Levant

Economy under occupation

by Executive Staff
written by Executive Staff

The perpetual strife afflicting the Palestinian Territories has taken its toll on the Palestinian population, whose aspirations for a viable state have withered away over the past 60 years of conflict with Israel. The consequences of the conflict are evident to any objective observer, including the diminishing area of any future Palestinian state due to settlement expansions, an increasing number of Palestinian civilians who have been killed or injured and the damage to Palestinian social fabric punctuated by the schism of political power and the recent Israeli offensive on Gaza. 

Perhaps the most nuanced aspect of Palestinian suffering is the state of the Palestinian economy. The systemic economic hindrances imposed upon the Palestinian economy by the Israeli government are considered by most experts to be the primary impediment to allowing the Palestinian economy to reach its full potential. The World Bank (WB) identifies three principal “paralytic effects” of Israeli policies on the Palestinian economy: access to economies of scale, access to natural resources and access to an investment horizon. Moreover, the bank also cites physical impediments such as road blocks, closures, earth mounds and the ongoing construction of the separation barrier deemed illegal under international law as a “paralysis confronting the Palestinian economy.”

Further exacerbating this paralysis is the political and economic division of the West Bank and the Gaza Strip. The lack of a contiguous Palestinian land mass and the Israeli economic blockade of the Gaza Strip have resulted in the divergence of the West Bank and Gaza in terms of the effects on total GDP, which stood at an estimated $4.14 billion in 2007, according to the Palestinian Central Bureau of Statistics (PCBS). The PCBS also noted that Palestine’s total GDP for 2008 is expected to comprise 70 percent of that in 1999 (prior to the second intifada). Per capita GDP fell nearly 30 percent from its height of $1,610 in 1999 to $1,099 in 2007 and is expected to decrease by 7.4 percent in 2008, according to figures by the PCBS and the World Bank. Furthermore, the effects on real GDP of the West Bank and Gaza cannot be accurately gauged due to Israel’s continuing economic blockade and its subsequent military offensive. The IMF  and WB estimates that results from the first quarter of 2008 are slightly negative and project modest growth of 0.8 percent in 2008 “due to a continued, yet marginal drop in economic activity in Gaza, given its already-low base, matched with a modest rise in economic activity in the West Bank.”

The inevitable emergence of Gaza’s alternative economy as a result of the Israeli blockade was estimated to provide nearly 90 percent of all products entering the strip each month, equivalent to about $40 million of contraband, said Palestinian economist Omar Shaban in an interview with Bloomberg. Facilitated by a series of tunnels between Egypt and Gaza, goods that traveled through the tunnels ranged from vegetables to Viagra and served as the main lifeline of the civilian population of Gaza. The associated costs of these improvised means of transporting goods is evident in shops and markets across the strip where an Apple iPod Nano, that lists on Amazon.com at around $150, would cost $500 in Gaza, according to Bloomberg. The Israeli offensive that started on December 27, further intensified the upward pressure on essential items such as food, which has seen a 20 percent and 23 percent rise in prices in the West Bank and Gaza respectively, according to the World Food Program (WFP). The price of one kilogram of tomatoes in Gaza during the Israeli bombardment is said to have risen from about 1.5 shekels ($0.40) before the Israeli onslaught to 7 shekels ($1.75), an increase of over 400 percent, according to Reuters. To date Palestine still does not have its own currency.

Gaza’s imports/exports before Israel’s blockade, during the blockade and after ceasefire deal with Hamas

Source: Paltrade

Increase in obstacles* in the West Bank, Dec 2006 – April 2008

– ‘Baseline’ figure is the number of obstacles erected in the West Bank as of August 2005, which was 376
* Obstacles are defined as checkpoints, partial checkpoints, earth mounds, road gates, road blocks, earth walls and trenches
Source: OCHA

Israel has hobbled the means of transporting palestinian products in a competitive manner

