Executive Magazine

An arranged marriage

by Paul Cochrane April 3, 2011

written by Paul Cochrane

The United States Department of the Treasury’s designation in early February of Lebanese Canadian Bank (LCB) as a “financial institution of prime money laundering concern” hit the bank like a missile strike. And, as so often is the case with American ‘operations’ in the region, the collateral damage was high.

Immediately blacklisted the world over and unable to deal in US dollars, LCB was “crippled,” in the words of a source close to Banque du Liban (BDL), Lebanon’s central bank. The Lebanese banking sector went into damage control mode, concerned it could be part of a wider targeting of the industry, with the designation the worst blow to the sector’s reputation since 2000, when Lebanon was placed on the Non-Cooperative Countries and Territories list of the Financial Action Task Force (FATF), a Paris-based inter-governmental body set up to promote the adoption of anti-money laundering and counter-terrorist financing regulations (it was taken off the list in 2002).

The governor of BDL, Riad Salameh, flew to Washington to discuss the charges, where the US reassured him that the measure was not politically motivated, despite LCB’s alleged connection with Hezbollah, which the US designates as a terrorist organization. Nor, he was told, was it related to the fact that Lebanon’s next government will be led by the Hezbollah-backed March 8 coalition.

“The designation of LCB made people scared,” said the source close to BDL. “The Treasury assured BDL that they didn’t target the Lebanese banking sector and said Lebanon is a friendly nation. The US says it is not a political act but the timing of the designation is a bit precarious. I personally believe politics was involved. [But] I’m not saying the evidence is unfounded — the US has promised to provide information — as there is no smoke without fire.”

Rumors began to circulate that three to four other Lebanese banks were in the sights of the Treasury’s Financial Crimes Enforcement Network (FinCEN). “This is a completely unfounded rumor, and Salameh said this publicly. He told us that during the meeting [in Washington] this was not mentioned,” said Makram Sader, Secretary General of the Association of Banks in Lebanon (ABL). LCB’s designation came as a surprise to the ABL. “It is a specific case but really surprised us as Lebanon is dealing with the world through a large network and with over 250 correspondent banks,” he said.

The designation drove LCB’s reputation into the gutter and stimulated a limited run on the bank by depositors. The designation is just a first step before further action against the bank is taken, with LCB allowed, under US law, 60 days to appeal, which they are doing as the management have denied any wrong doing.

But the damage has already been done; to stave off a crippling run on the bank, LCB had to act fast. “LCB’s shareholders decided to sell, as they couldn’t deal in US dollars, which killed the bank. It wasn’t a decision by the US or BDL,” said the source.

With BDL against the acquisition or merger of any of the top three Alpha banks — Bank Audi, BLOM Bank or Byblos Bank — with LCB, for fear that it would create a ‘super-bank’ and kill competition in the market, four other banks sought LCB assets and liabilities. Société Générale de Banque au Liban (SGBL) made the winning offer and, as Executive went to print, SGBL and LCB representatives were in Paris, along with members of BDL and SGBL’s part shareholder, French bank Société Générale, to hammer out a deal. The consolidation will boost SGBL from the 10th largest bank in Lebanon to fifth.

The charges

In the words of US Treasury publication The Federal Register, “FinCEN has reason to believe that LCB has been routinely used by drug traffickers and money launderers operating in various countries in Central and South America, Europe, Africa and the Middle East; that Hezbollah derived financial support from the criminal activities of this network; and that LCB managers are complicit in the network’s money laundering activities.” In the notice, FinCEN lays out a case stating Lebanese-Colombian citizen Ayman Joumaa, who was named a “specially designated narcotics trafficker under the Foreign Narcotics Kingpin Designations Act on January 26, laundered “as much as $200 million a month” from cocaine sales. The proceeds were ‘cleaned’ through foreign exchange houses linked to Lebanon, LCB and its Gambian subsidiary Prime Bank, as well as through Trade Based Money Laundering (TBML) activities involving used car dealers in the US and the trading of consumer goods.

FinCEN then laid out LCB’s connection in rather unclear language and dubious math: “With respect to the exchanges and companies related to Ayman Joumaa, numerous instances indicate that substantial amounts of illicit funds may have passed through LCB. Since January 2006, hundreds of records with a cumulative equivalent value of $66.4 million identified a Lebanese bank that originated the transfer; approximately half of those were originated by LCB, for a cumulative equivalent value of $66.2 million, or 94 percent, thus, indicating that LCB probably is the favored bank for these exchange houses, particularly in the context of illicit banking activity.”FinCEN did not reply to queries by Executive asking how, if $66.4 million is the total and LCB was the origin of half the transfers, this is equal to $66.2 million, or how the latter figure is 94 percent of $66.4 million.

With the BDL still to carry out an internal investigation, as it does not yet have the full American report, the details are still vague regarding the accusations of LCB’s possible money laundering activity or knowingly acting as a financial conduit for Hezbollah. The language within the designation (“may have”, “believed to be” or “probably”) is an indication of its ambiguity.

The bank has also been suspected through what is legally referred to as “guilt by association,” with LCB managers accused of having ties with Iranian officials through Hezbollah’s Tehran-based envoy Abdallah Safieddine. The bank is also implicated via a Lebanese shareholder in LCB subsidiary Prime Bank who is “known to be a supporter of Hezbollah.”An indication of the political motivations of the designation is the discrepancy between the punishments of LCB and Jordan-based Arab Bank, which was forced to pay $24 million in 2005 for allegedly inadequate controls against money laundering at its New York branch. “Why wasn’t LCB fined? They wanted the bank closed. It’s a wake up call for the Lebanese banking sector and the threat posed by Hezbollah,” said a senior compliance officer (CO) at a Lebanese bank who requested anonymity. “The US has the power to sanction a bank anytime and put anyone away. We’re helpless here and need to be very careful to protect the banking sector. I’d give up a suspicious customer, even if it lost millions to protect the bank.”

Collateral damage?

LCB is not the only financial institution to have been shaken by FinCEN’s designation; all Lebanese banks and foreign exchange houses’ relations with the US have been affected.

