Above the vast expanse of the East African plains, signs of human life finally come into view. Hardly the congested maelstrom of its neighboring capital cities of Kampala and Nairobi, Juba spreads outwards in moderation, a seemingly sedate outpost along the Nile. As the plane circles, the thatched, pointed roofs of tukuls, mud huts not usually befitting a nation’s capital, appear, dotted among the city’s more robust structures.
After touching down, the weary arrivals pile into the stiflingly claustrophobic room that makes up this “international” airport’s baggage terminal and immigration hall. Some are returning home after years away, having left to escape the war and to seek out opportunity in neighboring Uganda and Kenya, or beyond, and anxiously await the reunion beyond these walls with their long-separated families. One man spots a woman outside — most likely his mother — and waves excitedly. She puts her hand to her face in exaggerated joy. Drawn back by the promises suggested by independence, and the prospect of lasting peace, what is actually to come for this man and other returnees, and for those who waited out the continent’s longest running civil war, is increasingly uncertain.
On the streets of Juba, and other semi-urban centers like Rumbek and Torit, the excitement in late 2011 remained palpable. The boyish face of John Garang, the founder of the Sudan People’s Liberation Army, which fought and won against Khartoum’s rule from the North, stares down approvingly from billboards throughout the capital, and t-shirts commemorating the July 9 day of independence are still very much the fashion du jour. But while nobody expected an easy transition to statehood for the world’s newest nation, just how calamitous an infancy it has proved to be has shocked those who for so long sponsored the idea of a sovereign South Sudan.
Nearly 40 years of civil war since united Sudan’s independence from British control in 1955 have naturally taken their toll — all the more so since one of the costs, and a principal motivation, of that guerilla war with the predominantly Arab North was a deprivation of development in the South. In terms of infrastructure, the country is virtually starting from scratch, with no homegrown electricity generation, 100 kilometers of paved roads in a country of approximately 660,000 square kilometers and no running water. In late fall of 2011, at the end of the rainy season, huge swaths of the country — nearly all of the northern half — were inaccessible by car, and even those routes with “safe passage” were a pock-marked mess, littered by the carcasses of trucks and vans left to rot after succumbing to one of many craters. For South Sudan, infrastructural development should be the number one priority of the new government, but the persistent threat of violent conflict both with Khartoum and among communities within the south is siphoning its resources and attention.
Cattle raiding — the practice of stealing another group’s livestock — is certainly not a new phenomenon among the country’s largely pastoral communities, but the scale of the raids and the collateral damage inflicted on civilians have escalated dramatically. At a certain point the term “cattle raiding” no longer does the violence justice; in December, a series of cyclical clashes between the Murle and Lou Nuer tribes in the largest and least developed state, Jonglei, prompted the release of an open letter by the Lou Nuer calling for the extermination of the rival group. In due course, “6,000 to 8,000” Lou Nuer youths brazenly attacked Murle villages over the span of several days and killed more than 3,000 people, according to a local commissioner (the figure has yet to be confirmed by the government). Despite tracking the column of fighters for weeks, neither United Nations peacekeepers, nor the SPLA (South Sudan’s army) soldiers deployed to prevent their approach were able to intervene, as the raiders’ forces dwarfed their own.
And particularly troubling in post-independence South Sudan are relations with the North, as the prospect for a return to war grows more imminent by the day. The two are linked by oil, a vital resource for both struggling economies, the majority of which lies in South Sudanese territory. Once extracted, however, it must pass through the North, up to Port Sudan. Since independence, the two sides have been unable to agree on a transit fee for the oil, leading Khartoum to seize shipments and Juba to halt its pumping altogether in January. And as the North suppresses an internal rebellion on its southern front, it has bombed the disputed town of Jau on multiple occasions, wounding several SPLA soldiers, as both sides mass forces along their respective borders.
This was not the narrative envisioned by John Garang, nor by those who danced in the streets on July 9 in cathartic jubilation. And it is certainly not the foundation of a new and better life envisioned by returnees — neither the more than 100,000 from the north, nor members of the diaspora who bring with them technical skills essential towards rebuilding a country. Blessed by largely untapped natural resources, South Sudan has the potential to be an economic powerhouse in East Africa, but the same conflict that has stunted its growth for decades continues to fester.
Back in the arrivals hall, the developmental depths out of which this nascent country will need to rise are on full display. The returnee jostles for position at the end of a conveyor belt, which unceremoniously dumps a suitcase to the floor while its owner scrambles to retrieve it, pushing people aside, before the next one falls on top. At the immigration desk, desperate hands wave passports at the two unfazed officials while a European NGO employee argues with another who has rebuffed her visa. It is not an easy thing to leave Juba Airport. Finally, passports stamped, bags collected and blood pressure high, the man steps out into the late morning sun of South Sudan, the world’s newest nation.
Las Palmas sprawls along the coast of the third largest of the Canary Islands archipelago, scattered in the warm seas just beyond the northwest coast of Africa. From a satellite’s eye view, the island is almost a perfect circle; Gran Canaria, with a surface area of 1,560 square kilometers, centers around its highest peak, the extinct volcano Pico de Las Nieves — the ‘peak of snows’ — at 1,949 meters. It’s a long way from Lebanon, and yet the charms are superficially similar: you can spend your days basking in balmy weather, draining the cocktail bars while admiring the snow-capped peaks above. It’s a superb destination for a Porsche press trip to test out their gleaming new 911 Carrera Cabriolet, but it also reminds you how pollution and traffic impede top-down driving in Beirut.