Trade with Israel

The inherent nature of the Palestinian economy, being small and resource poor without its own airport or seaport, predicates that the majority of its economy relies on its ability to trade ­­within its territories and with its neighbors. Trade flows constitute nearly 85 percent of GDP, the vast majority of which (85-90 percent) is with Israel, according to the World Bank. This dependence on the state of Israel can be seen as a direct result of Israel’s economic policies. After Israel invaded the West Bank, it engaged in a policy of “integration” and, in theory, sought to eliminate the barriers that stood between the two economies. This resulted in a rise in Palestinian income as workers took up jobs inside Israel. Palestinian dependence on the Israeli economy at the time of the Oslo Accords in 1993 was immense. Trade with Israel represented more than 90 percent of total trade volume and the trade deficit stood at 45 percent of GDP, according to the Royal Economic Society. After the second intifada in 2000, Israel announced that it intended to end all Palestinian employment in Israel, effectively pulling the rug out from under the Palestinian economy.

Since the Israeli siege on Gaza came into effect in June 2007, essentially stopping all intra-Palestinian trade, the conventional trade of Palestine has relied solely on the internal and external trade of the West Bank. The numerous restrictions and administrative blockades imposed upon the Palestinian residents of the West Bank by the state of Israel have crippled the means of transporting Palestinian products in a competitive manner, thus creating enormous amounts of uncertainty and hobbling shippers’ abilities to compete in regional and global markets. The result has been a perpetual decrease in the amount of Palestinian trade over many years, even before the blockade and the construction of the separation barrier. According to the World Bank, between 2000 and 2006 the amount of West Bank enterprises that made a significant amount of sales outside of their home cities decreased from 60 percent to below 40 percent.

Such increased levels of uncertainty continue to add to the anguish of Palestinian enterprises that are becoming subject to increasingly high fixed costs per kilometer within the West Bank and by default the rest of the world. A recent survey conducted by the World Bank commissioned Palestinian Trade Center (PalTrade) identifies several parameters that increase costs for transporters inside the West Bank. The survey identified as much as a 40 percent increase in distance covered to reach key areas such as Jerusalem and the Allenby Bridge (connecting the West Bank and Jordan) as a result of Israeli policies that do not allow Palestinian trucks to take a direct route. The survey also points out increases of up to 70 percent in labor costs due to delays caused by road closures without announcement, flying checkpoints, unexpected variations on restrictions on cargo and movement of vehicles and people, losses due to inability to deliver on time and the waste of resources waiting and trying to predict certain outcomes.

Intra-West Bank trade routes and effect of impediments

Source: World Bank
Labor costs per kilometer*
* Labor costs computed on the basis of the combination of various vehicle types
Source: World Bank

Ultimately, trade dependency on Israel has proven to be detrimental to the Palestinian economy. In order for trade to thrive, Palestinians must have access to global markets and alternative trading routes. As Executive went to press, the Rafah border crossing between Egypt and Gaza remained closed by Israel and Egypt, as it has been since the Hamas takeover of Gaza in June 2007. Although the crossing could potentially provide an enormous amount of respite for the ailing Palestinian economy, this has yet to materialize. Even when the crossing was “operational,” it proved not to be a viable alternative to accessing the global market as the crossing operated only 16 percent of its scheduled working hours between June 2006 and March 2007, totaling a daily loss of $500,000 worth of exports according to the United Nations Office for the Coordination of Humanitarian Affairs (UNOCHA).

A viable palestinian state would need a sustainable economy free to trade and operate its businesses

Trade to the east

Trading through Jordan is also uneconomical due to the fact that all goods moving to and from Jordan must first cross the Allenby Bridge controlled by Israel. This is “a cumbersome and inefficient process that adds to the cost of shipping and discourages West Bank shippers from using the Jordan routes,” says the World Bank. Goods traded through Jordan are subject to redundant searches, parcel volume restrictions and lack of adequate storage facilities for sensitive products like vegetables and medical supplies. The only silver lining is that due to the recent increases in Israeli restrictions, coupled with some improvements in Jordanian logistics, Queen Alia Airport has become slightly more competitive for handling large volumes than its Israeli counterpart Ben Gourion, which tacks on $1,150 for “security surcharges” per metric ton, according to the World Bank. Nevertheless, the World Bank states that Palestinian traders still prefer Ben Gourion because of “better service, easier access and more frequent flights.”

