to Executive in 2010’s end-of-year review of the automobile sector. Rasamny thinks this is not likely.

“I completely disagree [that we will lose momentum]. The Koreans are bursting with success, and it is not a fly-by-night operation anymore,” he said. “Many dealers, especially Japanese car dealers, blame the high yen. It is a small factor. Put a Hyundai next to a Japanese car and the shape is far better, the reliability and excellent re-sale value — you’ve got all the ingredients of a winner,” he added. Indeed, Hyundai have won numerous awards worldwide since 2007.

China, for its part, is forecast to manufacture 10.26 million cars this year, with this figure set to triple by 2015, with the annual output of China’s 30 major car makers expected to reach 31.2 million vehicles, according to the country’s National Development and Reform Commission. Yet the effect on Lebanon is yet to be noticeable. Chinese brands Brilliance, Chana, Chery, DFSK, Geely and JAC have cumulative sales of just 212 units so far this year (up by 4 units on 2010), compared to 1,746 American cars, 11,611 Korean, 8,125 Japanese and 5,779 European.

And while dealerships may complain of Korea’s rise, it is also having a negative effect on the used car market, which accounted for around 70 percent of cars bought in 2010.

“Used car sales are affected by us due to a new awakening of the Lebanese public that they are shooting in the dark buying a used car, and better off buying a new car from a reputable company with a warranty of a major manufacturer, as there is somebody to complain to if there is a problem,” said Century Motor’s Rasamny. Used cars sales dropped 29 percent this year, from 46,800 units as of September 2010, to 33,600. Sales also dropped due to restrictions imposed by the central bank and the US government on money transfers following the taking down of Lebanese Canadian Bank in February on accusations of money laundering, allegedly carried out in part via used car dealerships in the US.

“Another factor that brought sales down is that the government introduced new regulations in September that banned the import of cars under a person’s name,” said Aoun. “We’re happy about this, and the total imports of used Mercedes dropped by 25 percent versus 2010.”

The outlook

As the year draws to an end, dealers expect overall sales to be just under 2010’s, at around 32,000 units. As for 2012, it depends on the dealership, new models to be launched and the overall economic landscape. “I think the top three — Kia, Nissan and Hyundai — will remain the same, and market sales will be 28,000 to 32,000 units, but not down to 17,000 unless there is a war. The planned increase in value added tax (from 10) to 12 percent will have an effect,” said Natco’s Hayek.

“Next year will be similar to 2011,” said Debs of Rymco. “I don’t see the political situation improving in the region anytime soon. The whole region is practically stagnant, while currencies are all over the place.”

IMPEX’s Homsi is upbeat that next year will have similar results to 2011, but strikes a note of caution. “Unfortunately, today we have Lebanese issues, Syria, problems throughout the Middle East and the global crisis, in addition to production constraints of natural disasters like in Japan. The whole chain is affected so there are a lot of challenges; it looks like one big question mark.”

Bazerji expects a difficult year ahead. “I think 2012 will be harder than this year, as we are in a difficult neighborhood, which will affect us. For instance we haven’t profited from wealthy Syrians coming to Lebanon. But we’ll manage, as that is what we’re good at.”

I spy money – no you don’t!

Money Laundering Bulletin

Intelligence agencies are, by definition, secretive. So, too, are their budgets and how they finance covert activity, especially in foreign jurisdictions and where they carry out so-called ‘black ops’. If spies use techniques to quietly transfer funds that resemble the practices of organised crime or terrorist groups, there is one major difference, writes Paul Cochrane: the sometimes tacit cooperation between government agencies and the financial sector.

Espionage accounts

Of course, nailing down proof of such collaboration is not easy. In researching this piece, MLB was not, alas, granted access to the accounting books of the world’s intelligence agencies, so it is based on informed sources and research. Interestingly, of the anti-money laundering (AML), financial crime, compliance officers and other experts contacted, the vast majority were surprised by the topic itself and not able to comment. “Exotic”, the article was called by a few, while, in conversation with others, the words ‘Hollywood’ and ‘James Bond’ cropped up. Some, intrigued, speculated as to how spies could be financed but thought that money laundering was not involved. Others did not return requests for interviews despite initial interest. One reply was revealing, stating the article was “inappropriate”…

Telling though is the finding that the topic of spies and money laundering seems not to have been given much thought from a regulatory or risk perspective by AML professionals, perhaps unsurprisingly as they are primarily focused on regulations relating to organised crime, illicit transactions and terrorist financing - espionage funding does not, for example, feature in the Financial Action Task Force’s (FATFs) 40+9 Recommendations.