Until now, the choice between coupé and cabriolet might have been an agonizing one for someone considering dropping in the region of $100,000 (depending on customs fees) on the car of their dreams. Supreme performance from a coupé, or the style and freedom of a cabriolet with some compromises on the frame and engine? Now, a new intelligent lightweight design for the hood and all-aluminum frame for the body means that when the hood is up, the silhouettes of the coupé and the cabriolet are barely distinguishable. And, both of the 911 Careera Cabriolet and the sports version have the same engine as the 911 Carrera Coupé equivalent: 3.4 and 3.8 liter boxer engines, respectively, with 350 and 400 horse power. The driving power has been ratcheted up as well, with electro-mechanical power steering and, for the Carrera S, Porsche Torque Vectoring with differential lock featured as standard.
Foot to the floor
These features were amply put to the test spiraling up the sides of Pico de Las Nieves in a yellow Carrera S the morning after our arrival. The car, with its significantly reduced weight from previous models and torque of 390 Newton meters at 5,600 revolutions per minute, ate up the roads and cornered elegantly.
The fantasy trip came to an end on the sands of the Las Palmas autodrome. In this environment you really test the car, and the fact that these are seriously high quality racing sports cars comes to the fore. Handling them requires reaching top speeds of around 286 kilometers per hour and taking curves brutally fast, and after putting the pedal to the floor for two to three laps you have to cool the car down for one slow driving lap, a process that really drives home its racing credentials.
After honing my embrace of the car and witling down my lap time through the day, needless to say, I left Las Palmas with a smile on my face.
Inching along amid a cacophony of horns in one of Lebanon’s estimated 1.6 million vehicles leaves a driver with ample time for reflection. As the clock on the dash ticks past another hour and the feet maneuver endlessly from gas to brake, how the country reached this point inevitably comes to mind.
For the sixth year running the country is set to operate without a budget. The president has again broken his oath to uphold the constitution, which states a budget must be passed by the end of January.
This is beyond unfortunate. With a budget comes some sort of policy framework that, in theory, commits the government to put its money where its mouth is. What we have currently is the politically calculated calamity of treasury advances, a crude process where cabinet has to agree on every spending measure outside of the 2005 budget. In any case, hardly any money that came from the people that year, or any subsequent year, comes back to them through the budget. That’s because after the debt servicing is paid to the banks, the deficit of Électricité du Liban is covered and the salaries of the patronage apparatus (also known as the public sector) are paid, the state is already in a deficit.
Any further spending, with borrowed funds, lies solely in the hands of cabinet. In other words, the money borrowed on behalf of the public, that should be spent on the public good, becomes fodder for the overlords pulling the strings at the cabinet table in their petty battles and under-the-table deals. The fact that the funds of $1.2 billion agreed to by cabinet for new power plant construction is to be allocated from the next budget — regardless of how unlikely it is to manifest — and not done through a treasury advance, highlights how little intent exists in cabinet to actually implement reforms.
Thus no one should be surprised when they look out from the windows of their cars to find themselves locked tight in an inescapable labyrinth of metal, given the absence of government policy to reform public transportation. To say that we are approaching tipping point in terms of what our roads can handle would be tardy commentary — we are well past that point. Since our policy makers ceased producing budgetary policy, more than 500,000 cars have entered the country, with the current trend at around 100,000 cars every year. The traffic and the pollution can only get worse.
But traffic aside all these cars are, quite literally, starting to drive the economy and an increasing proportion of the job market. Already the value of the car imports totals some 4 percent of gross domestic product, which doesn’t help much given that this is money leaving the country, not staying in it to create employment. Then consider all the customs and fees, which account for another 4 percent of GDP, which people must pay to a government that does little for them in return. And since the years of economic growth were “jobless,” in the words of the last finance minister, many local private sector jobs are now being steered by those very same cars.
Figures relating to how many people are directly and indirectly employed in the automotive sector are sketchy, not least because a national labor survey has never been conducted. But the sprawl of the ‘car economy’ can easily be seen with just a glance at the countless mechanics in Goberi, Sarafand or on the road to Halba, or the armies of valet parking attendants and cabs in the capital.
With labor-intensive sectors such as agriculture in decline and the trade or services having a small labor component, the options left for gainful employment are hardly the professions that will produce a society that progresses beyond being passive consumers of imports, or one that has the political and economic infrastructure to build anything else. The longer we go without a shift in the financial dictates that rule the country, the more our job market and our economy will be skewed toward import-based sectors, rather than creating one that can compete productively on an international level.
Unless our financial policy makes an abrupt U-turn, we will continue to be driven mad by our politicians and, perhaps deservedly, ourselves.
Journey to the opening bell
Facebook recently announced that it is going public, in a move which would constitute one of the biggest offerings and tech initial public offerings in history, estimated to reach $5 billion. While dwarfing the $1.67 billion raised by Google in 2004, this news can only remind us of the buzz that surrounded Google, turning it into one of the fastest growing companies and most attractive places to work at.
All this ado about Facebook cannot but get us thinking about IPOs in our region, which have been relatively few and far between compared to most developed and emerging economies. Surely there are several challenges that stand in the way of regional companies wishing to go public, ranging from unfavorable regulatory and market conditions to lack of investor confidence in such times of political upheaval. However, there are several areas that a company can work on to prepare the grounds internally and thus improve its chances of carrying out a successful IPO.