“The effect from American banks was bad, by two banks in particular; we were not allowed to send from a Lebanese exchange house to an exchange house anywhere via the US. They don’t want any payments from banks related to the exchange dealers. It has created panic and is putting exchange dealers out of business,” said the CO. “The US banks also don’t want us to deal with used car dealers. But they cannot penalize other banks for what happened or consider all transfers as suspicious,” the CO added. “Deal with us or not, period. The banking sector is not loose and American banks shouldn’t be scared of Lebanese banks; banks are cooperating and closing accounts with exchange dealers, even good exchange dealers.”

The FinCEN links LCB and Joumaa to foreign exchange dealers in Lebanon. But those interviewed denied involvement. “We don’t know Joumaa. We’re a Category A listed exchange company and don’t know him,” said a manager of Hassan Ayash Exchange in Beirut. “This designation against us is not right, from A to Z. I will of course appeal with a lawyer and provide all the documentation and transfer records.” Another exchange manager noted: “Hezbollah doesn’t need the money; it gets it from Iran. So why would they use my exchange? And if I have to close my company [because of the designation], Hezbollah will not look after me.”

Joumaa is also linked to Elissa Holding, based in downtown Beirut, which owns Phenicia Shipping, the Elissa Exchange bureau in Sarafand, near Saida and companies in the Republic of Congo and Benin. The Elissa Holding manager, who was not at the holding’s office on a visit by Executive, did not answer further calls. The US also labeled Caesar’s Park Hotel in Beirut, next door to Hassan Ayash Exchange, as a meeting point for money launderers and a front company.

Jalal Joumaa, general manager of Caesar’s Park Hotel, declined to comment on the issue or on whether he would appeal. The exchange houses, Elissa Holding and the hotel are still operating, with no apparent action taken against them by the Lebanese authorities.

Upgrading the law

Ayman Joumaa was publicly designated as a drug kingpin in late January, two weeks before LCB was labeled a prime money laundering concern; this ought to have set off warning bells at LCB’s compliance department, at exchange houses and with Lebanese regulators. If the FinCEN report is to be believed and Joumaa has links to LCB that stretch back to 2006, what it would suggest is that there are certain weaknesses in Lebanon’s anti-money laundering (AML) regime.

The BDL has said that, in line with recent US requests and following a mutual evaluation of the country’s AML regulations in 2009 by FATF’s regional body, MENA-FATF, it will upgrade procedures. Current proposed laws include cross-border cash regulations, declarations and disclosures, and the addition of another 10 predicate offenses to the current seven.

“The procedures also have to be more explicit on terrorist financing, as according to MENA-FATF they are not clear,” said the source close to BDL.

Lebanon is also being pushed to ratify the United Nation’s International Convention for the Suppression of the Financing of Terrorism (1999). That it has not shows there “is no political commitment, and this sheds doubt on how committed the government is to the whole process,” said the source.

The ABL, however, said it has been in favor of signing the convention since 2000. “Reputational risk is important to us and we will double and review the procedures, as the authorities are doing. And we will try to push and accelerate the introduction of new laws and regulations to fill all the gaps,” said Sader.

The designation of LCB has certainly been a wake-up call for Lebanese banks and how the sector is regulated. “Banks have learned a lesson, for example closing exchange bureaus because they believe, [as do I], that it has a lot of risk,” said the source. As to LCB’s guilt and whether the designation was a carefully timed political move, only time will tell. According to Sader, “LCB’s appeal could take months or years.”

April 3, 2011 1 comment

Comment

Secularism’s time to shine

by Sami Halabi April 3, 2011

written by Sami Halabi

During the rain and overcast last month, one would have been forgiven for thinking the masses of Lebanese reciting slogans skyward about independence, resistance, justice, arms, tribunals, truth and stability had been duped into believing that their approach to social and political discourse would make the sun come out and the sky turn blue. Instead, however, many Lebanese would do well to regard each day that passes as an opportunity lost to the dreary sectarian bickering of our politicians — the same ones we fought so ardently to elect.

That we Lebanese have mixed up our priorities is nothing new but that does not make it any less relevant or painful to watch. Foreigners marvel at how we put up with governments and parties that have, literally, no stated socio-economic policies, but instead spout vague dogmatic principles that change with the tide. And yet still, we wait for the call from our zaim to cast a ballot or carry a placard. Thankfully, events in the region have put things in perspective. No longer can we claim to be the vanguard of freedom and democracy in the Middle East. Indeed, the Lebanese pale into the shadows of apathy behind the uprisings of our Arab brethren elsewhere demanding free societies that value equality over political patronage and sectarian entitlement.

Of course, there are those who will make the excuse that Hezbollah’s weapons are the problem, but it’s not the weapons themselves that prevented previous governments from forming a national labor strategy to absorb the 15,000 graduates each year — many of whom eventually leave the country — or prevented us from reforming our public sector to properly provide basic services such as electricity, water and telecommunications. Rather, it is the constant employment of these weapons in the politics of fear that has led us to this point. The situation will persist as long as the discourse remains in its present absolutist form: that arms should only be under the purview of the state or that the weapons — with their ambiguous size, location and uses — provide better security than a national army subject to regional and international pressures and commitments.

While both of these arguments hold some merit, neither honestly portrays the whole picture. What neither side is willing to admit is that there is a solution to the problem that they effectively evade.

Israel is not the only reason that Hezbollah’s weapons continue to exist outside of sovereign authority. The history of the south and its majority Shia inhabitants is wrapped with mistrust of the state due to decades of disregard from the central government in Beirut, dominated by the Sunni and Maronite powers. The divide is not only over arms, but also provision of public services; the sectarian overlords who hold influence over that provision have used it to underpin their politics of “fearing the other,” thus conscripting loyalty within their community and preserving the status quo.

But over the last two months cries for toppling the sectarian regime have risen in Lebanon, with thousands marching through the streets in protest last month. While expression of this secular vein is not in itself new, its current manifestation is within, and propelled by, a regional context demanding of substantive change rather than a cosmetic rearrangement of the existing power structure. Those who benefit from Lebanon’s current social construct know their power would be threatened if reforms toward a secular system gained momentum, and that in a society built on the principle of equality the emotive force of their sectarian sloganeering would be rendered mute. Even the issue of Hezbollah’s arms would be tempered, as the associated paranoia over them would lose its confessional dimension.

For this movement toward change to gain critical mass, it will need to convince the skeptics, many of whom also support the end of the sectarian system but are wary of any new movement being co-opted by either side of the current religious and political divide. There are many other factors that will also determine the movement’s success, but one thing needs to be recognized: now is an historic opportunity to wake the Lebanese consciousness, for us to stop baying like sheep for leaders who only perpetuate our problems and to cast them from their thrones as we march toward a solution together.

