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Please General, do your job

by Sami Halabi
written by Sami Halabi

In most nations civilian rule of the army is hallowed political ground; it ensures that the power of the gun cannot be used to overcome that of the ballot box. Yet in a country such as ours, where the army is neutered by the executive, our parliament holds virtually no power to implement the laws it rarely passes, citizens are detained and released on a whim from a zaim while those convicted of working for Israel are set free, the prospect of independent decision making by the army would seem ideal. 

As the Syrian situation spills over into Lebanon this summer (and probably the next), the issue of whether the army should act to preserve the ‘interests of national security’ without the meddling of politicians will likely come up again and again. Our official policy of ‘disassociation’ from that conflict is an obvious self defense mechanism that has, until recently, served the country relatively well (considering the alternative of getting caught up in what is probably already a civil war). 

But disassociation cannot be an exclusive concept; rather it need be an inclusive one. It must extend to internal actors on both sides that would use Syria as the fire to fuel their extremist interests if it is to have any chance of effectiveness in the months (and perhaps years) that we will have to deal with trouble across the border. Instead of retreating to the barracks when fighting breaks out, the military must act as it is legally mandated to and ‘disassociate’ itself from those who would see us dragged into the sectarian strife  across the border. 

Yet a rush to the militarization of decision-making sets a dangerous precedent that we need consider before we call for the army to set itself to purpose. The history of nations, including ours, is rife with examples of how a rush to ‘preserve the republic’ leads to an oppressive military state, something that will not provide an answer to the problems ailing the country.

Take for example of how military men cannot be counted upon to uphold civil rights. Our presidents that ascended from the ranks and file have done practically nothing to keep their oath to uphold the constitution, as it is breached almost as a matter of habit by the governments they preside over. Those ex-commanders who are regarded as pallbearers of the state, such as former president Fouad Chehab, can easily be singled out for creating the conditions (such as discrimination against Palestinians) that led to the civil war itself. 

Yet every so often those chief consensus commanders do serve a purpose. President Suleiman’s call for a resumption of National Dialogue to deal with the issue of arms, and specifically (but not exclusively) those of the resistance, represents a tilt toward reform. But it is still early days. 

We should not forget that by the end of the last National Dialogue sessions in 2010, the country was rife with jokes about what a sham the whole affair was, precisely because Hezbollah rejected the issue of a national defense strategy that encapsulated its arms. But now that Syria could go either way, or no way at all, Hezbollah seems ready to hedge its bets, otherwise Suleiman would not have announced his plea. 

And since the last dialogue sessions it has become blatantly obvious that the political class in Lebanon cannot deal with the everyday issues that plague the country because of their obsession with the issue of weapons, as if they are the reason the lights go out or outbound planes are filled with our brightest young minds. 

So amidst all that we are faced with today, the convergence of both internal and external factors presents us with a rare opportunity to overcome the hurdle of arms that has divided us. Any attempts to set preconditions by the opposition are merely play for time, something we are running out of fast. If the army can do its job without overstepping its boundaries and the resistance is truly genuine in its commitment to real dialogue, the Arab uprisings could, perhaps, finally have reached our shores. 

The only other option is to continue to slip into an increasingly sectarian conflict, and we all know what happened the last time we tried that.   

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Seeded by neglect

by Zak Brophy
written by Zak Brophy

In late May, Lebanon’s northern city of Tripoli erupted into deadly violence with the shockwaves eventually spreading south onto the streets of Beirut. By the time the politicians, generals and sheikhs had scrambled together some semblance of order, more than a dozen people had been killed and the stability of the nation was shaken to its feeble core.

The collapse in security was, of course, intrinsically linked to the unremitting uprising in Syria and the shaft that it drives through the opposing camps within Lebanon. However, generations of economic neglect and the more recent political estrangement of much of the north have helped lay the foundations for the unrest we see today. 

During the most recent fighting in Tripoli I spent a couple of days with the residents-cum-combatants in the staunchly anti-Syrian regime neighborhood of Bab El Tabbeneh. With his new high-powered rifle lying nearby — his last one had overheated and broken due to the intensity of the past days fighting — one of the men told me, “If there was an economy here, then we would not have all of these problems. If people had jobs and opportunities and a future then they would forget all of this. Why would we care for fighting? We would forget it all.”

In the poverty-ridden suburbs of Tripoli such as Bab el Tabbeneh it is hard to see beyond the bullet-scarred buildings, tired markets and rubbish-strewn streets. But step back and look a degree deeper and the decaying facades of beautiful Ottoman era buildings hint to a more prosperous past; Tripoli’s prized position as a major trading hub was quashed by the French in favor of Beirut, starting a decline within the city that continues to this day.  

Regardless of the political, religious or ideological slant of the fighters they all agreed, without hesitation, that they had been forgotten by the state. One of the men quipped, “There is nothing here and this has been an intentional policy to keep the people poor so they have to beg for money and then they become reliant.”

This is compounded by the disintegration in faith given to the traditional Sunni leaders within many of these communities (Tripoli is roughly 85 percent Sunni Muslim). Fighter Abou Wadih told me, “They are all liars. If I go and ask the politicians for help they offer nothing, only when there are elections will they give, and then once in power they go.” 