It is true that no one can predict the volatility of the stock market or the investors’ mood; however, it has become widely acknowledged that communication is key to any successful organizational change, especially when it involves going public.
A well-established corporate culture is crucial to successful organizations. In fact, a corporate culture that all employees identify with is an enabler of their alignment around the company’s purpose, strategy and goals; it enhances productivity and increases their pride and sense of belonging to the organization.
Part of the family
But having a solid and well-established corporate culture becomes much more critical when a company ventures into an IPO. This is because when a company goes public, it is moving from being privately managed to becoming publicly transparent and accountable, thus welcoming a new stakeholder to its family: the shareholders. The way business is managed changes and thus requires the company to adopt new management processes that reflect best leadership and management practices. This places employees under scrutiny and pressure; they feel vulnerable and are reluctant to change. Clearly, all these adjustments put a strain on the corporate culture, which would need to be solid and resilient to smoothly navigate the bumpy road of an IPO. As a very recent example of this, Zynga, the world’s largest social gaming company behind the popular Farmville Facebook game, decided to go public and succeeded in raising $1 Billion when it first traded on NASDAQ in December 2011. However, the company’s shares went down by 5 percent soon after the launch and upon announcing first quarter results that were more or less in line with expectations the stock fell nearly 18 percent. One of the reasons according to experts was the company’s corporate culture. Employees describe the corporate culture as intense and data-driven, where objectives and key results are the basis for employee and staff evaluation, and where performance data are used to calculate hard work, thus creating an atmosphere of competition and even all-out war between colleagues and departments.
However, even having a strong corporate culture in place is not a sufficient guarantee that employees will remain on board during and after the IPO. Efforts should be put on internal communication to reassure employees that the change in the way business is conducted and the addition of new business partners does not imply that their performance will be questioned or that the company will no longer value them. Communication efforts should strive to make employees feel proud of being part of the IPO adventure; they should feel part of a family rather than pawns manipulated by top management. Google understood that the reason behind its success is in attracting top notch professionals and young minds, and as such, its IPO letter started by “Our employees, who have named themselves Googlers, are everything,” putting the emphasis on the idea that going public will not change their corporate culture but rather reinforce it.
Returning to the Arab region, we note the large number of companies that have yet to institutionalize their corporate cultures, let alone establish strong and solid ones which could withstand the strains of an IPO. With a vast majority of companies being family-owned businesses, family feuding, nepotism and emotions remain at the center of management practices. Non-family employees many times feel like outsiders and thus lose the motivation and desire to work, never mind getting into a long process of an IPO that will bring new stakeholders on board and make the family members richer. There is no secret ingredient in the recipe of a strong corporate culture. However, there are key drivers that any organization should have in order to build or reinforce a distinctive yet common corporate culture; this should start by gathering all employees around the same mission, vision and values of the company and establishing a two-way communication whereby leadership would make sure to listen to concerns, address doubts and acknowledge achievements.
Weaving a tale
The second success factor that can go a long way in helping ensure a smooth IPO is elaborating a story or narrative around the company, one that would go beyond business and profit to emphasize its achievements, namely in terms of how it touches the lives of its various stakeholders. Who can forget the story of Facebook that has been turned into an award-winning movie? It would be a generalization to say that behind every successful company that went public is the story of a young student with a genius idea who tried to make it happen from his bedroom.
However, Steve Jobs, Larry Page, Sergey Brin and now Mark Zuckerberg are the first names that come to mind, when we think of successful companies that went public. In fact, the common ground between them is that all these high-listed companies were first start-ups whose founders wanted to make the lives of people easier through a certain service or product. Sometimes these stories might be far from reality, such as the story of e-bay founder Pierre Omidyar who started the e-shop concept following a discussion with his wife about how to acquire PEZ-dispensers. The anecdote might not be true; however, it succeeded in attracting potential investors, increasing familiarity with the company, allowing the public to relate to its founder, while downplaying the fact that he was already a multi-millionaire when he created the company.
As such, it is important to create a story around the company, whether it is centered on its founding and evolution, its services and products, or the noble cause that it espouses, as it will help generate considerable brand awareness and often loyalty, allowing stakeholders to identify with it and providing it with significant communication mileage. But most importantly, a story helps establish an emotional bond and paint a human side to a company, particularly at a time when the schism between the corporate world and the rest of society is growing wider. A feel-good, inspiring story encourages people to often unconsciously root for the company over others, providing it with a competitive edge that can translate into a solid goodwill bank that might shield it in times of crises and positively impact its bottom line.
When we think about IPOs, the first thing that comes to mind is a number in billions, a ringing opening bell at Wall Street, and a success story of entrepreneurship. This entrenched image could very well be duplicated in the Middle East, especially since the region is now becoming an investment hub with many countries well on their way in carrying out capital market reforms and instituting regulations that are in line with international practices. With communication as a pivotal enabler behind the success of any IPO, regional companies should start by cementing their corporate cultures and creating an inspirational story behind their success. Who knows, the next Facebook or Google might just be around the corner.
"We salute the Free Syrian Army,” reads a banner in Badawi, a poor suburb of Tripoli, where the Lebanese flag is about as common as the three-starred flag that adorned flagpoles in Syria prior to the 1963 Baath Revolution. Further down the road, a billboard heaps praise upon the “Islamic” revolutions in Tunisia, Egypt and Yemen.