Furthermore, intelligence agencies, with the exception of those linked to ‘rogue’ states, are not deemed a risk for compliance and due diligence. After all, the secret services work closely with the finance industry to thwart money laundering and terrorist financing, as well as monitor for those on sanctions lists. There is also a degree of mutual understanding, with bankers, at least at senior levels, very aware of the diplomatic and national security ramifications if the funding methods of intelligence agencies were exposed.

No information then was available on whether and if so which illicit financing techniques are utilised by the intelligence services – except by venturing into conspiracy theory territory (the CIA, MI6 involved in drug trafficking and so on). But we do know that they have used illicit financing in the past and therefore, most probably, are still doing so.

The most famous case in recent history is the Luxembourg-registered Bank of Credit and Commerce International (BCCI), which was brought down in 1991 for laundering money for such a plethora of dictators and criminal enterprises that it was jokingly referred to as the ‘Bank of Crooks and Criminals International’. One customer was the CIA, which used the bank to finance foreign operations, including what became known as the Iran-Contra scandal, as well as to fund the Afghan Mujahideen to fight the Soviets in the 1980s. The CIA’s involvement with the bank was the subject of a 1992 US Congressional report by Senator John Kerry. The then incumbent head of the CIA, and recently retired US Secretary for Defense, Robert Gates, was also questioned.

The long game

While the Cold War is long gone, internecine struggles between western and Russian intelligence agencies continue. Last year, 10 Russian spies were arrested in the US following a seven-year investigation by the FBI. An eleventh member was the suspected paymaster. The sleeper cells had jobs, owned houses and ran front companies. “Money laundering happens but we don’t find it so much with the intelligence services,” according to Mark Birdsall, editor of Eye Spy, a magazine on international intelligence. “In some respects money laundering has been overtaken by the creation of legitimate companies,” he said, “Now rather than create spy networks, the Chinese, for instance, are setting up networks to create front companies in the US, and have managed to win defence contracts, a problem as, once inside the industry, they can access all sorts of secrets. The Chinese and Russians are very patient, and will wait years to enable an operation to happen. Usually it is hiding in plain sight.” Clandestine operations by the likes of the CIA also work in the same way, added Birdsall, spending years to establish a seemingly legitimate front company. “It is very similar to what organised crime is doing,” he said.

Indeed, Russian intelligence agencies have been linked to organised crime and money laundering. In a February 2010 leaked US embassy cable, Spanish national court Prosecutor José Grinda Gonzalez alleged that Russia’s Federal Security Service (FSB), the Foreign Intelligence Service (SVR) and military intelligence (GRU) “control organised crime in Russia” and launder money through front companies across Europe: the claim was made at the US-Spain Counter-Terrorism and Organised Crime Experts Working Group meeting in Madrid in January 2010.

The Russians, on the other hand, have accused Britain and the US several times in the past few years of using non-government organisations (NGOs) to provide cover for foreign espionage, going so far as to issue a new law in 2006 to require NGOs in the country to re-register and regulate the flow of money from external sources after 20 foreign agents and 65 people linked to spies were arrested in 2005. Moscow’s fear of NGOs has resulted in a new moniker for this phenomenon, GONGOs – ‘government-organised non-governmental organisations’.

Whatever the state of the Cold War hangover, it is, of course, the Middle East that is the key focus today of many intelligence operations. But how intelligence agents and informers in the region, if caught, are financed is invariably not revealed by the investigating authorities. In Lebanon for instance, 150 people were arrested and charged with spying for Israel in 2010 - Lebanon’s government authorities refused to comment on how the Lebanese accused were funded, but local media reports have alleged that agents made trips to Europe where they were met by a handler and paid by transfers into European bank accounts or simply in cash. GONGOs have also been flagged as possible revenue conduits.

“Someone is paying them. In a small country like Lebanon there is a huge growth in NGOs. You see their budgets and salaries, but when you visit their offices something is suspicious,” said Camille Barkho, manager of Amerab Business Solutions in Beirut, which sells AML software in the MENA (Middle East and North Africa) region.

Funding can also be very straightforward, with transfers to an informer or agent wired to an account under the US$10,000 threshold in order not to arouse any suspicion, said Barkho. Last year, according to United Arab Emirates (UAE) police reports, investigations into the assassination of a member of the Palestinian group Hamas in Dubai, carried out, say local authorities, by the Mossad, Israel’s secret service, revealed that the hit squad openly used credit cards to finance the operation.