Prime Minister Najib Mikati may be a Sunni from Tripoli who enjoys a certain degree of support from the more affluent middle classes, but among the bitter and poor men bearing arms he is seen as a shrewd businessman and a political opportunist who has set up camp with their enemy, Syrian President Bashar al-Assad.

As for Saad Hariri, who inherited his father’s business and political empire but not his personal gravitas or political acumen, his standing has been on a downward slide since his humiliation at the hands of Hezbollah and their allies in 2008. “When they killed us he stayed quiet because he likes only his pen and his laptop,” said Abou Wadih. I think its fair to say that the lads on the front lines don’t pay much heed to Hariri’s oft-quoted tweets from his salubrious abodes in Riyadh and Paris.

Tripoli has always been a bastion of Sunni Islam in Lebanon but having been cut economically adrift without a political rudder, it is the Islamic institutions, and more specifically the ultra-conservative Salafi sheikhs, who have sought to fill the leadership void. Sheikh Salam al-Refai is a leading Salafi preacher in Tripoli who told me that the people were looking more and more to religious leaders like him for direction, although he assured, “we don’t want to play a political role.” But in the absence of the institutions and representatives of the state their leadership cannot be anything but political. 

It was the Salafi-led groups leading the protests against the security services’ capturing of Islamist Shady Mawlawi and, even if the fighters hail from a range of persuasions, it is from the Salafi mosques that decisions are made as to when the guns ring out in Bab El Tabbeneh. 

Generations of abandonment have made dry tinder of northern Lebanon as fires from Syria burn across the border. 

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Real Estate

First sails to the wind

by Jeff Neumann
written by Jeff Neumann

Power cuts several hours per day are a way of life in Beirut, and some rural areas of Lebanon go without electricity for upwards of 16 hours a day, every day. The irony, that a country which boasts a banking sector with deposits three times the size of its economy cannot produce mid-twentieth century levels of electricity for its citizens, is lost on no one. And yet nothing has been done to address the problem. Talk has ranged from leasing offshore electricity barges from Turkey, to importing thousands of megawatts (MW) of electricity overland from Iran in order to bridge the enormous gap between consumer demand and supply on hand.

Experts estimate that demand for electricity in Lebanon will reach 4,000 MW in less than three years. Today, the country produces only around 1,500 MW of electricity, while at peak times around 2,500 MW is actually needed. As a net energy importer with an outdated and ramshackle power grid, Lebanon must get creative.

One significant part of the solution could come from wind turbines. Early last month, a company called Hawa Akkar officially launched a wind farm project for north Lebanon that it says will eventually contribute 60 megawatts of electricity to the national power grid. 

But the biggest hurdle for the project is, perhaps unsurprisingly, the Lebanese government. Electricity generation cannot be privatized in Lebanon because the law has not been implemented yet. That means the state-run institution that everyone loves to hate, Électricité du Liban (EDL), will maintain its power monopoly into the foreseeable future.

New wind beneath the wings

The Hawa Akkar plan calls for twenty wind turbines to be spaced out along a north-south ridge line that tops out at 800 meters high near the town of Machta Hammoud in Lebanon’s northern Akkar region. Akkar has long been neglected by the government in Beirut, and many local officials see this wind farm as the potential start of a new era of prosperity for the region, creating jobs and spurring outside investment. “The people of Akkar are fed up with power shortages” and want the government to act, says Najji Ramadan, mayor of Machta Hammoud. 

If Hawa Akkar’s ambitious plan stays on track, the wind farm will be fully operational by early November 2013.

The proposed site of the Hawa Akkar Wind Farm can be compared to several current locations along southern Europe’s Mediterranean coastline. In terms of topography, average annual temperature and vegetation cover —all of which factor prominently into the harnessing of wind energy — the closest comparison would be Portugal’s Candeeiros wind farm. Its 37 wind turbines, the same model that would be used by Hawa Akkar, together produce 111 MW of power.

Hawa Akkar has teamed up with Spanish wind turbine producer Vestas for the venture, but the project remains 100 percent Lebanese-owned. The current plan for Machta Hammoud calls for 20 turbines. These are the V90 3MW model — each capable of producing 3 MW, enough to power some 60,000 homes across Lebanon. The total cost of Hawa Akkar is expected to reach an estimated $100 million.

General manager of Hawa Akkar, Albert Khoury, also the deputy general manager of E-Aley, an electricity concession that distributes electricity to the district of Aley, is passionate about the benefits of bringing the first wind farm to Lebanon: “We know this can happen, and will continue to push until it is done. We have so much support [in the government and private sector] and we are closer than we have been since the idea first came about.” He says the plan was initially discussed in 2008, and a measurement campaign began in Machta Hammoud in July 2009.

More than electricity

Along with Mayor Ramadan, Khoury points to the knock-on effect that a wind farm would have on the area. “Hawa Akkar has the potential to produce hundreds of jobs in the area,” he says, citing everything from the dozens of employees required to maintain the project, to an increase in tourism for the area, meaning new hotels, restaurants and improved roads and infrastructure for the local population.