Sami Halabi is deputy editor of EXECUTIVE Magazine

April 3, 2011 0 comments

Finance

Equities in times of upheaval

by Thomas Schellen April 3, 2011

written by Thomas Schellen

When the Egyptian Stock Exchange (EGX) finally resumed trading on March 23, six weeks after the resignation of President Hosni Mubarak, officials were pragmatic about the day’s 8.9 percent drop in the EGX 30 index. The gain of freedom far outweighed the economic cost of the revolution, interim EGX Chairman Mohammed Abdel-Salam told reporters.

It did not come as much of a surprise that Egypt’s benchmark index nosedived in the first 30 minutes of trading after the market’s revolutionary hiatus since January 24. A great deal has happened in those two months, during which the EGX lost just short of 40 sessions.

During the period of market closure in Cairo, the only evidentiary indications of how investors felt about Egyptian equities came from the trade of Global Depository Receipts (GDRs) of Egyptian stocks on the London Stock Exchange (LSE), where the handful of actively traded Egyptian GDRs dropped mightily.

Of 10 Egyptian GDRs on the LSE, six were active during the EGX closure, and four of those six are the country’s strongest companies by market capitalization. All six dropped between January 9 and March 21 — one telecom GDR and two financial stocks fell more than 30 percent apiece, Orascom Construction Industries and Orascom Telecom Holding lost 26 percent and 15 percent, respectively, but a cement scrip closed the period only 2 percent weaker.

At the same time, five other LSE-listed Arab GDRs with trading activity during this revolutionary period fell on both their home markets and, pronouncedly, on the LSE. Only one Arab GDR, of Lebanon-based Byblos Bank, gained on the LSE over the period.

In short, the Arab stocks with the guts to venture into international markets have not fared well during the revolutions. The benchmark indices of the Egyptian bourse and the Tunisian Stock Exchange (TSE), the countries hailed most for their roles in the “Arab Spring,” on March 29 closed 24 percent and 15 percent down when compared with the start of 2011, placing them at the tail end of global stock market performances in the year to date. Moreover (and partly explaining the incomparably poor performance of EGX and TSE), the exchanges of Egypt, Tunisia, Libya and Bahrain combined lost out on more than 90 trading sessions in the first quarter of 2011, with the young Libyan Exchange likely to be in limbo for many more weeks.

Investor behavior on Kuwait Stock Exchange
(January 1 to February 28, 2011)

Investor behavior on Saudi Stock Exchange
(February 2011)

Gulf Cooperation Council exchanges at the turn of February to March appeared bound for forbidding territory. Selling pressure drove the Saudi Stock Exchange (SSE) and Dubai Financial Market (DFM) benchmark indices to multi-year lows in the first few days of March, almost as though wealthy corporations and individuals had been spooked en masse by the prospect of radical change in power structures across the region.

Then, the whole mystifying decline went into reverse. The SSE’s Tadawul All-Share Index clawed back almost 10 percent in March to close the March 29 session within 2 percent of its index recording at the beginning of 2011. The DFM index gained 15 percent from March 3 to March 29.

When viewing performance of the most active Egyptian GDR on the London Stock Exchange, Commercial International Bank (CIB), in step with the popular unrest and political changes in the Middle East and North Africa this past quarter, it seems likely enough that the developments of politics and stocks were linked in obvious interactions. The ouster of Tunisian president Ben Ali, the day of rage on Tahrir Square, and the intensification of protests in the GCC at the end of February all meshed with periods of drops in the CIB price on the LSE, whereas Mubarak’s resignation was followed by a gain in the stock’s price.

Flight impulses are instinctual survival tools of a vulnerable being, and this quarter reminds us that the investor is as susceptible as any other. The intuitive response to first quarter disasters in 2011 was to sell. As the prime example of panic reaction, the Nikkei 225 descended 20 percent in the week of March 13, although the impact of the March 11 earthquake on Japanese gross domestic product was quickly estimated to be closer to 2 percent, not 20. By market opening on March 30, the Nikkei was still down over 9 percent when compared with the close on March 10, the evening before the triple catastrophe struck Japan.

Market analysts and investment advisors responded to the panic selling on the Tokyo bourse with reminders that the Kobe earthquake in 1995 caused a similar downside pressure on the Nikkei but that the market was back up to pre-disaster levels within less than a year.

This illuminates the challenge, and perhaps the importance, of Arab markets in these times of social change. Arab markets, for one thing, have been growing at an impressive rate but they have not commanded all that much global attention. This is evident in the fact that global stocks barely fluttered when the Egyptian market dropped on March 24. Index fluctuations of Arab exchanges have not visibly impacted global equity markets in the past, or present, whereas such impacts were easily generated by crises and even one-day hiccups of American, European, Japanese and also Chinese stock markets in recent years.

Secondly, the experience of Arab stock markets in the epoch of revolution is something incommensurable. There have been many revolutions of many different colors (from orange to jasmine) in the modern era, however, the larger and more significant revolutions have taken place in countries before they had active stock markets.

The biggest sea change of our age, the end of the Soviet era in 1989 (to which many have compared the Arab Spring of 2011), was the bankruptcy of a centrally planned economy. The Soviet Empire had weapons and many resources, but no stock markets. Every revolution and democratization of that period between 1989 and 1991 thus was a point of departure from grey markets into the regulated freedoms of a financial economy with stock markets.

Political cycles and confrontations are of course known to impact bourses. The global wars of the 20th century, World War I and World War II, and other military conflicts before them, have paralyzed stock markets for their duration of armed confrontation. Singular events, from terrorist attacks to tsunamis, are also noted for the influences they have exerted upon equity markets.

But officials at the World Federation of Exchanges — which represents the majority of the world’s stock market operators — could not recall examples or studies regarding the interplay of stock markets and revolutions. There seems to be no paradigm of stock market behaviors in past revolutions that one could use to reference and compare the trends of Arab markets against as this region is undergoing its grassroots uprising.

Disconnected from reality

It may not write a big chapter in world equity markets history, but Arab bourse trends in the past quarter have not so far exhibited behaviors that journalism’s simple tools of logic and analytics could correlate with the storms of revolutionary change. Careful analysis of the index flows and the events of the Arab Spring might yet provide insights into the role of equity markets in times of revolt; its connects and the disconnects.