Public funding

Of course, arguably, the major western intelligence agencies do not need to launder money or engage in illicit financing due to the immense budgets at their disposal. The 16 agencies within the US intelligence community, which includes the CIA and comes under the control of the Defense department, had a budget of US$80.1 billion in 2010, it was publicly announced. According to Gordon Thomas, an investigative journalist and author of ‘100 Years of M15 and M16’, funding for the two agencies and Britain’s GCHQ (Government Communications Headquarters) is decided upon by what is called the ‘Secret Service Vote’. “It is a figure not listed anywhere in government records. It is not voted on by anybody, or by Parliament. Only the prime minister sees it, and he is not told what it is for,” said Thomas. “The figure is decided by the heads of the intelligence services; if you need a billion you get a billion, and you don’t have to explain how it is used. The current figure I have for 2010, and the same this year, is UK£4.5 billion.”

Public-private partnership

For money to go from government accounts into the banking system and not be linked back to the state, high level contacts are used. “I know that MI5 and MI6 have former City, high-ranking people who joined them to run the finance end of things. They would then call the head of a bank to arrange for an account to be opened. It is all done at the highest levels as money is critical to make the intelligence world tick,” said Thomas.

Look the other way

Compliance officers would clearly not be aware of such accounts. AML professionals, said experts, would have to look out not for intelligence agency accounts connected to the country in which the bank is operating but for foreign agents operating in their jurisdiction who would pose a regulatory risk. That said, the Association of Former Intelligence Officers (AFIO) in the US believes the readers of MLB do not need to know how intelligence agencies are funded or if they use illicit means. “We do not see where public comments or articles on this topic serve the best interests of the US or intelligence community seeking to defend itself from terrorists or spies while having to deal with those who will secretly aid, accommodate, house, protect, and hide them from discovery or capture,” the AFIO stated in an unsigned email. “Funding the people or enterprises needed to effectively run intelligence operations is a crucial trade-craft technique in our national defense arsenal, and it does not belong in discussions in the public realm merely for readers to while away reading time with interesting, inappropriate articles against the self-interest of their country and themselves, whether they realise that or not.”

http://www.moneylaunderingbulletin.com/moneylaundering/customerduediligence/i-spy-money--no-you-dont-2658.htm

The Middle East's Internet Inflection

Executive magazine, Middle East edition

Expansion on the web opens alternative avenues for business and society

Information technology (IT) players refer to the major changes the industry’s had on the way people think and act as inflection points. One inflection point was in the late 1980s and early 1990s when the internet started to become more widely adopted by organizations. It took time to gain momentum, to move from the office into the home and reach the two billion internet users on the planet today. We are now in the middle of a second IT inflection point: mobility, with the internet wirelessly accessible through laptops, smart phones and tablet devices in what some are calling the “post-PC” world.

In the Middle East and North Africa (MENA), the past two years have arguably been an inflection point of a related yet somewhat different nature. According to statistics released by search engine Google, internet usage in the Middle East grew by a staggering 39 percent in 2010 to 86 million users, up from 64 million in 2009, with overall penetration reaching 29 percent. Such growth is just over double the increase in internet usage on a global basis, estimated at 14 percent by Internet World Stats in 2010.

The momentous rise in Internet penetration and adoption of mobile devices in MENA has had ramifications that no one would have imagined, including the role IT played in the uprisings this year via the use of social media and mobile technologies in coordinating protests demanding political freedoms.

Dollars online

When the wave of mobile communications spread across the region a little over 10 years ago the first big commercial surprise was the fact that mobile phone operations proved highly attractive and viable in less affluent nations and could serve as business enablers in unexpected ways. For private sector enterprise, the new big question after the eruption of the region’s social and political restructuring is if Internet and mobile networks will be the next big thing for regional business.

The trend for online media usage is increased spending on digital marketing, currently accounting for 22 percent of MENA companies annual marketing budgets, while 58 percent have increased digital budget spending this year, according to a 2011 EConsultancy study, whether on social media, mobile marketing or video advertising.

Ecommerce is equally booming, with 32 percent of MENA Internet users buying online in 2010, according to Spot On, a Dubai-based communications company, and retailers selling some $90 billion in goods and services last year, up 37 percent on 2009, according to Startup Arabia, an Arab technology startups and services website. The top purchased items are airline tickets, books, computer services, clothing and hotel reservations.

Ecommerce and online advertising, the drivers of the dotcom era, are still the top potentials for business on the web but it remains to be seen if they can fulfill the expectations for what had been called New Economy in the Internet’s early days. Barriers against the rise of these economic activities cannot be discounted.