Khoury says the government’s reaction has been “very positive,” but he hopes it will turn its words into action soon. A spokesperson from the Ministry of Energy and Water (MoEW) declined to comment on the likelihood of Hawa Akkar gaining full approval from the government, but did say the ministry is “studying all aspects of wind energy production, including Hawa Akkar.” The MoEW’s 2010 Policy Paper for the Electricity Sector looks to produce 60 – 100 MW using wind power, stating that the ministry will “complete a wind atlas for Lebanon and launch Independent Power Production wind farms with the private sector.” The cost of producing 60 MW was estimated at $117 million, almost 20 percent higher than Hawa Akkar’s proposal. 

In January of last year, some 18 months after the Policy Paper was released, the United Nations Development Programme and the Country Energy Efficiency and Renewable Energy Demonstration Project for the Recovery of Lebanon (CEDRO) drafted a National Wind Atlas of Lebanon. 

At last year’s Copenhagen Climate Change Conference, Lebanon pledged that by 2020, 12 percent of the country’s energy needs will be met from renewable sources, such as wind farms and thermal power plants. Given the sensitivity of the energy sector in Lebanese politics, and the inevitable stalling and bickering that goes along with it, that target date may be overly ambitious. 

And it is not only a decrepit power grid that is keeping Lebanon in the dark. Last month, EDL last month claimed that political violence and instability in north Lebanon, “resulted in stopping the maintenance works on the first gas turbine at the Deir Ammar power plant,” and that 200 MW of power would be lost from the national grid. Akkar can be volatile, as events this year have proven.

According to Steve Sawyer, secretary general of  Global Wind Energy Council, a lobbying group, “There is almost always resistance from the grid/system operators to doing something new.” Speaking in general terms not specific to Lebanon, Sawyer says, “typically, 10 to 15 percent wind power capacity can be added [to a national grid] without substantial modifications and relatively minor operational ones. Higher penetrations generally require more substantial modifications both in terms of the infrastructure and the management.”

Khoury emphasizes that the plan is not for Hawa Akkar to compete with EDL or any potential private electricity distributors in the future, but rather his company only intends to “contribute” to the national supply of electricity, whether by generator barges or overland imports.

Forecasts for the future

For two years now, since the Policy Paper for the Electricity Sector was released, the MoEW has claimed that “the legal framework for privatization [law 462] … exists but is not applied.” Statements like this only fuel public cynicism.

The thought of not having to pay for daily access to a generator during rolling power cuts seems far fetched today. But if plans such as Hawa Akkar Wind Farm, or other renewable sources of energy production come to pass, 24-hour electricity across Lebanon could become reality. While the Hawa Akkar Wind Farm plan is ambitious, it will only provide a fraction of Lebanon’s energy needs. But it could be a start and, if successful, will encourage other private companies to follow the same route toward a more energy independent Lebanon. And it is quite simple, as Mayor Ramadan says: “We not only own the land, but we own the energy, too.”

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Bulldogs beneath the carpet

by Daniel Harris
written by Daniel Harris

Winston Churchill once said that watching the Kremlin was like watching two bulldogs fight beneath a carpet — outsiders have little idea what is going on until the bones of the loser fly out from beneath. These days much of the same could be said of politics in Tehran.

Although his bones are still intact, Iranian President Mahmoud Ahmadinejad has taken a severe beating recently as a result of his ongoing, byzantine dispute with Supreme Leader Ayatollah Ali Khamenei. While rifts between political factions in Iran are well documented, this particular conflict illustrates the reality that the supreme leader and those around him are resorting to increasingly drastic measures to snuff out political pluralism in the Islamic Republic, and that the fallout with their erstwhile neoconservative allies will have far reaching repercussions for Iranian politics in the future.

The split between the conservatives and neoconservatives occurred after the latter emerged as a political force in the 2005 presidential election. Behind Mahmoud Ahmadinejad, their message of economic populism, revolutionary zeal, and puritanical moralism struck a chord with the traditional conservatives looking for an ally against the reformist movement. Ahmadinejad found popular support by promising to root out corruption and redirect Iran’s oil revenue to the country’s poor. 

But now the neoconservatives are in serious decline. 

Three events illustrate this trend. The first is the trouncing they suffered in the recent parliamentary elections. Conservative members of Parliament now dominate the Majlis (the Iranian Parliament) and are incensed at what they perceive as the president’s lack of respect for parliament, exemplified recently when Ahmadinejad came before the Majlis to answer questions and instead mocked the MPs and cracked jokes. The Majlis is so hostile to the president that some conservative MPs have called for his impeachment. 

Secondly, Ali Larijani was re-elected as Speaker of the Majlis. Larijani is an outspoken critic of Ahmadinejad from the conservative camp and is seen as close to Khamenei. He is well placed to frustrate Ahmadinejad’s last year, and is also well placed for the presidential elections in 2013. 