Positioned at the heart of the Middle East, on the Mediterranean, Palestine has tremendous inherent potential. The promise of a thriving and prosperous Palestinian economy is as logical as it is fleeting in the face of the ongoing Israeli persecution of the Palestinian people. Undoubtedly, a viable Palestinian state would need a sustainable economy free to trade and operate its business without the current hindrances imposed upon it by the ongoing Israeli occupation.

Unless realities on the ground change, the economy of Palestine looks set to remain a burden shouldered by Palestinians, rather than a operable underpinning for a future Palestinian state.

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Turkey’s return to the east

by Claude Salhani
written by Claude Salhani

The deep involvement by Turkey’s prime minister in the recent conflict between Israel and Gaza marked Ankara’s return, after an absence of nearly a century, into the fold of Middle Eastern politics. This was something Mustapha Kemal Ataturk, the architect of the post-Ottoman Turkish Republic, wanted very much to avoid.

Indeed, much to the chagrin of many of his compatriots, Prime Minister Receb Tayyip Erdogan’s Islamist Justice and Development Party openly sympathized with Hamas in the recent war in Gaza, and that despite cordial relations between Turkey and Israel and Turkey’s neutral stance in the Arab-Israel conflict.

For many Turks, the prime minister’s change of direction in foreign policy is seen as a serious deviation from Kemalist tenet. Ataturk, the architect of the new republic, was a great visionary who wanted to take Turkey out of the Levant once and for all, and bring it into Europe, where he felt Turkey belonged.

“The larger problem that many either don’t see, or want to ignore, is the fact that Turkey’s identity is going through a speedy transformation,” says Tulin Daloglu, a Turkish journalist in Washington. Erdogan, some observers feel, is gradually eroding what Ataturk had put together and they are not comfortable with the notion.

“My first reaction is negative. Erdogan might have strong emotional attachment to Hamas,” says Daloglu.  “But Turkey should not be competing with other leading countries in the region. It should be [working] in full cooperation with them.”

Shortly after the collapse of the Ottoman Empire at the close of World War I, Ataturk shifted Turkey’s horizons from its traditional eastward leaning to align it with Europe and the West. That included strict separation of religion and politics along the lines of France’s ‘laïcité’. Ataturk and subsequent leaders of modern-day Turkey have labored hard to make this dream of Europeanizing Turkey a reality.

But Europe did not do enough to help speed up the process, as it is perhaps somewhat reluctant to admit a country of more than 70 million Muslims into the European Union. As can be expected, Europe’s failure to seize that opportunity to befriend an important and moderate Muslim country risks sending the Turks back in search of alliances in the Levant, and even beyond, into the former Soviet republics of central Asia. The European Union failed to grasp the importance of bringing in a large — albeit Muslim — nation into the EU, a step that would have solidified European-Arab relations.

Still, in spite of the nearly 100 years during which the Turks stayed away from the Middle East, the three centuries the Ottoman Empire spent incorporating much of the Arab world seems to have left some traces of affinity, at least insofar as the current prime minister is concerned.

But with the continued rebuttal by Brussels, Paris and Vienna of Turkey’s application to join the EU, the inevitable was bound to happen: Turkey’s rapprochement with Arab Islamists and its involvement in the Middle East conflict as a mediator. The latter role was certainly facilitated by the political void left when the United States under the presidency of George W. Bush showed little or no interest in trying to mediate the various problems related to the Middle East crisis. Washington’s refusal to negotiate with Damascus is a prime example of the disastrous policy followed by the Bush neoconservatives and one upon which Ankara jumped to take the relay.