“There are definitely social aspects to Internet adoption, with access to the super information highway meaning more freedom of information,” said Samer Taha, chief executive officer and Founder of Jordan’s Waseela, a telecom system integrator and managed services provider. “Countries are trying to balance developing IT with censorship, while others are delaying roll out due to the amount of information available (on the web). So even if the private sector is willing to invest, governments are often more reluctant.”

Although growth in IT and adoption of social media in the region is indicative of economic potentials, Internet penetration rates vary wildly from country to country, with the United Arab Emirates the highest at 65 percent, Bahrain at 50 percent, Jordan at around 30 percent, Lebanon 25 percent and Syria 18 percent in 2010, according to Internet World Stats.

“Overall the Middle East and the Gulf are not so different from the third world, there is a digital divide comparable to the first and second worlds,” said Taha. “Yet with the Gulf countries reaching first world levels by introducing 4G [fourth generation mobile telecoms], the non-Gulf countries are three to five years behind.”

As the adoption rates of social networking site Facebook and video site Youtube in Arab countries show, the MENA region is catching up with international rates of web usage but the numbers differ widely between countries. Facebook, for example, had attracted 19 million new users in the MENA this year up to June 30. The site claims a total of 56 million users in the MENA at midyear, a 51 percent increase from a year earlier.

Yet while Facebook reported 100 percent increases in users in Algeria, Egypt, Palestine and Yemen over the past year, and 317.5 percent growth in Iraq, user numbers dropped by 61.8 percent in Libya and by 200,000 in Qatar due to government censorship.

Youtube, in another way, also serves as an example for the factors that make online business an interesting but complex proposition in the region. In October, repercussions of using the service were highlighted a case where three young Saudis were arrested after uploading a clip on poverty in the kingdom on Youtube. But this appears not to have reduced the popularity of the social media tool. Saudi Arabia is considered number one worldwide for Youtube uploads per capita, according to Khaled el-Amrawi, regional director of Enterprise Solutions Middle East of Intel Corporation Egypt.

Going mobile

Internet penetration has been boosted by the rapid uptake of smart phones, which allows people to bypass the relatively high cost of purchasing a personal laptop to get wired, at the same time providing the latest “must-have” gadget that doubles as a conventional mobile phone. According to a survey released this year by Effective Measure, 45 percent of MENA Internet users surveyed use mobile phones to access the internet.

In countries with already high penetration like the UAE, the adoption of second and third devices — smart phones and tablets — is pushing penetration even further, said El Amrawi. Recent data backs this up, with an Arab Advisors Group survey revealing that smart phones constitute 43.7 percent of total cellular handsets in the UAE, 54.6 percent of total handsets in Saudi Arabia and 41.6 percent in Jordan.

The adoption of these devices among the region’s burgeoning youth is already having an impact on how people use email. “This new generation, the mobile generation, often has no specific email address as they use Facebook instead,” said Michael Bayer, president of Europe, Middle East and Africa at Avaya, a computer networking and telecommunications company.

Furthermore, portable devices are surpassing PCs and laptops as the primary business tool. “I don’t use my laptop unless I’m opening a big attachment. Around 90 percent of my work is via my smart phone; contacts, email, everything,” said Bashar Bashaireh, regional director of Fortinet, a network security company.

The regional race

The region is experiencing an inflection point in how governments and businesses are using online technology. This year, IT spending by Middle Eastern and African governments is forecast to increase by 10.7 percent from 2010, reaching $6 billion, according to research firm IDC, while total MENA IT spending is estimated to reach $45 billion, up 50 percent from 2010. The numbers are estimates, and Dubai IT exhibitor GITEX estimates total Middle East IT spending substantially lower, at $14 billion. Nonetheless, it is big business. “The Middle East is an area where an IT company can grow by 30 percent year on year,” said Bayer.

With e-commerce sales forecast to reach $1.4 trillion worldwide by 2015, the MENA is expected to enjoy a significant slice of the e-pie as e-commerce becomes more widespread. “E-commerce in the MENA is following in the footsteps of Europe and the United States, so I think there is a future and huge potential,” said Hassan Hamadani, marketing and business development manager at Brocade, a networking solutions company.

In public and private sector IT investment the UAE, Bahrain, Qatar and Saudi Arabia are leading the pack. But other countries are trying to catch up and be viable IT hubs, most notably Egypt and Jordan.

“There was a plan for Egypt and Jordan to be software and IT hubs,” said Taha. “Egypt has succeeded to a degree but the momentum did not continue, while in Jordan it didn’t take off as hoped. Dubai has high operational costs but is seen as the right hub due to infrastructure, logistics and other advantages not there in Jordan or Egypt.”