Countries in the GCC with protests reported in February and March were of course Bahrain and Oman, along with one shorter period of mostly aborted demonstrations in Saudi Arabia. However, the GCC equity market with the biggest drop in the first quarter of 2011 was the Kuwait Stock Exchange, down 9.1 percent year-to-date by March 29 market close.

The Bahrain Bourse (BB), freshly renamed from Bahrain Stock Exchange, was closed for minimal periods even as protesters were targeting the financial district of the capital Manama, where the exchange has its base. After the forceful breakup of demonstrations on March 18, the bourse’s benchmark index approached the end of the first quarter in 2011 with a number of gaining sessions and its March 29 close was minimally down versus the start of the year.

While daily average turnover was 49.8 percent down in first quarter 2011 when compared with the same quarter in 2010, there were no immediate compelling correlations between the expansion and suppression of protests and the BB index movements throughout February and March.

All the while, international analysts have diagnosed from the upheavals significant detriments to the kingdom’s business aspirations to attract or even retain foreign companies; the Economist Intelligence Unit forecasted last month that political unrest in Bahrain would persist over the coming four years.

In Oman, a country with a surprise peak of discontent at the end of February, the Muscat Securities Market (MSM) close on March 29 was 6.2 percent down from the start of 2011. Curiously, while the relatively isolated first eruptions of fiery protests in Oman were reported in the media in the last few days of February, the MSM index’s most pronounced drop in the period began earlier, on February 14.

The MSM general index’s two-week slide by more than 12 percent ended on February 28 and the market, apparently oversold, rebounded 4.2 percent on March 1 and ended the month with a positive balance even as protests, while not quite escalating, did not abate either. During the period, the MSM average daily trading volume was actually higher than in the first quarter of 2010.

It might be easier to link MENA equity movements during this period to the perceptions — dominated by international media — of the Arab upheavals if the role of international investors in Arab markets were more mature. But while statistics by the Kuwaiti and Saudi bourses show that most investor categories — retail, funds and corporate — acted as net sellers in recent months, the actual dominance of Saudi retail investors in the SSE trading volume, for example, is more than 80 percent and the engagement of non-Arab investors is less than 2 percent, according to the exchange.

Jordan’s Amman Stock Exchange has a high share of foreign stock ownership but this reflects mainly the participation of Gulf-based investors in the Jordanian market, which slumped almost 10 percent in the first quarter, with a rather consistent downtrend. Only the EGX foreign ownership ratio of stocks is sizeable at just less than 24 percent of active shares, according to Reuters.

Arab stock exchanges mirror the political economy of the time, and the role of regional equity markets in supporting the needs and dynamics of the region’s economic restructuring will be interesting to follow in coming years. Yet in times when the economic fundamentals are quivering, with no surety as to their direction, it seems advisable to inquire about the trends within the numbers and ratios – known as technical analysis.

Whereas EGX trading records in the second week of the market’s reopening showed gains, prompting officials to ooze confidence, Paris-based technical analyst Julien Nebenzahl, chief executive officer of Day by Day, a trading firm and consultancy, said shortly after the market’s reopening that the Cairo bourse held further downside potential, because the index had broken an important support level.

Also in the SSE, the region’s largest market, Nebenzahl told Executive by phone “there is no real opportunity, technically speaking,” but added that the TASI also was not poised to drop.

But good news is expected from the UAE markets, where some bearish targets have been met, and the second half of 2011 could see a positive trend to the upside. The best market to invest in across the Middle East in this period, according to Nebenzahl, is the Casablanca Stock Exchange in Morocco. “It is still bullish at any time,” said Nebenzahl, who emphasized that in his field of technical analysis the only thing that matters are numbers and proven behavior patterns. In other words, personal opinions about political events are not relevant.

The fascinating question about cycles and trends, both economic and political, is why they are so consistent, and which have not been discovered yet. According to Nebenzahl, a known political and consequential power cycle with the rather long amplitude of 100 years is coming to bear in the recent developments in Tunisia, Egypt and elsewhere in the region.

According to this cycle, America’s power as the world’s leading entity should have started to diminish beginning around the year 2000. Because the global leadership of the United States is weakening, Nebenzahl said, “in conclusion of this period, we’ll see troubles in many countries,” and pressure changes, such as are emerging in the Arab world, are “typical results.”

April 3, 2011 0 comments

Comment

Western silence is complicity in Yemen

by Farea al-Muslimi April 3, 2011

written by Farea al-Muslimi

The massacre the Yemeni regime committed against civilian protesters on March 18 was horrific, a true act of tyranny by President Ali Abdullah Saleh. Gunmen opened fire from rooftops on a demonstration in the capital of Sanaa, resulting in at least 50 confirmed deaths, a strong affirmation that the president’s regime was not going to bow to anti-government demands anytime soon.

On this day, and since unrest first began to mount several months ago, Saleh’s crimes have been buffered by a silent accomplice: the international community.

On March 21, a large contingent of the Yemeni army joined the protesters in their demands, prompting a flood of diplomatic and high-level governmental resignations throughout the country and at embassies around the world. Remarkably, one of these defections was on the part of Ali Mohsenal-Ahmar, the President’s half brother and the leader of the military campaigns against the Shia Houthi movement in the North.

Despite the proverbial writing seemingly on the wall, the international world for the most part remained silent, with only one exception— French Foreign Minister Alain Juppe, who said on March 21: “We estimate today that the departure of President Saleh is unavoidable.”

During the Tunisian and Egyptian revolutions, Western leaders were also very slow to react, toeing the line before putting their weight behind populist movements once their momentum appeared unstoppable. This may yet occur in Yemen. But as of late March, the specter of Al Qaeda and a ‘failed state‘ in the Persian Gulf seems to have their tongues tied.

To combat Al Qaeda, the United States has promised $300 million in military and security aid this year, but currently a portion of that assistance is being diverted to help suppress this popular revolt; on March 12 embarrassing photographs surfaced in the media of American-made tear gas canisters used against protesters. This is not the first time that Saleh has used such funds for purposes unrelated to the fight against Islamic extremism; as an October 2010 Foreign Policy article details, the money has also helped fund the suppression of a separatist movement in the south, which Saleh disingenuously alleges is led by Al Qaeda.