Thirdly, Khamenei re-appointed former president Rafsanjani as head of the Expediency Council, a religious supervisory body. Rafsanjani is also a rival of the president, and was not expected to retain his post because of his soured relationship with Khamenei. Even if he is at odds with the supreme leader, Rafsanjani’s presence in the government will keep pressure on Ahmadinejad’s administration and strengthen Khamenei’s network of supporters, even if he doesn’t like him very much. 

These events, in addition to Khamenei’s surprise statement last year in support of the idea of abolishing the presidency altogether, will weaken Ahmadinejad at the end of his term. Yet he remains defiant, and will likely continue to press his policies, try to limit Khamenei’s influence and try to position his allies to propagate neoconservative influence. Regardless, he will find this difficult in the face of the setbacks he has suffered. 

That Khamenei mooted the possibility of eliminating the position of the presidency is significant. It says that essentially the conservatives are willing to bring back the position of prime minister, elected by the Majlis, as a replacement for the president, who is directly elected. Khamenei and his camp see the presidency — a position the previous supreme leader sought to empower in the late 1980s — as a liability. The last three administrations have not been sufficiently amenable, and it is not clear if the conservatives have a candidate able to win by direct vote from the people. Therefore, since they have been able to exert more influence over the Majlis through their members on the Guardian Council — which interprets the constitution and approves MPs — having a prime minister instead of a president would mean more conservative control. 

With the decline of the neocons, the conservatives now are moving to maintain their control over the republican institutions of the government. They do not want a repeat of Ahmadinejad. Eliminating the presidency would aid them in this, but it remains to be seen if they will pursue it before the next presidential election in one year’s time. Either way, they will likely try to limit political pluralism and increase the checks and balances on the electorate. Their experience with the neoconservatives has taught them they can’t even trust their friends, and so now they are loath to leave anything to chance in the future.

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Real Estate

Hoping good fences make good neighbors

by Jeff Neumann
written by Jeff Neumann

At first thought, a new 10,000 square-meter gated community might seem like the last thing an already overcrowded Beirut needs. But the forthcoming Bella Casa, by MENA Capital, takes a different approach to sequestered living. Instead of avenues lined with cookie-cutter tract homes, Bella Casa will feature three residential towers of small and medium-sized apartments, spacious lofts and penthouses, while leaving roughly 8,000 square meters for communal space.

Nabil Sawabini, chairman of MENA Capital, says: “When we started about five years ago, our focus was on the high-end market because there was a genuine demand for that kind of product.” Times have changed, he adds, and buyers are now looking for smaller, more practical living spaces: “We started to notice just over a year ago that there was a shift towards medium to smaller-sized apartments, and the shift was principally because the price-per-square-meter went up considerably. People simply could not afford the larger apartments anymore.” 

According to Sawabini, the current plan calls for MENA Capital to break ground this month near the Adlieh roundabout in Ashrafieh, with delivery expected in the summer of 2015.

Financing

Bella Casa is funded principally through a MENA Capital investment vehicle, Signature Properties. There are co-investors for 20 percent of the project, with the remaining balance — some $8 million to $10 million — financed by Bank Audi for the purchase of the land.  

“Normally we do not pursue a project unless we [have sold] a minimum of about 20 percent of the project,” Sawabini explains. “By selling that much up front, we insure that there is marketability. And by doing so we reduce the funding requirements for the project and the risk involved. Once you go over the 50 percent mark the bank becomes very heavy handed. They can then dictate the terms [of the project].”

In addition to the land purchase, Bank Audi was also brought on board to provide mortgages to buyers. Sawabini says the plan is for Bella Casa to remain “affordable” to potential homeowners who have “high standards of living” but perhaps cannot, or simply do not wish to, live in downtown Beirut.

MENA Capital’s vision of Bella Casa is one of a wide range of options for buyers. There are one, two and three-bedroom apartments, as well as lofts and penthouses, but perhaps the most significant part of the design is the focus on communal green spaces.

Located “literally minutes from Ashrafieh and Downtown Beirut,” Sawabini says, “We started thinking of doing something that is accessible, good quality, tasteful in terms of design, and with the amenities that people truly want when they live in the city and, in many cases, that are lacking right now. 

The thinking was, “what areas of Beirut could possibly accommodate something like this?’”

Sawabini boasts that Bella Casa, while less expensive than some other properties in the area, will use “premium” materials usually reserved for the higher end of the market.

Running tracks, two swimming pools, a gym and playgrounds for children will take up much of the land allotted for residents’ use. “It just doesn’t make sense to fill an 8,000 square-meter lot with concrete,” Sawabini says, adding, “you have to build vertically.” The footprint of all three towers combined will be between 1,500 and 1,600 square meters.

And to stay in line with the global push toward greener building practices, Bella Casa will use the latest environmentally conscious technologies for waste management and heating. 

Of course, it is all speculation that there is a place in a crowded Lebanese market for a massive new gated community on the outskirts of Beirut. But if MENA Capital’s ambitious plan is a success, it could usher in a new era of smaller, self-contained communities here. 

Whether or not that is necessarily a good thing — in terms of the general sense of community more organic neighborhoods here typically have — remains to be seen.