But while the UAE is what one IT manager called a “high-tech sales office”, as it lacks research and development in software, Egypt is making headway as an “attractive offshore destination for R&D,” said Yasser el-Kady, CEO of the Information Technology Industry Development Agency (ITIDA), formed by the Egyptian government in 2005. While the political unrest earlier in the year negatively affected the sector, ITIDA has worked to retain the multinationals like Intel and Microsoft in the country while investing $500,000 to promote the IT sector. El Kady said a multinational outsourcer would be creating some 20,000 jobs when it starts operations later this year.

The $1.3 billion sector currently employees 60,000 people at some 11,000 IT and telecoms companies. With a strategic focus on the MENA, Kady said revenues will reach $7 billion by 2016. “Our goal is to treble software exports every five years,” he added.

As inflection points go, IT is the next big thing for the MENA in terms of job creation, foreign companies seeking to expand global market share, governments expanding electronic services and, potentially, greater political freedoms through hyperconnectivity.

Rein in the ratings agencies

Commentary - Executive magazine

Why should we take credit ratings agencies seriously anymore? It is a question that has growing currency globally, and one that would not have been asked several years ago, certainly not by those in the financial sector. Yet in these turbulent economic times I have heard corporate bankers, private traders, insurance brokers and compliance officers rant about how the credit ratings agencies (CRAs) have gotten out of control.

People are starting to question why the CRAs’ “opinions” — for that is what their ratings are — should wield such power in the global markets given their prominent role in instigating the financial collapse. Subsequent moves over the past year have further escalated the crisis, such as downgrading Greece, Portugal and Italy in the midst of the European sovereign debt debacle.

The CRAs raising ire are the three majors in the United States, Moody’s, Standard & Poor’s (S&P) and Fitch, not the 70-plus other CRAs that operate on a much smaller scale worldwide. Indeed when China’s Dagong, the only non-Western sovereign CRA, downgraded the US in 2010 to “AA” status it hardly registered, especially compared to when S&P did the same (to “AA+”) a year later.

In particular, the problem is the way the three CRAs work to assess the risk of debt-based securities and other structured financial products: CRAs are paid by clients to “objectively” rate these same clients. But there is a clear conflict of interest here. As US Senator Charles Schumer remarked to the Senate Committee on Banking, Housing and Urban Affairs in 2008, this is comparable to “allowing students to pay for their grades,” for naturally, everyone wants to receive a higher rating. CRAs bestowed “AAA” ratings — the highest possible — on the bulk of the $3.2 trillion in mortgage-backed securities issued by banks during the build up of the housing bubble, despite the risky nature of bundling together what is known as ‘collateralized debt obligations’, while watching their profits double to $6 billion between 2002 and 2007. When the bubble burst the following year and the big three CRAs were asked during US government investigations why they kept these securities rated so highly, all three stated: “it’s an opinion.”

Among the core issues here is that these opinions — the downgrade on the debt of sovereign debt or unrealistically high appraisals of toxic assets — are a type of self-fulfilling mantra: a poor asset wrapped in the gloss of a high rating will attract people to invest in it, making it worth more. This warps a market and can cause havoc, as we continue to see. Credit ratings are also used to anticipate future credit worthiness, but CRAs cannot predict the future no matter how good the data at their fingertips, and especially not if they are inherently in a conflict of interest.

So what is the solution to curb the powers of the CRAs? The US Dodd-Frank Act, the financial overhaul law enacted in 2010, and the Securities and Exchange Commission (SEC) have proposed policies to crack down on the CRAs, but they do not go far enough, with pressure from the well-lined pockets of the CRAs and Wall Street lobbying for significant concessions.

A more radical — and simple — solution was proposed by economist David Raboy at a Congressional Oversight Panel in 2009. Raboy suggested creating an independent clearinghouse that would receive rating applications from securities issuers and allocate each assignment to a ratings agency in a random fashion, with payment dependent on the complexity of the securities involved. Accurate ratings would ensure assignment of further cases. This model could be applied nationally or even at an international level, such as for sovereign ratings. Another solution is to scrap the CRAs all together. After all, the stock markets are devoid of ratings, with investors getting by on research from firms and banks to make decisions. If neither of these solutions is adopted — which seems likely unless the ongoing protests of the Occupy Wall Street movement pick up momentum for greater change in economic policy — then one must hope that the SEC can effectively rein in the CRAs through tougher regulation.

In a world with properly functioning markets, however, it is likely CRAs would have already rated themselves out of business, with their lost credibility leaving the services they offer akin to stirring gossip and spreading rumor.