The US has pledged $125 million per year in non-military aid to the country for development projects as well. As extremism is often a by-product of poverty, these efforts are welcome, but their effectiveness is diluted by chronic mismanagement and siphoning of funds by the Saleh regime. Yemen ranked 154 out of 180 countries in Transparency International’s 2009 Corruption Perceptions Index and has long been adept at preventing financial resources from spreading among the people. While these efforts to assist Yemen’s economy are correct in spirit, they ignore the crucial point: so long as Saleh, or an equally corrupt and unpopular alternative is in power, no progress will be made in the fight against Al Qaeda or against the poverty that shelters it.

While it is difficult to compute the importance of public opinion in international affairs, Western leaders are doing themselves no favors by unconditionally supporting their strong man. The September 11, 2001attacks and subsequent plots should have reinforced the notion that military force often emboldens ideology. Apparently, the “hearts and minds” strategy of Iraq and Afghanistan doesn’t come into play in Yemen.

On March 13, United States Ambassador to Yemen Gerald Feierstein asked rhetorically, “If Saleh leaves now, what will Yemenis do? His departure is not the solution”. This is a gross underestimation of the Yemeni people’s will. Such a statement, together with impotent calls for “restraint” from Hillary Clinton following the March 18 events, are unlikely to be forgotten.

In Egypt, the final thread holding up the Mubarak regime was US support, without which Mubarak conceded (though not without suspense). For President Saleh, that thread is more of an umbilical cord, and somebody should have fetched the scissors by now.

Farea Al-Muslimi is a Yemeni activist and writer for Almasdar

April 3, 2011 0 comments

Society

Q&A – Geoff Skingsley

by Executive Staff April 3, 2011

written by Executive Staff

Geoff Skingsley is executive vice president of human resources for L’Oreal Global. He recently sat down with Executive to discuss hiring conditions in the Middle East, as well as the ins and outs of managing 65,000 employees.

How do you encourage local hires in countries such as the Gulf states where they are not as readily available?

The GCC [Gulf Cooperation Council] is a different place from Lebanon. I think in Lebanon we actually have a pretty good situation. We’ve had a great history of exporting Lebanese managers. But we also have a good record of allowing Lebanese people to rise up inside the company. The GCC is a different story; even there, where there is less of a tradition of having talent moving up the pipeline, it’s still our objective to nurture young talent where we can.

I spent this morning talking to a group of young people with an average age of about 24 — and I do that everywhere I go when I visit our subsidiaries. We always try to make sure we have a bedrock of young management trainees who are our future leadership pipeline. Whether you’re in Lebanon, Turkey, the Gulf, Egypt… it’s the same story.

So you don’t feel a “brain drain” in Lebanon?

If you’re talking about internal to L’Oreal, there is to a degree a ‘brain drain’ but we are encouraging it. We’re moving the Lebanese outside. It’s a retention tool. If we’re offering up these opportunities quickly enough for these young talents then they’ll stay with our company but they’ll get opportunities in markets around the world. And the Lebanese have been particularly good exports. We would rather manage the brain drain in a positive way so that we are keeping them within our company, giving them career opportunities and one day we’ll bring them back into senior management roles here, as opposed to losing them because we haven’t been dynamic enough.

Do you keep your eye on the percentage of local employees to maintain the authenticity and market knowledge of the staff?

If you would ask me what is the ideal management committee in a country, it would be made up of three thirds. The first third is local managers who haven’t moved from the country; they represent continuity, knowledge of the customer, stability and inspiration for young local managers. The second third will be ex-pats: somebody who comes from a long way away, from a completely different environment, who brings a different perspective and is a contrast to the local managers. The third would be locals who we have [sent abroad] where they experienced something [new]… then they come back into their market benefiting from that knowledge. That’s what we strive to get, the combination of those three thirds.

What do you look for in young Lebanese graduates? How can they make themselves more attractive?

At minimum we would say that people have to show an interest in our products, in our categories and in our market. You don’t apply to the cosmetics business like you apply to the petroleum business or to IBM. You have to be able to talk with some degree of enthusiasm about the products because we are a mono-industry company and we are a very passionate company. You’ve got to show a genuine interest in the product field.

After that, over and above someone’s academic qualifications, it’s a great deal about personality. Is their personality going to fit into our organization? Do they have the degree of energy and passion and drive? Do they have the communication skills?

We are still a very entrepreneurial organization. The paradox with us is even though we are very large — $25 billion and 65,000 people — we try to remain entrepreneurial; we have a series of policies that promote that entrepreneurial spirit and therefore that has to emerge from young candidates who are applying to join us. We want to spot that spirit.

April 3, 2011 0 comments

Comment

In search of Syrian solidarity

by Anant Damir April 3, 2011

written by Anant Damir

In the initial days of protests in Daraa, on March 13 and 14, several friends and I began to discuss a strategy for how we could contribute to the cause. An organic uprising had been spawned after the secret police’s arrest weeks earlier of schoolchildren accused of scrawling a wall with anti-regime graffiti.

As a journalist, I had the resources to inform members of the press as to what was occurring on the ground. For one week, we facilitated the spread of information, providing news outlets small and large with video and first-hand accounts of both the demonstrations and the violence used to suppress them. We also created a Facebook group with information and links detailing what was happening and where.

On March 22, however, the abuses of Bashar al-Assad’s regime against which thousands were demonstrating in Daraa and elsewhere in Syria touched home. Simultaneously, a friend’s house and our office was broken into and ransacked. My friend was arrested; when he called, asking us to meet with him, we suspected correctly that it was a trap.

The experience puts into sharp relief the dangers of civic mobilization in Syria and the stunted growth of political expression in the country. Whereas in Tunisia and Egypt — though they were a far cry from free societies before the revolutions — a degree of discourse was possible, Syria is in its infancy when it comes to its citizens engaging one another in debates on national identity. Though some were already circumventing Internet censorship laws, access to social media websites such as Facebook was only granted in February [for more, see comment page 12 and story page 30]. Because of this muzzle, the only formal opposition to the Baath party line has come from the old guard of political resistance: the groups who signed the Damascus Declaration for Democratic National Change in 2005.