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The tribal curse

by Farea al-Muslimi
written by Farea al-Muslimi

Perhaps most of Yemen’s problems, if properly addressed, could be resolved within a short or medium timeframe — that is, except for the issue of tribes. Nothing in the country is more complex than its tribes. Even if not immediately apparent on the surface, tribal connections influence almost every aspect of Yemeni society and interaction, and lay the framework sustaining many of the country’s other problems.

The tribal system has existed in Yemen for thousands of years, but never quite in as problematic a form as it does now. Historically, the sheikhs that led the tribes represented the interests of their people before the national government, a setup that made practical sense given Yemen’s rugged geography and remote communities. Today, however, the focus of most sheikhs has turned to using their positions to concentrate wealth and power for themselves and their families. These tribes have, in many ways, replaced the role of the state, and become mini-states inside the state. A tribal sheikh acts as businessman, contractor, judge, lawyer, governor and every other type of bureaucratic functionary for his people. Some even have their own prisons for those who would disobey their tribal rule of law.

Economically, the impact has been terrible. Yemeni economists have estimated that 80 percent of the country’s income goes to a 2 percent segment of the population, with tribal sheikhs being among the most powerful of these elites. Having more than one salary from different government agencies, Yemenis even joke that some sheikhs get salaries as martyrs even if they are living. 

Though still a problem in Southern Yemen, the power of sheikhs is weaker there, given that it had been curbed during the communist years before the 1990 reunification. The north, however, is a mess, where, since Yemen’s revolution in 1962, the power of the tribes has been continually shifting. When former President Ibrahim al-Hamdi tried to enforce the rule of law and weaken the sheikhs’ power in 1977, he was assassinated. Recently deposed President Ali Abdullah Saleh took a very different approach during his three-decade rule, empowering the sheikhs and legitimizing his rule with tribal support, while fueling wars between those tribes that challenged him.

The so-called “war on terror” is only complicating the issue, with the West allying with tribes to fight Al Qaeda in Yemen. Western cash and support is now a new source of wealth and corruption for tribal leaders, and has been counterproductive in terms of counter-terrorism. If the existence of Al Qaeda is bringing you money, would you really try to kill them off?

For the last few decades, Yemeni tribal leaders have also had monthly salaries from regional powers; from Saudi Arabia to Iran, Qatar and even from Libya’s Muammar Qaddafi, cash poured in. It was as if tribal leaders were saying to Saleh: “You get paid by the Americans, we get paid by others.” Some were even getting paid by two opposing countries at the same time and working to achieve both agendas, such as Libya’s and Saudi Arabia’s.

In April, the Yemeni Parliament tried to pass the annual budget, including $60 million for the tribal sheikhs. This incited rage around the country, especially among the youth who still occupy many of the city squares around Yemen. This amount was actually only a small portion of what sheikhs used to get from the former regime every month as a guarantee for their loyalty to Saleh. For the first time, Yemenis spoke publicly against this practice, and prime minister himself went into the street and promised not to pay the sheikhs. In response, the sheikhs held a national conference, condemning the prime minister and accusing him of trying to “explode a crisis in the country.”

At the same time, international humanitarian organizations and Yemeni government were begging the world to fund the $262 million shortfall in funding for humanitarian crisis response operations in Yemen; more than 1 million children suffer from acute malnutrition and more than 10 million Yemenis do not have enough to eat, according to the director of Save The Children in Yemen, Larry Farrell. Yet while humanitarian aid organizations call on the world to save Yemen from a catastrophe, and the World Bank warns of Yemen running out of oil to fund itself, both of them seem to overlook the millions of dollars still being funneled to the tribal sheikhs — money that could go a long way in help Yemen feed its own children and solve its own problems. 

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Finance

Doors close across the border

by Paul Cochrane
written by Paul Cochrane

Lebanese banks with operations in Syria are caught between the proverbial rock and a hard place. The uprising that kicked off last spring has forced banks into survival mode as the Syrian economy has weakened and profits have been slashed. Some banks have considered exiting the country, expansion plans have been put on hold, and all players have set aside millions of dollars in provisions.

While Lebanese bankers are used to operating in crisis mode, the international sanctions against Syria — by the United States, the European Union and the Arab League — have presented further operational challenges and the specter of reputational risk. Although Lebanese banks are not legally obligated to comply with the sanctions — and operations within Syria are essentially unaffected — the sector has pledged to do so. The US Treasury in particular has breathed heavily down the necks of Lebanese bankers to comply with the sanctions and for Lebanon to not be a conduit for Syrian cash.

Such internal and external pressure has impacted the bottom lines of the seven Lebanese banks with Syrian affiliates, both within the affiliate itself and at group headquarters in Beirut. For while Lebanese banks only entered Syria from 2004 onwards, the market was under-banked and ripe for growth, with the banks attracting $6.79 billion in aggregate assets by the end of 2010.

“Before the uprising the banking sector was on a fast track and expanding throughout Syria. Profits were good and it was a virgin market that needed everything,” said Samih Saadeh, managing director of Banque Bemo, which has a stake in Banque BEMO Saudi Fransi (BBSF) in Syria.