Book review: In the Lion’s Den

In the Lion’s Den, a book by Andrew Tabler - Executive magazine

Andrew Tabler’s account of his time in Syria between 2001 and 2008 is refreshing — relative to the reams of Orientalist trite other Western authors have published about the Middle East and North Africa — in that he actually spent years in the region getting to know the place, first studying Arabic and working as a journalist in Cairo and later traversing the MENA for the Oxford Business Group writing country investment reports, before eventually basing himself in Damascus. Thus his offering, “In the Lion’s Den”, is neither ‘parachute journalism’ nor the story of a doe-eyed apple-pie eater struggling to make sense of an alien Arab fantasyland — the two most common categories of expat writing on the region. Rather, Tabler — a former contributor to Executive — is candid and observant in relating the challenges of trying to comprehend the vast complexities of a country like Syria.

The author has been accused of being naïve, in asserting that after Bashar al-Assad’s succession to the presidency in 2000 the country would move from autocracy to democracy, but what Tabler says interested him more was getting an “unexpected front-row seat to a fight”, pitting the young reformist Assad against the entrenched status quo of the old guard. He later admits some of his shortcomings in framing the situation as such; while there were superficial changes, it was clear after the first few years of the new Assad’s leadership that regime survival would always be the paramount concern.

Tabler was in a unique position to assess the touted reforms in Syria after a private meeting with Assad’s wife, Asma, and then working for one of her government-organized non-governmental organizations (GONGOs), the Fund for Integrated Rural Development of Syria. This led him to start up, under the auspices of Asma Assad, the country’s first English-language magazine, Syria Today. Tabler’s account of his meeting with the “first lady” is intriguing, as are the relations between Asma and her go-betweens at the GONGOs. Equally fascinating is Tabler’s account of being the only non-Arab and the first American to accompany a Syrian president on a state trip, to Beijing in 2004.

A criticism of “Lion’s Den” is it goes into no great depth about such encounters, or the running of Syria Today. Tabler also reveals little about his life in Damascus and travels around the country. A possible explanation for this may be that the book was intended both as a memoir and a dovetail into future career aspirations — Tabler’s current employer is the neoconservative Washington Institute for Near Eastern Policy think tank.

Much of the book consequently concerns Syria’s relations with Lebanon, Iraq and Israel, and America’s resultant foreign policy with Damascus. This ranges from Western hopes of engaging Assad to bring Syria ‘in from the cold’ — primarily through solving the Arab-Israeli conflict — to problematic relations after the Bush administration labeled Syria part of the ‘Axis of Evil’ and Damascus’ apparent reluctance to prevent fighters crossing its border into Iraq following the 2003 United States invasion. Relations soured further following the assassination of former Lebanese Prime Minister Rafiq Hariri in 2005, leading the US to withdraw its ambassador to Syria and Damascus entering into a strategic alliance with Tehran. The account of the ongoing tussle between Damascus and Washington is succinct and bipartisan, providing a useful primer on bilateral relations.

Tabler chose to write the book after he was not allowed back into Syria in 2008, due to his increasingly vocal criticism of the regime. Published in September, Tabler could not have asked for a more opportune moment for the release, given the international media attention on the Syrian uprising, and he has capitalized on this in the epilogue in arguing how Assad and the regime should be handled by Washington. While Tabler may have been taken in by Assad’s veneer of reform a decade ago, “In the Lion’s Den” resounds as an impeachment of the Syrian leadership and a call for even tighter international sanctions to bring the regime to account.

Qatar - Problems Amid the Promise

The undercurrents impairing Qatar's plans for a prosperous future

Special Report for Executive magazine

Read my commentary on nationalization employment policies in the GCC and Qatar:

http://backinbeirut.blogspot.com/2011/10/deference-versus-diversity-in-gulf.html

Also read my article on the financial sector and regulations in Qatar, published earlier in the year:

http://backinbeirut.blogspot.com/2011/08/peninsula-of-protectionism.html

I wrote about Qatar's foreign policy in May:

http://backinbeirut.blogspot.com/2011/05/tiny-giant-lng-fuels-qatars-massive.html

You can read about the working conditions of migrant laborers in Qatar here:

http://www.executive-magazine.com/getarticle.php?article=14727

This September, it seemed official: newspapers and wire services reported that the world had a new wealth leader in per capita gross domestic product (GDP). According to the International Monetary Fund’s World Economic Outlook database, Qatar ranked top of the global heap in per capita GDP on purchasing power parity basis, with more than $88,200 using a census figure of 1.7 million residents. The equivalent figure for Afghanistan, the first country on the alphabetical IMF roster, was $909. Moreover, with Qatar’s expansion of GDP forecast at 18 to 20 percent this year by the IMF, the country is one of the fastest growing economies in the world and the most rapidly growing in the Middle East and North Africa, by far.