Tripoli and the north of Lebanon are increasingly entangled in the Syrian quagmire, which could have dangerous implications for the future of Lebanon as a whole. As the Syrian conflict grows increasingly violent, Tripoli is no longer merely a safe haven for civilian refugees. It is also a base for the FSA to treat its wounded, as well as pick up arms and supplies. Syria is not at all popular in the predominantly Sunni city. Most inhabitants have not forgotten the heavy-handed presence of the Syrian army during and after the Lebanese Civil War. Many people were killed, or “disappeared”, and members of the Islamic movements bore the brunt of Damascus’ wrath.
Today, seeing their Muslim brethren being killed in Syria, they smell revenge. Mohamed, a Badawi shopkeeper, armed with a walkie-talkie and a handgun under his shirt, explained how cross-border activities between Lebanon and Syria concerned people, medication and arms. He complained about inflation: three dollars for a bullet and up to $2,000 for an AK-47. “Thank God, we are supported by the Gulf,” he said. The financial and logistic support for the Syrian uprising by countries such as Qatar and Saudi Arabia is no longer a secret. British daily The Times on January 22, for example, reported that Qatar and Saudi Arabia were beginning to fund the Syrian National Council (SNC) and armed groups fighting the Assad regime. On paper, the SNC is an umbrella organization for Syrian opposition groups. In reality, it is dominated by the Muslim Brotherhood, while there appear to be sharp internal divisions. Such growing pains are of course only normal for an organization less than a year old.
On January 26, the SNC published a one-page ad in Al Hayat thanking Saudi King Abdullah for his generous support; the 87-year-old monarch as a symbol of change in the age of Twitter and Facebook — who could ever have thought? Other reports are even more worrisome. On February 12, Al Qaeda leader Ayman al-Zawahiri urged Muslims in Lebanon, Turkey and Jordan to join the struggle in Syria. A day earlier the Iraqi vice-Minister of Interior, Adnan al-Assadi, claimed that Iraqi arms and Jihadists were crossing the western border.
While most mainstream media continue to broadcast a black and white picture of “the people vs. the power,” the mood of Syrian artists, students and intellectuals in west Beirut’s trendier bars is changing. They feel “their” revolution is slipping out of their hands.
“The regime has committed too many crimes — we want it to fall,” a student from Homs summed things up. “Yet you cannot deny that the opposition is mainly Sunni. The religious minorities and Kurds are hardly part of the uprising. If the majority of the Syrian people vote for an Islamic government, I think we should give it a try. But seeing the way things are going, I fear a civil war.”
If that were to be the future for Syria, then Lebanon would be foolish to think it can remain unaffected. The recent deadly clashes between pro and anti-Syrian factions in Tripoli were but a warning shot. The suggested solution, to turn the city into an arms-free zone, was well-meant yet laughable. No sane Lebanese person would dare uphold that as a feasible option. The problem with arming (radical) Sunni groups in Afghanistan, Iraq, and even Libya, has proven to be an unpredictable affair, as they often have their own agendas. Lebanon should know, following the pitched battles with Sunni fundamentalists at Diniyeh and Nahr Al Bared. Ask a shopkeeper, such as Mohamed, what he thinks should come next and the answer is truly frightening. According to him, the Shia simply are not Muslims and it is only thanks to Hezbollah that Assad is still in power. Therefore, following the fall of the latter, it should be the former’s turn. “If we had not had a civil war in Lebanon, Lebanon would today be Palestine,” he said. “That’s why we need another civil war to get rid of Hezbollah, so Lebanon is not an Iranian satellite state.”
There is only a passing mention of one of the Middle East’s tax havens, Dubai, and no mention of the other two contenders, Bahrain and Lebanon, in Nicholas Shaxson's book “Treasure Islands: Tax Havens and the Men Who Stole the World.”
This is a shame as there are plenty of juicy tales to tell about shell companies, dodgy accounting and suitcases crammed with petrodollars, but there is a good reason for the lack of coverage. The Middle East three are small fry in this business, with more than half of world trade passing through tax havens, while in 2010 the balance sheets of small island financial centers alone were conservatively estimated by the International Monetary Fund to be worth a staggering $18 trillion — just less than a third of the world’s gross domestic product.
Compare the Cayman Islands — population 56,000 — with Lebanon and Bahrain; in 2008, the Caymans had $2.2 trillion in equity liabilities (deposits and other obligations) and $750 billion in portfolio assets, while in 2010 Lebanese bank assets were $133 billion and Bahrain’s $210 billion. Likewise, the Dubai International Finance Center is a featherweight compared to the Dublin International Financial Services Center, which hosts 8,000 funds with $1.5 trillion in assets. So, while the reader will find nothing about the 2008 law that enabled Lebanon to become an offshore center (there were 5,983 registered companies in 2010), “Treasure Islands” gives a full account of how tax havens developed worldwide, the back-room deals that prompted legislative change, and the problems that tax havens cause.
At this point, a definition of “tax haven” is worth making, for as Shaxson notes, there is little agreement. Shaxson’s definition is a broad but salient one, with a tax haven a “place that seeks to attract business by offering politically stable facilities to help people or entities get around the rules, laws and regulations of jurisdictions elsewhere.” This can refer to the obvious, evading tax, to more complex financial dealings such as repackaging capital and trade miss pricing, to usury specialties and lax corporate governance laws. What all havens, onshore and offshore, have in common is “secrecy in various forms,” while a giveaway is whether “the financial services industry is very large compared to the size of the local economy.” A further common marker is very low or zero taxation rates, which are typically offered to non-residents, whereas residents are taxed.