At the end of 2011, aggregate assets had dropped by 17.2 percent to $5.8 billion. As Saad Azhari, chairman and general manager of BLOM Bank put it, “Syria was the (sector's) second most important market after Lebanon.”
The pull of gravity
Indicative of the impact of the uprising on the banking sector is BLOM's affiliate, the Bank of Syria and Overseas, where loans to Syrians dropped 60 percent over the past year, from $650 million to $250 million. As Jihad Yazigi, editor of the financial publication, The Syria Report, remarked: “Nobody is investing, nobody is spending, and companies are closing. Whole areas are out of business entirely. I think gross domestic product will decline 10 to 12 percent this year.”

To cover bad loans and banks’ exposure, provisions are being hastily put aside (see table). “All Lebanese banks are taking profits as collective provisions,” said Alain Wanna, head of Group Financial Markets Division at Byblos Bank. “In Syria the decision was for all profits made in Syria to act as collective provisions, as we don’t know how long (the instability) will last.”

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

Most affected by the Syrian crisis has been Bank Audi Syria (BAS), with profits down 83.20 percent to $2.1 million, attributed to problems with their portfolio (BAS' management turned down Executive’s interview requests). Less affected have been the newcomers, BLF's Al Sharq, First National Bank's Syria Gulf Bank, and Fransabank Syria, which saw profits, assets and customer deposits actually increase. BLF's general manager, Walid Raphael, put Al Sharq's 72.2 percent growth in assets, from $161 million in 2010 to $284 million in 2012, down to its recent start and a focus on commercial rather than retail banking, adding a new branch that opened in May. However, that has been the exception rather than the norm.

BBSF, the largest private bank in Syria with 40 branches, has put on hold plans to open three new branches in Damascus and one in the conflict-ridden city of Homs. “We are not looking for more business, but our strategy is to stay there and no branches have closed except in the hot areas,” said Saadeh. Profits at BBSF dropped 1.2 percent last year, to $11.8 million, but in the first quarter of 2012, with BEMO holding 22 percent of BBSF and profits down, the Beirut arm “got zero,” said Saadeh, which negatively impacted BEMO's net profits, dropping 53.57 percent on the first quarter of 2011, to just $1.45 million.

Causing further headaches for the sector was a requirement by the Central Bank of Syria (CBS) initiated prior to the uprising, for banks to increase capital from $100 million to $200 million. “There was a list of banks and a schedule for each to reach (in phases),” said Byblos’ Wanna. “Ours was in August last year. We tried to negotiate with the CBS to say the balance sheet was down but they insisted on the increase.” Currently Byblos Syria’s capitalization is $120 million for a balance sheet of $700 million. BBSF has also reached the first phase of the higher capital requirements.
Looking ahead
The banking sector has proved remarkably resilient in the face of the conflict. The limited run on the banks last spring by depositors was a “panic move,” said Saadeh, while deposits and withdrawals have “balanced out” since then. Bank share prices on the Damascus Stock Exchange (DSE) have also not plummeted as some might have expected, although they have been somewhat artificially salvaged by only 3 days of trading  a week, and stock only being allowed to decline by just 1 percent a day and increase by 5 percent. Nonetheless, the DSE has slumped by 40 percent since the uprising broke out, according to figures released by the International Monetary Fund.

Cross Border Performance

Summing it up
“We’ve not seen any banks go under in Syria yet, and that is a positive thing. People haven't withdrawn all their money and I see it as a stabilizing factor,” said Ayham Kamel, a Syria expert at risk consultancy firm, Eurasia Group, who formerly worked in the Syrian financial sector.

Yet with the economy expected to contract further this year, more sanctions slapped on Syria by the EU in May — including on the CBS governor Adib Mayaleh — and operational costs higher due to the crisis amid a slump in business, the outlook for Lebanese banks in Syria could not be described as peachy.

“There is a risk for Lebanese banks at some point, as I'd expect them to hit the red zone and become unprofitable,” said Kamel. “To me, it is not a question of if but when, given the current trajectory in Syria. They are going to find it very hard to manage the books and have profitability towards the end of the year or in 2013.”

 

This article was published as part of a special report in Executive's July 2012 issue.

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Short on solutions in Bahrain

by Thomas Schellen
written by Thomas Schellen

By hosting a Formula 1 race in 2012, the Bahraini government was angling for attention on two fronts, positive publicity and economic benefit. Instead, they received mainly critical attention driven by human rights activism and popular outrage. Much less attention came when the International Monetary Fund (IMF) published its annual economic assessment known to market watchers as the infamous ‘Article IV’ report.  The report’s top line was that Bahrain suffered a slowdown of its economic growth of some 1.8 percent in 2011.

Looking back on the past ten years (assuming the IMF got its estimates right) GDP performance was the poorest in more than a decade, with a full four-percentage-points discrepancy from the past 10-year averages.

But on questions whether the slowdown was a symptom or side effect of change, a mere fallout of the protests, or a result of other global and regional pressures, the IMF was decidedly ambiguous. On the one hand, the IMF said that “disruptions caused by protest activity during the first half of 2011 have weighed on growth.” On the other, the “macroeconomic impact of the unrest has been cushioned by the largely unaffected oil and aluminum sectors.”  It did not say which factor had a greater impact but it did point out that the oil sector contributes over 85 percent to Bahrain’s fiscal and external receipts.