To top it all, Qatar is not only both rich and growing, it has huge investment visions. Ongoing projects in the country are valued at $250 billion, with some $80 billion invested in infrastructure, followed by oil and gas at $75 billion, real estate at $55 billion, and petrochemicals, energy and water projects some $11 billion, according to financial information provider Zawya.

With this exceptional combination of wealth and opportunities, it is virtually inevitable that the desert peninsula is viewed as a veritable gold mine by a hoard of construction firms, engineering companies, architects, service providers and infrastructure developers that have struggled to stay afloat in the wake of the global financial crisis.

“The whole world is looking to get a foot into this market,” wryly observed a Jordanian official at a construction exhibition in Doha earlier this year. “Qatar needs everything, from construction and building materials to food stuffs. There is huge demand.”

Indeed, the May 2011 Project Qatar construction show — held only weeks after a 2022 World Cup Construction Conference organized by the government in Doha and benefitting visibly from the hype created by last winter’s surprise awarding of the World Cup still over a decade away — got a size boost of some 73 percent over the previous year and attracted more than 1,700 local and international companies, according to organizers International Fairs and Promotions.

The travelling circus of opportunity seekers entailed national trade bodies and companies from more than 70 countries, champing at the bit to establish a presence in Qatar and get some of the $3 billion in tenders to be issued in 2012 for the World Cup. “Qatar is developing quickly and it’s a good investment opportunity. We are hoping Qatar will be what Dubai used to be,” said Pamela McDowell, project manager at the Italian Business Council Qatar (IBCQ). Membership in IBCQ, an organization founded in 2004, doubled from 20 to 40 companies within the past year, and the organization hopes to have 50 companies involved in hydrocarbons and construction projects by 2012.

Corporations that used to make good profits in other countries of the Gulf region have been lining up to do business in Doha. “We are seeing migration of Australian companies from the United Arab Emirates to where the money and opportunities are,” said Susie Billings, Trade Consultant-Qatar at the Australian Trade Commission.

But while acknowledging the presence of investment and business potentials for international players, experts on the Qatari market also express caution that the boom mentality is dangerously crowding the field with contenders. “The World Cup is a big boost for Qatar but people think the road will be paved with gold, and they will be in for a shock. There is tight competition out there, margins will be tight, and a lot of people want a slice of the action,” said Andrew Wingfield, a partner at international law firm Simmons and Simmons in Doha. “But such competition will be good for Qatar.”

Other experts asked by Executive about the investment opportunities they see in Qatar offered surprisingly mixed perspectives, the great enthusiasm of some juxtaposed by advice to be conservative or to not even invest at this time.

The next Dubai?

Although Qatar was not overly affected when the global financial crisis hit the Gulf some three years ago, the government did have to shell out $3.96 billion to shore up state-linked banks and real estate firms in 2009. In oversupply scenarios somewhat reminiscent of Dubai’s property troubles, overpricing and scant demand for commercial real estate space in Doha has also prompted the government to rent an estimated 20 to 22 percent of all office space to give support to Qatari developers.

“That can be a problem here. Buildings are empty until the government comes to take it off developers’ hands,” [see real estate story page 66] said one analyst who was, like several others interviewed by Executive, only ready to share his insights if his name was not quoted, noting that being candid can cost one one’s job.

But while such market “corrections” may raise questions over how level — and how well-shielded against manipulations — the playing field really is in the competition for developing real estate in Qatar, the difficulties to fill some office towers with tenants have certainly not dimmed Qatar’s aspirations.

In April, the chairman of real estate developer Ezdan, Sheikh Thani bin Abdullah al-Thani, announced plans to construct the world’s tallest tower in Qatar. In another bid for a “largest of its kind” undertaking, some $7.9 billion has been pledged by the government to fund the Sidra Medical and Research Center, the largest endowment to a medical facility anywhere in the world.

The state-linked $20 billion The Pearl Qatar (TPQ) residential project and the $5 billion Lusail development rank as some of the most expensive real estate projects on the planet and in terms of hotel construction cost, the bills are said to be the most expensive per square meter in the world.

“Why? Labor is cheap (as low as $250 a month) but it is expensive because everything is imported from somewhere, and there is a monopoly on shipping and many other things,” said a real estate analyst. Inflation, which had been rampant in the country prior to the global financial crisis, is another risk that developers and construction investors have to watch out for. It is projected to reach 3.3 percent this year, according to QNB Capital, a unit of Qatar National Bank, which is the country’s leading commercial bank and one with strong state affiliation.