But these jurisdictions are not just obscure tropical islands, they are the renowned financial centers of the world: the United States, Luxembourg, Switzerland and Britain. Cumulatively, the biggest player is Britain, with its Crown Dependencies and overseas territories (Guernsey, Jersey, Cayman Islands, the British Virgin Islands etcetera), plus the former empire (Hong Kong, Singapore etcetera) accounting for 37 percent of all banking liabilities and 35 percent of all banking assets on the planet. If the City of London is added in, at 11 percent, the British group has almost half of the world’s banking assets. Like the rest of the globe, the Middle East is linked to these tax haven networks, as a cursory glance through company registries will highlight a listing of places such as Panama, Cyprus, the Bahamas and so on. According to research published in 2011 by Global Financial Integrity (GFI), four Arab states were in the list of the top 10 countries worldwide with the highest illicit financial outflows between 2000 and 2009: Saudi Arabia with $380 billion, the United Arab Emirates with $296 billion, Kuwait with $271 billion and Qatar with $130 billion. The GFI notes that the prominent destinations of this capital flight were fiscal paradises and the interconnected global financial centers.
Curbing tax havens is a pressing concern, as they deprive countries of billions of dollars in tax revenues as well as the capital available for lending, and played a major role in triggering the financial crisis. Shaxson offers some solutions, but taking on tax havens and their clientele incurs serious opposition. Some two-thirds of global cross-border trade happens within multinational companies — the majority of which utilize tax havens — while 99 of Europe’s 100 largest companies use offshore subsidiaries, with the largest users being banks.
While the reader is left with a degree of despondency given how intrinsically important tax havens are to the global financial system, Shaxson has done an invaluable service by making the public aware how rotten to the core it truly is.
The prospect of a war against Iran has been on the cards for decades. Since 2005, innumerable media reports have proclaimed that war is imminent, and this year will be the year it will happen. Think tanks, war strategists, risk consultancies and the various militaries have all compiled papers on how a conflict in the Gulf could play out. The headline of a 2009 article on the website of the United States Army sums it up: “Future Gulf War: Arab and American Forces against Iranian Capabilities.”
What is fundamentally different now is that there has been a sustained covert war by unknown actors against Iranian nuclear facilities and scientists over the past few years — from scientists killed by car bombs on the streets of Tehran to mysterious “accidents” and cyber attacks at nuclear facilities — and that an economic war has essentially been declared through the heightened sanctions by the US and European Union (EU) in recent months.
Crucially, the oil sanctions, meant to hit Iran where it hurts given its budgetary reliance on hydrocarbons, have removed a major logistical obstacle to conflict, in that the EU, which imports 4 to 5 percent of its oil from Iran — some 600,000 barrels per day (bpd) — will not have to scramble for alternative energy sources in the advent of war; they are already doing so now.
While the sanctions are to go fully into effect by July, countries are already starting to abide by the decision; Britain, Austria, Poland and Portugal, for instance, cut their imports of Iranian crude to zero in the third quarter of 2011. Iran unilaterally halted exports to France and Britain last month and most international oil companies, with the exception of Asian firms, have also pulled out of Iran to abide by the new sanctions.
The US has not imported Iranian oil since the overthrow of the Shah in 1979, and its reliance on Middle Eastern oil is the lowest it has been in decades. From 2005 to 2011, the US’ overall oil imports have fallen from 60.3 percent of consumption to 47 percent, while from the Persian Gulf it has dropped by 26.7 percent to 18 percent of total imports by 2011, according to the US’ Energy Information Administration (EIA) figures.
But with the 30km-wide Strait of Hormuz the conduit for more than 20 percent of the world’s oil and 40 percent of traded oil on the markets, it is essential to the global economy that this oil keeps flowing. With almost 17 million bpd passing through the passage in 2011, the Iranians’ threat to block the Strait is taken very seriously. As oil expert Daniel Yergin notes in “The Quest”, his recent bestselling book: “the Strait is the number one choke point for global oil supplies.”
It has been a long-term goal of the US to ensure the Strait remains open, spending an estimated $6.8 trillion (including baseline costs such as training, pensions, long-term debt repayments and military base usage globally connected to the Gulf) between 1976 and 2008 projecting military force in the Persian Gulf, according to research by Princeton’s Energy Policy department, averaging $492 billion annually between 2003 and 2008.
The US imported 663.2 million barrels from Saudi Arabia, Iraq and Kuwait in 2011. Through a rough calculation for 2011 using the five year annual average calculated above — $492 billion divided by 663.2 million barrels per year (b/y) — the US is paying $742 per barrel to ensure that this oil reaches its shores. When taking into consideration the 6.2 billion b/y that passes through the Strait annually, it is costing the “the world’s policeman” $79 a barrel to keep itself and everyone else in Gulf oil.
The US Department of Defense’s January paper “Sustaining US Global Leadership: Priorities for 21st Century Defense” states, “US policy will emphasize Gulf security, in collaboration with Gulf Cooperation Council countries when appropriate, to prevent Iran’s development of a nuclear weapon capability and counter its destabilizing policies. The United States will do this while standing up for Israel’s security and a comprehensive Middle East peace.” The recent build up of naval activity can therefore be interpreted as the US reasserting its military dominance over the Gulf. But with the oil supplies for the main cheerleaders for confronting Iran — the US, EU and Israel — largely cushioned to any disruptions in the Strait (not least due to massive stockpiles in the US and EU), this has, more than ever, helped pave the way for the possibility of war.