And while it takes more than a few protests to stop the flow of oil, the kingdom is being stretched thin. The IMF also observed that Bahrain’s fiscal stance had been expansionary to the point that the break-even price of oil for sustaining state expenditures had reached $114, versus $80 in 2008, the highest break-even price for oil in the GCC back when prices were even higher than today.

Yet one need only dig a little bit into the files to find that the IMF knows well that protests have changed the economic situation significantly. In a press statement released at the end of a two-week IMF visit for consultations in December 2010, David Robinson, the IMF official leading the delegation at the time, said: “Buoyed by the rebound in oil prices, the continuing recovery in the global economy, and fiscal stimulus, growth is expected to accelerate from the 3 percent recorded in 2009 to 4 percent in 2010 and further to 5 percent in 2011.” We all know what happened one month later. But you wouldn't think the IMF did if you looked at their recommendations. 

In the September 2009 Article IV, the IMF’s Executive Board “emphasized that the key challenges faced by authorities are to safeguard financial stability and mitigate the impact of the global downturn on the domestic economy.”

In the 2012 consultations, the IMF described the impact of the euro crisis on the Bahraini financial sector as “further deleveraging of the wholesale banking sector.” It also added that its “principal impact on the domestic economy has been the associated loss of employment in the financial sector, as contagion to the conventional retail banks appears to have been contained.” Nothing on addressing the problems causing unrest.

The debates in Bahrain over economic justice and social equity included, among many other things, the discussion of whether the 2012 Formula 1 event was so economically beneficial to the people that the demonstrations were ill-placed. The activists argue that the protests at the race were justified because of human rights violations and the need to attract global attention. Neither side could substantiate their argument with economic data, which would strengthen their claims of having the better way toward improving people’s lives.

Yet, if the government of Bahrain, or any stakeholder in the state or economy, were to look for an assessment of measures — such as the 15 percent increase of salaries for all public sector employees in August 2011 — that is conducive to lowering social inequality, they would not get answers from this year's assessment by the IMF’s Executive Board either. It concluded, “policies should be geared to restoring confidence in the economy, including by finding a lasting resolution to the social unrest, promoting growth, and securing a sustainable fiscal position.” We know, IMF, but how?

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Finance

Reputations at risk

by Paul Cochrane
written by Paul Cochrane

Syria and Lebanon naturally have shared business interests, but in an era of American and European sanctions against the Syrian regime and individuals associated with it, Lebanese businesses have been forced to try and insulate themselves from risk. 

The banks are no different. Byblos Bank, for instance, had the name of Rami Makhlouf — the billionaire Syrian businessman and cousin of Syrian President Bashar al-Assad currently under United States and European Union sanctions — removed from the public listing of shareholders in its Syrian affiliate, Bank Byblos Syria. The UK-based Bankers’ Almanac — effectively the shareholder listing of banks globally — “were asked on January 9 by [Byblos Bank’s] relationship manager to change the ownership details to their current listing,” a spokesperson wrote in an email to Executive.

Alain Wanna, head of Group Financial Markets Division at Byblos, confirmed that Makhlouf did hold a 4.9 percent stake and that the bank had recently tried to evict him as a shareholder, but Makhlouf had refused. 

Morthada al-Dandashi, who owns 2.85 percent of Bank Byblos Syria, may be a further reputational risk for Byblos. Although not sanctioned, a leaked 2008 US Embassy cable reported that Dandashi managed “Makhlouf’s ‘parallel’ financial activities in Syria,” and Makhlouf “paid Dandashi $2 million ‘ante’ to become a partner in Cham Holding, and deposited significant sums under Dandashi’s name in the Damascus branch of the Lebanese Byblos Bank.”

It appears though, that Byblos is in a bind. “Shareholders have the right to freely buy and sell shares as long as they own no more than 5 percent of the Bank’s total shares,” said Wanna. “Thus, Byblos Bank Syria has no legal authority to approve or disapprove the entry or exit of any shareholder.”

He added that while Makhlouf had been a founding shareholder in Bank Byblos Syria, he had reduced his stake and after three years Byblos was not required to list him. “Makhlouf is not represented on the board of directors, he has no executive function, is a passive shareholder and may be in other banks,” said Wanna.

Banque Libano-Française (BLF) is in a similar predicament with its Syria arm, Bank Al Sharq, which, like Bank Byblos Syria, trades on the Damascus Securities Exchange. Among its shareholders is Ahmad Nabil Mohammad Rafic al-Kuzbari, who was placed under US sanctions last year for his position as the former chairman of Cham Holding, which Makhlouf founded.

“Like many other Syrian investors, Kuzbari holds shares in Bank Al Sharq that represent 1.5 percent of the capital of the bank,” wrote a BLF spokesperson in an email. “He is not a member of the board of directors, neither [is he] represented on the board of directors nor is he involved in management. Consequently, we are confident that his shareholding does not represent a reputational risk for the bank.” 