These are well acquainted with the heavy hand of dictatorship; combined, they have spent many lifetimes in jail. Laudably, they have devoted their lives to their cause, but now that opposition in Syria has adopted a populist dimension they must open themselves up to a dialogue that incorporates Syria’s disparate voices, be they Sunni, Alawite, young, old, pro-or anti-regime. The old guard has entered the “Arab Spring” with the mindset that they have nothing left to lose. But most of those on the streets of Daraa, Latakia, Damascus and elsewhere have everything at stake. They are not lifelong activists but people searching for a voice in their society, with lives to lead outside of politics.

President Bashar al-Assad has attempted to use the sectarian divisions within Syria in his favor. Should his clasp slip, Syria would descend into an ethnically-motivated struggle for power between the Sunni majority and Alawite, Christian and Druze minorities, or so the line goes. Political adviser to the president Bouthaina Shaaban has been playing up these fears, calling the destruction of “peaceful coexistence” the true aim of the protesters. And in Latakia we have seen the real dangers, as the shabiha, notorious Alawite gangsters close to the Assad family (who may or may not be acting on their orders) killed up to 21 people on March 26.

Together with the diverse sectarian makeup of Syria is a multiplicity of desires within the populace. Some chant for the downfall of the regime, but most desire substantial reforms — an end to emergency law and to Article 8, which prohibits alternatives to the Baath Party. And some wish for no political change at all. At its present juncture, nobody has the right to speak for the movement. For the opposition, the true challenge is to respect and heed these myriad voices. One positive indication of the potential for civic engagement and dialogue lies in the example of the proposed “Personal Status Draft Law” in late-2009. A regressive, sharia-based effort to restrict citizens’ rights (particularly for women), it was eventually abandoned due to a widespread outcry against it on the radio, on blogs and from human rights organizations. Though one of the few examples of successful and diverse political participation, it could be a lesson to reformers still stuck in the absolutist terms of the past; despite differences in experience, there is common ground to be shared beyond the overthrow of the regime.

Without a gathering of opinions, Syrians will be tinder for the sectarian firestorm that Assad is happy to stoke.

ANANT DAMIR is the pen-name of a Syrian freelance journalist based in Damascus

April 3, 2011 0 comments

Society

Q&A – Vahe Torossian

by Executive Staff April 3, 2011

written by Executive Staff

Vahé Torossian is the corporate vice president of the Worldwide Small and Midmarket Solutions and Partners (SMS&P) group at Microsoft. On a recent visit to the region he sat down for an exclusive one-on-one interview with Executive in Beirut where he talked about how the company is adapting to regional events, and its role supporting small and medium sized businesses in the Middle Eastand North Africa.

You’ve come to the region at an exciting time in history. How has Microsoft reacted to what’s been happening here?

The way that we are looking at the situation today is [to see] what we can do from a business and an IT leadership perspective to help mitigate the [economic] impact and, whenever the economy recovers, help the small and medium enterprises [SMEs] and public sector to recover as fast as possible.

How many staff do you have in Tunisia, Libya and Egypt?

Over all in North Africa it’s about 200 people.

What were some of the projects Microsoft was pursuing in those countries?

Most of the times in these places they are sales marketing and services organizations… there are [a] few that are doing development or engineering types of jobs.

So the customers were mostly the government and government entities?

Yes, that’s right.

A lot of Western and multinational companies have done business with regimes that are known to be human rights abusers and who suppress democratic movements and political opposition. How would Microsoft, one of the largest corporations in the world, reconcile the ethics of working witha regime like that?

I think that Microsoft is very well known in the world in terms of affixing values and of course human rights protection, but we need to be clear that the role of a company like Microsoft is to stay at a level that it should be on, which is to say not engaging in any type of political consideration.

[We] are in countries where there are international rights to do business. Once you are there, if you have an organization in the country which is not respecting intellectual property, what you want to do is to help the government understand that if they establish [anti-piracy legislation] and then enforce it they can bring wealth to the country, increasing taxes and reducing the ‘brain drain.’ Most of the countries you are talking about have had years of talent moving out, especially the younger generation because nobody wants to stay in a country where you can’t protect an invention.

So it’s a business role…

It’s a business but also a citizenship role… We ask two things [of our] general managers anywhere in the world. One thing is, of course, that you run your operation, bring in a profit, develop your people, attract talent and so on, but there’s [another] component which is what you are contributing to the society. We always say 30 percent of your time as a general manager needs to be [spent on] what you are giving back to your country.

[It could be] based on education, giving free some software to a university, for schools, or educating people, helping them be aware of some of the risks found in some countries… or helping parents to be aware of what their kids can do on the Internet and how to protect them. After disasters, for example, we have always given free time [for employees] to be in the street, helping to reconstruct.

Today, I met with the municipality of Beirut and had the chance to share some of my experience of working with municipalities around the world and helping to fix some critical problems. We were talking about, for example, the parking situation, traffic, how to file a complaint on the internet, how to print a visa. All these things are part of a contribution to society but are not necessarily related to the business perspective. It’s about how we are lucky to be educated and how we can bring these things back to the society.

Most small and medium-sized businesses use the Internet. Here in Lebanon we’ve recently been ranked last place in the world out of 185 places in download speed and 184th in upload speed; does that limit the effectiveness of products that Microsoft could bring to the Lebanese market to help SMEs?

For sure, as cloud computing and online Internet services are increasing, the capacity of broadband is going to be critical. In this case [our role] is really to go to the government to explain that there is a huge opportunity to bring back talent and that the bottleneck is going to be inevitable, and what should be done with a telecommunications operator… to accelerate [closing] that gap.

Today people are using multiple devices — it’s not only the PC. You might have phones, tablets, or different types of formats. It is difficult to use these devices to accelerate the development of more opportunities [with poor] broadband, so that’s why in a country like Lebanon the broadband is going to be the bottle neck of expansion.

There are multiple ways to use technology when you observe the behaviors of citizens, and so you fix a problem, and most of these are SME applications. For example, I was mentioning this morning an example in Estonia where you have a concept of e-parking; you use your phone when you want to park your car. You park your car and put in your [license] number and there’s an application that will help you to pay; when the police come they can just check the terminal to see if you have paid to park or not.

How are you adopting your strategy in the MENA to compensate for recent events and the fact that we don’t actually know what is going to happen next with events progressing so rapidly?

We are reinforcing in the places where we are [already], and allocating resources to accelerate the growth and to compensate in the places where we might be behind.