Starving Asia
For Asian countries the situation is far more serious. Three-quarters of the Gulf’s oil exports are destined for the East; the closure of the Strait or a Gulf conflict would effectively starve Asia of energy, which would have serious economic ramifications regionally and globally. How to placate China, Japan, South Korea and India has therefore been a stumbling block in the West’s strategy to isolate Iran. Yet there is more at stake than energy imports. Russia and China were among the nine nations (out of 35) that voted against the International Atomic Energy Agency’s (IAEA) Iran file in November which said the Islamic Republic had carried out activities “relevant to” acquiring a nuclear weapon. While Iranian and Gulf energy supplies were a likely factor behind China’s “no”, Beijing is officially opposed to nuclear proliferation and has adopted a “studied neutrality” on Iran. China is concerned with US encroachment in what it perceives as its own back yard, according to Kerry Brown, head of the Asia Programme at the Chatham House in London. He adds that there is a deep conviction in China that American policy in the Gulf aims to keep Chinese interests at bay, causing the country to feel increasingly contained. Furthermore, by controlling the Gulf, the US is able to use energy as a bargaining chip with China and other Asian countries.
“Asian demand is rising exponentially; the US having oversight of the Persian Gulf means an inside track when it comes to the Asian powers, and a prize the US is not going to give up like Britain following the 1958 Suez Crisis; the US has learned its lessons,” said Professor Anoush Ehteshami, head of the School of Government and International Affairs at Durham University in England. “Indicative is the US is buying less oil from Saudi Arabia than in the past 20 to 30 years but the relationship is stronger than ever.”
Annoying the neighbors
The formidable Russian bear has been vexed and unsettled by some US regional strategies, facing encroachment in Eastern Europe from NATO’s planned deployment of a missile defense system, and in Central Asia from the large US military presence in Afghanistan. While Russia does not rely on Gulf oil and would stand to gain from rising oil prices upon the closure of the Straits, regime change in Tehran would equal the loss of a geo-strategic and non-aligned partner, and open the way for Russia to be circumvented as an energy corridor to the Caspian Sea and Central Asia, home to 48 billion barrels of oil and 449 trillion cubic feet of natural gas, according to statistics from BP.
Such a scenario would likely raise the hackles of Moscow and Beijing alike. Their grievances would only be compounded by their strategic setbacks in Libya where they curried particular favor with the former Gaddafi regime, and the current risk, especially to Moscow, of the fall of Bashar al Assad. Already the Russians have lost $4.5 billion in weapons contracts in Libya, according to the Moscow-based Center for Analysis of World Arms Trade (CAWAT), while $18.8 billion worth of contracts with Chinese companies are now in jeopardy, according to official Chinese statistics. Furthermore, the Russians could have already lost $13 billion from the effect of a United Nations arms embargo on Iran according to CAWAT, and face billions in losses from cancelled weapons contracts with Syria where it has already invested more than $20 billion in the infrastructure, energy and tourism sectors, according to the global analysis and advisory firm Oxford Analytica. That’s enough to make any bear irate enough to start a fight, and arguably the main reason why there is a lot more at stake than just the flow of oil out of the Gulf being interrupted.
The annual meetings of the International Monetary Fund and World Bank offer a relatively informal atmosphere for finance ministers, central bank governors and private sector executives to discuss the previous year and set a direction for the next. In Istanbul last month, the meetings reviewed a year of economic turmoil and vast change in government policies. Representatives from the Middle East recalled that the 2008 annual meetings in Washington occurred in a week when crude oil prices dropped 17 percent, the United Arab Emirates federal government guaranteed bank deposits and intra-bank lending and the Saudi stock exchange dropped to their lowest level in four years.
This year’s affair was far calmer. The broad consensus in Istanbul was that the worst was over and that the Middle East had survived the global crisis better than most of the world. Lebanon and Saudi Arabia were praised by many, including Mohsin Khan, the former regional IMF chief, for their conservative banking policies. “Both countries didn’t allow their banks to hold structured products, and this was a very smart move,” he told me. But whatever the successes they may claim for the past year, representatives in Istanbul acknowledged that major challenges remain, especially over unemployment and poverty.
The region already has relatively high jobless figures. The World Bank projects unemployment will rise by 25 percent in 2009 and 2010 in the Middle East and by 13 percent in North Africa, despite regional growth second only to Asia.
“The message, globally, is that, yes, there are signs of recovery, but it [the situation] hasn’t settled deeply,” said Shamshad Akhtar, the World Bank vice-president for the Middle East and North Africa (MENA). “We already had 20 million people unemployed [in MENA], and we have new entrants to the labor force [due to high population growth], so we have a problem.” The IMF’s Regional Economic Outlook, launched in Dubai on October 11, projects regional growth will fall from 5.4 percent in 2008 to 2 percent in 2009, before rebounding to 4.2 percent in 2010. A particular danger is that a disproportionate number of people, especially in Egypt and Morocco, live just above the $2-per-day income threshold for poverty, meaning the region cannot afford complacency over joblessness. This has been the major factor behind the World Bank’s increased lending in MENA from $1.8 billion in 2008 and 2009 to over $3 billion in 2009 to 2010. “Demand is steep,” said Akhtar. “Our clients need [to finance] reforms – and not just at the macro-level. Countries want to strengthen their financial structures, they want more microfinance. They want affordable mortgages and pension reform. They want to restructure social safety nets.”