There are also questions, however, as to how Qatar will manage the outcomes of its current aspirations, such as hosting the 2022 World Cup, in ways that are socially and economically sustainable. “Don’t ask about 2023. There will be 90,000 hotel rooms and 15 million square meters of office space by then. Who will take up the slack?” said a real estate analyst.

On the side of probable future liabilities, Qatar is also well on course to being the largest water consumer and have the highest carbon footprint per capita in the world, currently only nudged out of the top post by the UAE [see Greenwash story page 78].

Diversification of the national economy away from reliance on hydrocarbon exports has been a mantra for every single oil-producing Arab country for decades. In Qatar, diversifying the economy is happening, with the contribution of oil and gas down from 60 percent to 51 percent of GDP last year. However, the country’s wealth is driven up primarily by hydrocarbons. “It is the fastest growing economy in the world because it is pumping gas, not because of anything else,” said one analyst. It also doesn’t help that the private sector is still a minimal economic player and dwarfed by the state’s participation in every branch of the economy. “Some 90 percent of the workforce are employed by the government or semi-government agencies,” said Wingfield.

“The private sector doesn’t drive anything, it’s the government,” said a real estate analyst. “Everyone is waiting under the government tap for some drips, as it was very much turned off over the past two years. But with projects that were slated to be finished by 2030 now having to be done by 2022 — so compressed into just 10 years — there is so much to do.”

A portrait at Doha's Souq Waqif of the Emir holding up the World Cup after Qatar's successful bid to host the event in 2022

Vision 2022 or 2030?

Being pulled in numerous directions, Qatar is now at a crossroads as to where it should go on a national level. Follow the economic model promoted by the West — of the kind Dubai fully embraced with major ramifications — or pursue a model that will preserve its identity and culture while focused on being a knowledge-based society?

The National Vision 2030 is quite explicit about the direction the country is to take. It talks of the country’s “abundant wealth” creating “previously undreamt of opportunities and formidable challenges,” and that it is “imperative for Qatar to choose the best development path that is compatible with the views of its leadership and aspirations of its people.” Its main four pillars are human, social, economic and environmental development, which “emerged from an intensive consultation across Qatari society.”

As Wingfield noted of the Vision 2030, “There is some quite frank stuff about what needs to be done; I was surprised.”

However, it has to be asked how effective the supposedly open discussion over the country’s direction can be if all the consultants, professors, analysts, real estate experts, bankers and so on that were interviewed were wary of making any negative comments, even constructively critical ones. As one professional said: “I’d like to have certain quotes off-the-record, as this is a country in which you mind your Ps and Qs.”

The question how can you truly progress if there is no re-evaluation, no taking stock of development, may be vital also for Qataris themselves, who traditionally have little say in the country’s future, with the decisions made at the top level. Political parties are banned and only the fourth municipal elections were held this year. Under such conditions it is not easy to undertake a wide societal discussion that includes constructive criticism of the direction the country is going in. Also in corporate decision making, evidence during the extensive research for this report strongly suggested that final decisions would often be imposed from the top-down, and sometimes even totally out of the blue, making management consensus a matter of acquiescence instead of effective team work.

Executive is committed not to fall into the mold of non-critical, starry-eyed views of countries so it is the mission of this Qatar investment report to support real development by reporting in a constructive manner. Potential investors and businessmen need to know, now more than ever, what is going on, particularly in times when global financial uncertainty is converging with regional unrest.

One lesson from the mistakes of Dubai was the absence of careful reality checks by gushing media punting unending promotions of limitless growth, luxurious lifestyles and presumably easy money. Doha should also not want to repeat the Dubai error of falling for the money-driven fine-weather-only consultants who put out serial reports of great promise and then vanished, along with the validity of their research, when harsher realities required actual solutions.

For those with genuine care for Doha’s long-term appeal and fulfillment of its potentials in regional and global communities, now is a time of concern even as Qatar’s own experts speak assuringly of the next few years.

“We will catch up with Dubai, but Dubai was obliged to change its economy (due to depleting hydrocarbons), and we don’t have that problem here,” said a Doha-based analyst.

Certainly Doha wants to make its mark on the world stage, but such incredible growth and change needs to be carefully managed.

“If the time to 2030 is not filled in the right way, it will be wasted,” said Ali al-Humaidi, managing director of Almaras Management Consultancy in Doha. “We are rushing into being a modern country, but upgrading so fast is short-sighted. And you can’t cheat on learning, we can’t kid ourselves and say what others have done in 20 years we can do in five.”