There are still some businesses that are operating [in states hit by unrest] and they [still] have to consume [Microsoft product] licenses because they are still recruiting people, they are still invoicing, and for these ones we try to make sure they are all using genuine operating systems and genuine software, because the piracy rate is quite high in emerging markets; Lebanon is around 72-74 percent, which is quite high.

The technology business was really rocked when the Egyptian government completely shut down the Internet. How do you adapt to the fact that the system on which all your products are based could one day be completely shut down?

Usually we have highly secured lines and we have redundant lines that help us to recover very quickly from this type of [event]. When the tsunami hit Southeast Asia [in 2004], all the cables which were under the sea were destroyed but it took us just 48 hour to find new paths for the employees in Southeast Asia to reconnect to the Internet. Because of that we were able to allow the citizens to find their families and lost friends and so on.

If a country decides to close the Internet and protect its borders there is not much you can do. But experience shows that it’s never a long-term situation; it’s always fixed at some point of time. Today as a country you can’t close off the internet for too long; there will be a revolution!

April 3, 2011 0 comments

Society

Book review: Middle East Patterns

by Executive Staff April 3, 2011

written by Executive Staff

Places, People, and Politics (5th edition)

A book by Colbert Held and John Cumming

People who are not from the region are often puzzled by the Middle East. To outsiders, and to some locals as well, the perennial problems in Cyprus, Palestine, Israel, Iran or Lebanon, and the current events in places such as Bahrain, Egypt, Iraq, Libya or Yemen may seem impenetrable. This, along with the strategic, political and cultural importance of the region, is why a new edition of Middle East Patterns is especially welcome.

The book, which examines the region’s history, geography, international relations and economics, is co-authored by Colbert Held and John Cummings, Americans who are anything but strangers to the area. Held was employed for 15 years as a United States Foreign Service officer, with assignments in Iran, Lebanon and Saudi Arabia, as well as many temporary missions throughout the region; Cummings, who has taught economics at universities in Iraq and the United States, spent nearly three decades in the Middle East working with the US government and the World Bank.

Despite its many incarnations, the basic framework of Middle East Patterns has remained consistent over the last three decades; the examination of the whole region first from a topical perspective and then country-by-country is successfully preserved in the latest version. The region’s ethnographic, economic and geopolitical patterns, with a focus on natural resources, are well covered. On top of this, the book is now enriched by a new economic emphasis: in addition to looking at the “places, peoples and politics” invoked by its subtitle, the fifth edition contains fresh material on socio-economic development and political economy, which in turn complements new sections on topics such as terrorism and piracy.

Syria is the first to be considered — in a chapter tellingly entitled “Middle East Heartland,” ending with a wise summary of the country’s position today: “Despite its own ambiguities, and despite the external efforts to marginalize it, Syria persists as a key historical and geopolitical player in the region.”

While outside perceptions often fail to take into account the region’s true complexities, Middle East Patterns presents a comprehensive and unbiased picture of its nations. The chapter on Iran in particular is a healthy antidote to Western vituperation of countries in the region whose policies are uncongenial, not to mention the oversimplification by foreign media of things Middle Eastern.

Also including a thorough bibliography, many tables, a copious index and numerous footnotes, the book is no intellectual lightweight. (The current version of Middle East Patterns is weighty in the literal sense as well, having gained more than 40 pages on the 646 pages of the 4th edition, which was published in 2006.)

So whether for a foreign student, a globetrotting manager of a multinational, or just a Western television viewer tired of hearing the region summed up in clichés, Middle East Patterns is a valuable reference. And for a serious non-regional reader who is ready to consume well-written books cover-to-cover but only has time to look at one volume on the Middle East, the work of Held and Cummings could be the best bet. But the best compliment that can be given to Middle East Patterns is that it can also be read, with great interest, by a Middle Easterner.

April 3, 2011 0 comments

Economics & Policy

Executive Insight – Carbon neutral skies in Middle East Aviation

by Alessandro Borgogna April 3, 2011

written by Alessandro Borgogna

Like many other industries, the global aviation sector is preparing for a future in which increasing financial and political pressureswill be brought to bear on the issue of climate change.

Airline operators are putting together plans to cut emissions of carbon dioxide and other greenhouse gases, and these changes may squeeze consumers and businesses in the Middle East, through higher fares, reduced routes and fewer services. But focusing only on these short-term pain points ignores the tremendous economic opportunities the industry’s transformation could bring to those nations that act first to reposition themselves for competition in a carbon-constrained world. Developing countries have unprecedented access to financial support to help them begin this transition and offset rising costs. The extent to which they take advantage of these funds may determine whether the region can capitalize on the new industries and jobs that will likely result.

The European ETS deadline

The carbon conversation has been slow to reach the aviation sector, due to its relatively small contribution to global emissions (some 2 percent, according to the United Nations), but a near-term deadline has captured the industry’s attention. In January 2012, aviation will be held accountable for its emissions under the European Union Emission Trading Scheme (ETS). The only global effort so far to attempt to include the aviation sector in a carbon-compliance trading system, the ETS mandates that any airline operators flying in and out of the continent — regardless of where they are based — will have to offset their related carbon emissions above a fixed allowed amount.

Air transport emission growth

If extension of the ETS goes on as planned, Middle Eastern airline operators will have to choose between passing on their higher costs to passengers, mitigating them through voluntary offsets purchased by passengers or reducing their profits for the sake of price competitiveness. The global air transport industry has filed a legal challenge to the EU’s plan — but regardless of its outcome, Middle Eastern airlines are still likely to face pressure due to growing global recognition of the sector’s rising importance in the fight against climate change. In 2009, the International Air Transport Association (IATA) pledged to achieve carbon-neutral growth beginning in 2020; the International Civil Aviation Organization (ICAO) followed last year with a similar goal.

While the 1997 Kyoto Protocol exempted aviation when it affirmed the ETS as the most efficient and effective way to achieve global greenhouse emission reductions, consistent 4 percent to 5 percent annual growth in global air passenger traffic over the last decade has put the sector very much in the spotlight as countries work toward a post-Kyoto agreement.