The World Bank’s 2009: Economic Developments and Prospects, launched in Istanbul, drew attention to the opportunity presented by the economic crisis for governments to “ease infrastructure bottlenecks and restructure ineffective — yet expensive — subsidies programs.”
Iran is the clearest case, with around 30 percent of GDP going into subsidies. Egypt’s food and energy subsidies are around 30 percent of government spending and 10 percent of GDP, while in Morocco 90 percent of subsidies go to groups other than the poor.
At the macro-management level, the annual meetings generally endorsed the region’s approach to the economic crisis, although there was also a clear sense that governments had much left to assess in their performance.
The region’s monetary reaction to the crisis was “unprecedented,” especially in guarantees to banks, explained Khan, now senior fellow at the Peterson Institute for International Economics in Washington. “Back in 2007, there was a lot of worry about the inflation rate. There was talk of reining in monetary expansion, the revaluation of exchange rates…that has changed.”
Governments, much like in developed countries, have lowered interest rates as inflationary pressures have eased. Although inflation is considered a danger in Egypt — where the IMF projects a rise to 16.2 percent in 2009 from 11.7 percent in 2008 — representatives at Istanbul agreed it would not become a regional issue in the near future. Their greater fear is that the global economic recovery could falter and depress the price of oil.
In the Gulf Cooperation Council, fiscal policies — especially with the vast reserves of Abu Dhabi and Saudi Arabia — have been at the forefront of the response to the downturn. But many in Istanbul pointed out that fiscal stimuli have been less innovative than monetary changes, as several state infrastructure projects in the Gulf are already in the pipeline.
The shadow of politics, as ever, loomed over discussion at the annual meetings of the regional outlook. Both Saudi Arabia and the UAE moved quickly to squash a poorly-sourced story in The Independent that secret meetings were underway to abandon the dollar as the currency in which oil contracts are made.
But their anger at the report reflected a sense that the region can ill afford any further disruption — and that any serious sharpening of tensions, especially over Iran, could quickly upset a mood of cautious optimism.
GARETH SMYTH has reported from the Middle East since 1992, mainly for The Financial Times
“Looking at the present situation in the Eurozone area one has to be more optimistic than one would have been six or seven months ago.”

“There will be no more ‘Kodak moments’ — after 133 years, the company has run its course.”

“Our wish and hope is [that] we can stabilize this oil price and keep it at a level around $100.”

“We want to be number one.”

“This battlefield is not limited by borders; it is fought behind the scenes. You can’t see it and blood isn’t spilled, but there is a battle in new and developing worlds.”

“We expect to increase revenues from the region this year… There are very few places in the world today [where] I can … [readily] write a big cheque and this is one of them.”

“Right now, the US Congress is considering legislation that could fatally damage the free and open Internet.”

“If the content industry would like to take advantage of our popularity, we are happy to enter into a dialogue. We have some good ideas.”

“We are confident that the privatization of the stock exchange will be of a great benefit to Kuwait’s economy, investors and the listed companies.”

“We will have a partial managed float, allow the rate to be determined by the market and intervene when necessary.”

RBS closing Middle East M&A arm
Royal Bank of Scotland, majority owned by the government of the United Kingdom, is in talks to sell its Middle East merger and acquisition business as part of a global restructuring at the bank. RBS did not give a timeframe for the sale or details on the possible buyers. RBS is currently working on four M&A deals in the Middle East, which include the sale of 50 percent of Saudi Arabia-based Aujan Industries to Coca-Cola for $980 million, and aims to close these deals in 2012. The exit by RBS from the region follows moves by other investment banks such as France’s Credit Agricole, which closed its regional offices for Middle East M&A and relocated the business to Paris. Lloyds Banking group, another UK bank, is in talks to close down its operations in the United Arab Emirates. Several European investment banks struggling to cope with the European sovereign debt crisis are looking to exit non-core businesses such as those in the Gulf region.
Kuwait privatizes bourse
Kuwait has hired British multinational bank HSBC to help with the privatization of its stock exchange, the third largest by market capitalization in the Gulf Cooperation Council, after Saudi Arabia and Qatar. The privatization plan, outlined in the new Capital Markets Authority (CMA) law, calls for an initial public offering of 50 percent of the stock exchange to Kuwaiti citizens and an auction of the remaining 50 percent to listed companies, with a maximum ownership per listed company of 5 percent. Currently the Dubai Financial Market is the only publicly traded exchange in the GCC. The CMA law in Kuwait was established in March 2011, more than 30 years after the formation of the Kuwait Stock Exchange, and it is the first stock market regulator in the country. “This will make Kuwait one of the first countries in the region to privatize its exchange and we are confident that the privatization will be of great benefit to the Kuwaiti economy, investors and the listed companies,” said Abdullah al-Gabandi, head of the exchange privatization committee at the CMA.
News Corp invests in Dubai’s media
News Corp, which is at the center of a phone hacking scandal in the United Kingdom, wants to boost its presence in the Middle East media industry. It is acquiring a minority stake in Dubai-based MOBY Group, the largest media company in Afghanistan and owned by the Mohseni family. Under the terms of the deal, News Corp gives up its 50 percent ownership of Broadcast Middle East, a Farsi-language television company owned by both News Corp and MOBY. In exchange, News Corp receives a minority stake in MOBY. No financial details were provided. News Corp already has a solid presence in Middle East media through its 15 percent stake in Rotana Media Group, majority-owned by Saudi billionaire Prince alWaleed bin Talal. “Merging our Farsi joint venture into MOBY allows us to expand our activities with what is surely one of the most dynamic and exciting media businesses in emerging markets anywhere,” said James Murdoch, deputy chief operating officer at News Corp.