That being said, it is not too late for the Europeans to save the day. In fact, Turkey’s flirtation with Hamas may come as a mixed blessing to the West. On the one hand, a rapprochement between Ankara and the Arab world — particularly with the Islamist organizations, such as Hamas — will prove useful in mediating a future settlement of the Middle East conflict. When the current war between Hamas and Israel finally runs its course, a Turkey acceptable to Palestinian Islamists will prove to be quite an asset. Turkish troops positioned in a newly created buffer zone between Hamas and Israel could be one of the few armies in the world acceptable to both sides. Turkey has the largest, toughest military in the Greater Middle East, more likely than not, on par with Israel’s. Some of their units have seen action in the mountains of Kurdistan, where Turkey has been fighting a guerrilla war against the PKK (the Turkish Workers Party) for several decades now.

The drawback is that Turkey’s reemerging friendship with the Arab world, and its continued exclusion from Europe, will further ‘Islamize’ Turkey. The end result could be that instead of Turkey acting as a buffer between Europe and the Arab/Muslim world, a role Turkey played during the Cold War as a NATO front-line for the Iron Curtain, Europe may wake-up one day to find Turkey suddenly on the other side of that border.

Claude Salhani is editor of the Middle East Times and a political editor in Washington, DC.

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Finance

UAE – Called to account

by Executive Staff
written by Executive Staff

With the tumultuous ride of 2008 fading, banks in the UAE are unsure of what awaits them in the New Year. Slower growth? Check! Tightened liquidity? Check! A troubled real estate sector? Check! The uncertainty comes in what else will banks operating in the Emirates have to deal with and how exactly will they weather the aftershocks of last year?

Waiting with baited breath, investors and analysts alike are anticipating the disclosure of fourth quarter 2008 results in the coming weeks. Before making any sudden moves, experts across the board agree that this year’s first quarter results will have an enduring affect on the banks’ performances for the remainder of the year. Moody’s Investors Service has already declared a “negative outlook” for the UAE banking sector in 2009. While statistics are momentarily unavailable, there are a few indubitable issues that banks in the UAE will be facing in 2009; with the sharp decline in oil prices and the ensuing oil production cuts, the fiscal surplus and real economic growth of the UAE in 2009 are expected to be notably weakened. Thankfully, the country’s “high levels of accumulated oil revenues, over the past five years have served as a catalyst for growth and the accumulation of substantial financial reserves,” Moody’s said. Once the international financial crisis washed ashore on the Gulf coast, a major slowdown in growth in the UAE — and across the GCC — was inevitable. During the five years up to mid- 2008, banks in the UAE were growing so quickly that their “funding growth couldn’t keep up with lending growth, which clearly was unsustainable,” notes Robert Thursfield, a director in the financial institutions group at Fitch Ratings. According to the UAE Central Bank, banks in the Emirates lent a staggering $70.7 billion in just the first nine months of 2008; but this year, lending conditions are being reigned in. The economy’s expeditious growth created a major liquidity problem throughout the UAE.