Under US law Americans are banned from financial dealings with sanctioned individuals or entities. Interestingly, the International Finance Corporation (IFC), the private investment arm of the World Bank — itself 51 percent funded by the US Treasury — also owns a stake in Byblos Bank, at 8.36 percent. 

When asked about being jointly invested with a sanctioned individual, an IFC spokesperson wrote in an email that: “Our investment is at Byblos-Lebanon level, while Makhlouf is a minority shareholder in Byblos-Syria, which is a different entity registered under the Syrian banking law and subject to supervision by the Syrian Central Bank.”

This separation is dubious, given that Lebanese banks and their Syrian arms are consolidated and that the group gains from the profits made in Syria.

The US Treasury’s Office of Foreign Assets Control (OFAC), responsible for enforcing sanctions, has been “repeatedly engaged with the Lebanese banking sector to stress the importance that it not become an outlet for the Syrian regime and its proxies to evade sanctions,” in the words of a spokesman.

Lebanese banks categorically deny Syrian money is moving through Lebanon, and while anecdotal evidence suggests banks are generally denying new accounts to Syrians, financial sources point out that this can, and is being, circumvented by Lebanese individuals acting on behalf of Syrians. Indeed, the leaked 2008 US embassy cable noted Makhlouf has accounts in Lebanon under different names. 

Also, a US Treasury official visiting Beirut stated banks have to refuse banking relationships not only with OFAC sanctioned individuals, but also family members and affiliates.  

“How can a Lebanese bank know those surrounding an OFAC-listed individual to avoid them? It is really weird and beyond banks’ capacity,” said Paul Morcos, founder of the Justicia law firm that provides legal consulting for the banking sector. “Legally, it is a grey area, and it is as if bankers are no longer responsible for best efforts but have to achieve the best results.

 

This article was published as part of a special report in Executive's June 2012 issue

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Rebuilding the future

by Jihad Yazigi
written by Jihad Yazigi

Syria’s political landscape has dramatically changed in the last fifteen months and so has its business environment.

A few weeks before the uprisings began in March 2011, the Syrian government had announced its five-year economic plan running from 2011 to 2015, which was supposed to serve as a guide and a broad strategic framework for economic policy in the coming years.

The plan confirmed the continued liberalization of the economy, the gradual cancellation of all forms of subsidies on energy products and a return to focusing on manufacturing and other “productive” sectors. 

For many in Syria’s business community, which had already benefited from a step-by-step transformation of the economy into a market-led system since the early 2000s, the prospects looked promising. Syrian expatriates returned home to benefit from the new employment and investment opportunities. Regional investors were banking on the opening of a new frontier market, while locally-based investors saw their decades of patience bearing fruit at last.

Few could have imagined what the following months would entail. When a few children were detained in Daraa, their families went out to demonstrate to request their freedom and everything changed forever in Syria.

In the following months, the economy would contract significantly and security would deteriorate, causing many businesses to close and lay off staff, expatriates to return to their place of exile, investors and tourists to flee. 

The question now is on how, when and with what means Syria is to be rebuilt. For many, it’s probably already too late. The shaky reconstruction of neighboring countries — such as Iraq or Lebanon — has convinced them that it will take far too long for Syria to return to normalcy or for potential investments to start generating returns to justify the risk of staying. They have left the country — or are planning to do so during the summer — and will probably not return anytime soon, leaving that possibility to their children. Investors in this category generally have most of their capital safe in bank accounts abroad and have limited fixed investment in Syria proper, while executives in top management positions will easily find opportunities in the Gulf and possibly further afield, in the United States or Canada.

For others, leaving is simply too costly and/or complicated. Investors that have put at stake much of their capital or savings in a project, bankers that have deployed across the country at the cost of millions of dollars, expatriates that have cut off almost all links with their previous host country, or people simply too attached emotionally to Syria, will try to stick it out as long as physically possible. Others will relocate to nearby places, such as Lebanon or Dubai, from where they will be able to continue to manage their investments, or temporarily find a new job in the hope that the conflict will end soon. 

It is this category of investors and highly qualified individuals that Syria will need to rely on when reconstruction begins. The size of their involvement and experience in the country, as well as their commitment to it, will be an invaluable asset when the time for rebuilding arrives.

Much, however, remains to be clarified before this takes place. Not only must the political crisis gripping the country end, the economic policies of the future must also take into account the calls for change that are coming from large segments of the population. In other words, investors must understand the underlying causes of the current uprising if they want to contribute positively to the new Syria. Syrians taking to the street are, in the words of a Syrian intellectual, from “the working world.” These are the people who have suffered in the last two decades from the rising income disparity, decreasing state investment in infrastructure and social services, and unregulated liberalization that has shed thousands of jobs.

While those with financial capital and wherewithal need to continue to lobby for their interests as investors and champion the cause of good governance and of a sound legal and business environment, they must also take into account the fact that the state must continue to have a role in the economy — albeit redefined — and that solidarity between the haves and the have-nots needs to prevail. This will be a requirement for Syria to change for good and for the stability they cherish to hold, whenever it may return. 

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