Knickers in a twist
Kuwaiti retailer Alshaya, one of the largest retail companies in the Middle East, invested in struggling United Kingdom lingerie company La Senza by acquiring 60 of its domestic stores as well as the brand in the UK, from KPMG the administrator of the now bankrupt chain. The remaining 84 stores and 18 concessions were shut down. La Senza was owned by private equity firm Lion Capital, which acquired it in 2006 from Theo Paphitis, famous for his BBC business investment show “Dragons’ Den”. Alshaya, which operates several British retail brands such as Debenhams, Mothercare and Next, intends to invest $156 million in the business. It already works closely with Limited Brands, the United States-based owners of the lingerie brand through franchise agreements for the Victoria’s Secret, Bath & Body Works and La Senza brands. The stores in the Middle East will not face closures as Limited brands confirmed that “our businesses in other territories, including the Middle East, is [sic] not impacted in anyway and it is very much business as usual.”
Qatar goes nutty
Al Rifai International Holding, a Lebanese based manufacturer of nuts, has sold a 15 percent stake at an undisclosed amount to Qatar First Investment Bank (QFIB), a Doha based Islamic investment bank established in 2009. Al Rifai sells nuts, kernels and Middle Eastern delicacies throughout the Middle East and Europe and its sales in 2011 grew by 50 percent. QFIB’s move is its first into the food and beverage industry and it provides the bank with access to new international locations. “From the outset, our strategy was to focus on sectors that benefit from key drivers of economic change,” said Emad Mansour, CEO of QFIB as he expects the fast growing global savory snack market to reach $85.4 billion in 2012. “The partnership will also allow us access to multiple sources of funding and risk mitigation tools, thus helping our group implement and further develop its growth and improvement plans,” said Mohammad Rifai, CEO of Al Rifai. The holding previously raised $15 million in September 2010 through a private placement led by MedSecurities, a subsidiary of BankMed.
Lebanon’s risky debt
The cost of protecting against default on Lebanon’s debt rose further in 2011 as spreads on the country’s five-year credit default swaps widened by 150 basis points (bps) last year, compared to only 28 bps in 2010, and ended at 447.5 bps according to CMA Datavision, a CDS and bond-pricing firm. The widening of the spreads in 2011 mainly occurred in the first two quarters of 2011 due to the turbulent political situation in Lebanon and revolutions that shook the Arab world. The spread performed better in the fourth quarter relative to the rest of the year as it only widened by 17.8bps. The worst performing countries in this quarter were Greece, with spreads widening by 57 percent, followed by Slovenia at 46 percent, and Egypt at 35 percent.
A binary battle at the bourse
Unidentified pro-Palestinian hackers attacked the websites of the Tel Aviv stock exchange and El Al Israel Airlines, as well as the marketing websites of three banks (First International Bank of Israel and two subsidiary banks, Massad and Otzar Hahayal). Stock trading and flights were unaffected. The hacker group, which goes by the name “Nightmare”, warned of an impending attack the night before the hacking through an email to Ynet, a popular Israeli news website. Ynet reported that the email was sent by OxOman identifying himself as a Saudi hacker who has also exposed the numbers of thousands of Israeli credit cards in recent weeks. In retaliation, Israeli hackers calling themselves IDF team, named after the Israeli Defense Forces, attacked the website of the stock exchanges of Saudi Arabia and Abu Dhabi. Both exchanges, however, denied the claims that their sites had been attacked, with Abu Dhabi blaming the slowdown of its exchange on technical faults. “If the lame attacks from Saudi Arabia will continue, we will move to the next level which will disable these sites longer term,” the IDF-Team wrote. “You have been warned.”
Lebanese dynasties among the region’s billionaires
The Lebanese Hariri and Hayek families made it to Arabian Business’ list of top Arab 50 billionaires. Saad Hariri, former prime minister of Lebanon, was ranked 28th richest Arab, down one spot from 2010, with an estimated fortune of $3.8 billion, up from $3.7 billion in 2010. His older brother Bahaa is ranked 32nd, up seven places from last year with an estimated wealth of $3.35 billion, up from $3 billion in 2010. His younger brother Ayman also made the list, ranked 36th, up from 44th place in 2010, with an estimated fortune of $3.15 billion, up from $2.4 billion last year. The two other Lebanese on the Arab rich list, Nick and Nayla Hayek, are newcomers to the list and amassed fortunes running Swatch group, the world’s largest manufacturer of watches. They ranked 38th place with a fortune estimated at $3.1 billion.
Kafalat loans down 3 percent in 2011
Kafalat loans, extended by commercial banks to small and medium enterprises and supported by the Lebanese government, decreased by 2.6 percent in 2011 to reach $165 million. The number of loan guarantees amounted to 1,272 in 2011, down from 1,404 in 2010, while the average loan size increased to $129 in 2011 from $120 in 2010. The agriculture sector received the most Kafalat loans as it had 41 percent of the total guarantees. It is followed closely by the industrial sector at 38 percent. Tourism received 17 percent of the total Kafalat loans.