Where the trouble began
Backtracking to 2007, banks in the Emirates were awash with liquidity as foreign ‘hot money’ was streaming into the country, expecting a revaluation of the dirham. Cash deposits thus surged and the streaming liquidity empowered banks to go on a lending binge. According to Moody’s, the banks used short-term deposits to fund long-term loans. Then, after letting go of the idea of a currency revaluation, foreign funds briskly withdrew their money and liquidity in the country began drying up. The ratings agency estimates that liquidity fell to around four percent of total banks’ assets and it was in late 2007 that the UAE started feeling the brunt of tightened liquidity. Conditions worsened in 2008 once the financial crisis shook the foundations of the UAE economy and banks were one of the first to feel the effects. The continued “liquidity constraints observed [in] the last two quarters of 2008 are expected to have severe consequences, curtailing future asset growth and profitability,” exhorted Moody’s.
To support the mounting cash crisis, by September 2008 the UAE’s central bank announced it would inject $19 billion, while also setting up a $13.6 billion emergency fund facility. Around 15 percent of this fund had been absorbed by UAE banks as of January. Two out of three transfers from the injection have already taken place and the third shot is expected to happen soon. “Originally, they were talking about mid-year, but that may be brought forward. [Also], although initially liquidity was injected straight into bank deposits, we now understand [this is] being renegotiated and [it is] being used as Tier 2 funding. We should get clarity on that over the next couple of months,” explains Raj Madha, director of equity research at EFG-Hermes in Dubai.
The worsening property sector in the country has left the financial market very uneasy and virtually every bank has been — or will be — affected by its outcome. According to Credit Suisse, banks in the UAE have the highest exposure to real estate among their regional peers, with a 35 percent exposure rate for the first half of 2008. Since the credit crunch began, there is no doubt that this figure has risen. With high loan-to-deposit ratios and high exposure to the real estate market, UAE banks are becoming increasingly vulnerable to loan defaults. Some banks will be affected more than others and as Thursfield puts it, “you can’t be a bank [in the UAE] and not have exposure [to real estate].” Moody’s noted the “high potential for a decline in asset quality in the likely event of a property market correction, signs of which were apparent in [fourth quarter] 2008.” In particular, Moody’s was anxious about “the loans to ‘opportunistic’ developers that have been extended over the past four to five years following Dubai’s decision to allow freehold ownership to foreigners in 2003.” As Madha remarks, “It is virtually impossible for the banks to insulate themselves adequately against a very negative scenario, as the entire economy of the UAE is linked to property and if not property then [to] finance or tourism, or retail, all of which are also suffering.”

Baton down the hatches
Due to such unpleasant market conditions, it is no surprise that banks are tightening their lending policies. Emirates NBD — the largest bank in the Middle East — for example, announced in January that it would only consider expatriate customers for home loans if they earned a minimum of $6,800 per month, up from its previous limit of a mere $2,177. Lending policies will only heighten the problem of mortgage availability in the country, thus making it even more difficult for low and middle-income earners to finance their homes. Other banks in the UAE have taken similar action, with HSBC doubling its minimum salary requirements from $2,722 to $5,444 in November 2008. Lloyds TSB also raised its loan bar in late 2008, from $3,260 to a substantial $6,805. The bank, like its peers, bases these changes on the “exceptional market conditions” taking place. Banks in the UAE will definitely suffer “from higher delinquencies, both in retail and corporate lending,” underlines Thursfield. One major difference in banks’ strategies this year will be in residential mortgage lending. “Previously, [banks] might have lent to around 90 percent loan-to-value, now they might be only lending up to 60-70 percent loan-to-value. That will be a very straightforward way of reducing risk to that kind of exposure,” notes Thursfield.
Moody’s points out that the “equity price collapse in 2008 will affect [fourth quarter] financials (although its effects are expected to stabilize in 2009).” Banks in the UAE will eventually recover from this as they have a strong association with their wealthy sovereign and are — as Moody’s conveyed — “the principal architects and drivers of infrastructure and other large-scale businesses and have traditionally helped to boost the franchises of local banks.”
Madha hopes “that the banks do not have significant exposure to third tier developers or brokers; but if they do, they should certainly be reassessing that.” Going on to highlight what UAE banks need to focus on this year, Madha believes, “Finally, it is time to overhaul credit criteria and lending standards and impose a much more cautious approach to lending and credit scoring, encouraging working capital efficiency in all its clients, and watching cash flow and counterparty risk on every loan.” Aside from liquidity, oil prices and a faulty real estate market, Thursfield believes top concerns for banks this year will be “capital, profitability, funding, staffing, franchising, etc.” Another top concern for Madha is asset liability management. Banks must “make sure they have a full understanding of their exposure to the market risk,” he comments. In 2009, banks will definitely be more prudent with their assets and overall management strategies. The major challenge will be maintaining the results of 2008, as growth will unavoidably slow down.