Opportunities in low-emission

Fortunately, the international accords reached in Copenhagen in 2009 and Cancun in 2010 supported low-carbon investments in developing nations. The platforms for these initiatives are called low-emission development strategies (LEDS), which involve short-term mitigation steps (called ‘nationally appropriate mitigation actions,’ or NAMAs) and more structural mid-to-long-term changes (‘national adaptation programs of action,’ or NAPAs). The LEDS platform represents a tremendous opportunity for the Middle East, and particularly for its aviation industry. Airline operators can now implement emission-reducing projects and receive marketable carbon credits in return, or they can coordinate a larger scale transformation and apply for funding through the NAMA framework. Thanks to these new efforts, emissions-reducing projects don’t have to break the bank. Projects can either be co-financed or fully financed through a growing pool of internationally available funds. The Copenhagen accord of 2010 established $30 billion in fast-start financing for such projects, and delegates meeting in Cancun last year committed to expanding that amount so that $100 billion in new and additional funds are made available every year by 2020.

Plan of action

Rather than wait to see if they will be forced to comply with the European ETS next year, aviation operators in the Middle East should start laying the groundwork now to get ahead of coming regulations and to investigate the possibilities of breakthrough changes in the fast-growing market for alternative fuels. This can be accomplished through three broadsteps:

Take short-term actions to “clean house”

Fleets operated by Middle East airlines are newer, and hence more efficient, than their European counterparts’, which will help to blunt the impact of the ETS if it is enforced. Still, there is ample room to improve the overall efficiency of the air-traffic system and ensure that all carbon waste is eliminated. Flight delays and aircraft congestion are principal contributors to the aviation sector’s inefficient energy use; these can be dramatically reduced by enhanced cooperation between civil and defense aviation organizations, alongside other regional efforts to optimize aircraft routing. In addition, existing aircraft lease contracts should be reviewed to eliminate the most inefficient parts of the fleet.

Enhance government-industry ties

Operators should engage their governments to ensure that they assume an active role in formalizing a LEDS for the sector that is focused on activities that qualify for NAMA or NAPA support. This will allow the industry to realize carbon credit returns on capital invested and, where applicable, access international carbon finance funds. Ideally, designing a LEDS should be a country’s first step, laying the foundation for future activities, but this may not always be possible. Developing a LEDS is a long and evolving process, and it may make more sense to weave the LEDS approach into existing carbon-reducing activities and use it as the basis for future growth.

Define the business case for bio-fuels

Barring any quantum-leap breakthroughs in aircraft design, the most promising opportunity for emissions reductions in the aviation sector is in bio-fuels, which produce up to 80 percent fewer carbon emissions than fossil fuels over their lifecycle (provided they are grown locally). At least 10 airlines outside of the region have already conducted successful flight tests with feedstocks ranging from sugarcane to jatropha (a type of shrub) to coconuts. Jatropha, in particular, holds immense promise for the region, as it is a non-food crop that can grow in desert climes and does not require much irrigation. Middle East airline operators are right to be concerned about their profits and competitiveness as the deadline looms next year for compliance with the European ETS. But there are bigger forces in play, and focusing on this factor alone may cost them the chance to seize the opportunities that are emerging with the evolution of carbon finance markets. Middle Eastern airlines have been growing at a much faster pace than global benchmarks, if that growth is to continue then the region’s operators and regulators will need to plot a course for competing —and prevailing — in a carbon-constrained future.

April 3, 2011 0 comments

Economics & Policy

Executive Insight – OIF

by Fabio Scacciavillani April 3, 2011

written by Fabio Scacciavillani

For those eager to engage in predictions as to where the events that have rocked North Africa, the Middle East and beyond will lead, it would be wise to remember that these are uncharted political waters, and the long wave of repercussions will run for decades as the old post-colonial order crumbles.

Our perceptions and expectations are somewhat distorted by history books that condense in a few pages an account of events that took years to develop and fully come to fruition. Even upheavals which some of us witnessed during our lifetimes leave memories that focus on the climax and exclude the lull. So when our internal equilibrium is shaken, we unrealistically expect a swift ending.

The collapse of the Soviet Union and the Warsaw Pact started with Gorbachev’s ascent and perestroika, then the break-up throughout Eastern Europe and finally the indelible image of Yeltsin on a tank declaring the end of the Empire. But it took several years. And the aftermath was not a smooth transition, but years of hyperinflation, mass unemployment, subsidy cuts, institution building, uprooting of state monopolies and judicial reforms.

In essence, historical processes so profound to reshape entire continents often follow a “drunkard’s walk” — two steps forward, one step back and maybe a few sideways. The vicissitudes of the “Arab Spring” will likely follow such a pattern. Hence in the months and years to come we will need a framework to evaluate the direction, the pattern and the likely outcome of this process. As economic exclusion leads to the mounting resentment that caused the turmoil, fiscal interests and redistribution will be dominant factors in shaping the course of history.

The convulsions have been especially acute in countries which depend on earnings from renting energy commodities (and also tourism). Rents provide the state with a cache of resources, but little incentive to build modern institutional capital, a pre-condition for social and material advancement. When governments can obtain conspicuous resources without having to resort to taxation it is hard for them to resist the temptation to eschew checks and balances; officials feel immune to scrutiny, deeming a partial distribution of these resources to powerful interest groups sufficient to retain power.

In the long run, the lack of modern public institutionsa trophies the ability of a society to progress, wastes the energies of the youth, spreads bitterness and often spurs a withdrawal toward tribal or sectarian splits. Resources are rarely eternal and in any case their size tends to shrink relative to the growing population. Unless the revenues are invested to diversify the economy into new sectors and enlarge the pie for all, eventually hand outs alone will not be enough ensure decent living standards.

Protests and riots should be interpreted not only by a call for redistribution but also for a social contract which fosters economic inclusion, upward social mobility and betterment opportunities. Unfortunately, this transformation cannot be delivered overnight and so the undercurrent of unrest will not abate instantly.

Still, it is a very positive sign that at least in the Gulf Cooperation Council the rulers have grasped what is at stake and have launched the so-called ‘Gulf Marshall Plan.’

One hopes that it will constitute the first step in a new economic strategy which desists from adding cadres to an already bloated and often utterly inefficient bureaucracy and focuses on skill creation and entrepreneurial talent. Likewise, one hopes that awareness spreads among decision makers that political survival is not only a matter of throwing a few handouts around, but devising a set of rules hinging on rights and not on privileges, on fairness and not on proximity to elites, on competence and not on favors. It will be a long road because it will clash with entrenched bad habits and long-established traditions — a good reason not to delay the journey and stick to newfound determination.

Fabio Scacciavillani is chief economist at the OmanInvestment Fund

April 3, 2011 0 comments