New year, not so new strategies
Since the global financial meltdown hit home, banks in the UAE have indeed received a reality check. “Three months ago, most people seemed in complete denial that anything would happen in the UAE; now obviously that sentiment has changed dramatically”, states Thursfield. Strategies of banks have since been reviewed and the general sentiment is that an international crisis of such a vile nature could not have been foreseen in advance. Since the banks are well capitalized and are unlikely to default — especially with the sector’s sturdy bond with their affluent government — their main concerns will be rather easy to keep an eye on. Thursfield believes that the main strategies of banks will not change, albeit they may “be more cautious and will certainly slow down their lending in corporate and retail.”
Indeed, vigilance and calculated moves are key for 2009. Madha expects banks operating in the Emirates will be focusing on “stabilizing their balance sheets and their NPLs [non-performing loans]. Once they are able to achieve this, then they will be starting to look at issues of raising growth and profitability.”

Forecasts
The arduous obstacles ahead for banks in the UAE are nothing to look forward to, as Moody’s and others are confident that negative market conditions will “persevere for at least 12 to 18 months.” Envisioning the worst case scenario, Madha foresees a lack of improvement in the property market and “that a major state developer could default on its loans and liabilities.” Yet it is unlikely the government would allow that to happen. Thursfield posits a similar scenario, but with banks being the ones to default. He points out, however, that this would also be “pretty unlikely.” On the bright side, says Thursfield, “it could be a good result and lead to consolidation and then you would have fewer banks going forward.” Mergers and acquisitions just might become more attractive to some of the 52 plus banks operating in the Emirates and possibly pose a long-term solution for the over-banked country. Governor of the UAE’s central bank, Sultan Nasser Al Suwaidi, in mid-January underlined that, “consolidation between banks may provide one of the most effective solutions to face the shocks of the crisis.”
In the most ideal scenario, Madha hopes to “have confidence brought back to the market by an alliance with Abu Dhabi, establishing the financial viability of all businesses in Dubai.” Thursfield claims the best case would be if banks in the UAE could “maintain profitability levels from 2008.” This will, without a doubt, be challenging.
It will take quite some time for banks to fully stabilize, as the long-term effects of the global turmoil take their final shape. Governor Al Suwaidi forecasts credit growth in the country to slow to no more than 10 percent in 2009, after surging more than 50 percent in the year to June 2008. Needless to say, 2009 presents many challenges for the banking sector and depends greatly on how well banks respond to last year’s outcomes.

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Capitalist Culture

Populism – Dazed by idolatry

by Michael Young
written by Michael Young

As the carnage in Gaza escalated in January, about the most popular foreign leader in the region was the Venezuelan President Hugo Chavez. We might be able to understand the Arab delight when Chavez expelled the Israeli ambassador from his country (as later did his Bolivian counterpart, Juan Evo Morales), but less understandable was why so many Arabs ignored that Chavez is a populist autocrat who not long ago tried to change his country’s constitution to extend his mandate.

The question might seem disingenuous. The obvious answer is that Arabs don’t much care about what Chavez does at home, as long as he stands as a symbol for those issues the peoples of the Middle East consider important: uneasiness with Western capitalism, suspicion of globalization, hostility toward the United States and Israel, and a taste for radical behavior, or at least what can be sold as such abroad. Fair enough. However, the too- frequent Arab attraction to foreign autocrats tells us a great deal about the Arab world itself.
Here we have the region that perhaps most suffers from despotism, that is the most in need of open societies, term-limits on leaders, and lucid alternatives to the visceral aggression underlining populist behavior, and yet whenever its peoples look overseas, they tend to embrace those leaders who in most ways duplicate the behavior of their own oppressors. Instead of a capitalist culture of free markets and free minds, many Arabs will go for the radically chic choice of applauding dictators who irk the West. This was especially visible throughout the Cold War. The notion that America was more popular at the time than it was under George W. Bush is only true in relative terms. Even if America is deeply disliked today, it was never particularly liked two, three, and four decades ago, when Arabs were moved much more by the likes of Fidel Castro and Che Guevara, or by the bevy of post-Stalin Soviet leaders from Nikita Khrushchev to Leonid Brezhnev, then they were moved by the generally duller representatives of Western democracies.
Defenders would say this didn’t diminish the fact that, for many Arabs, such approval was mostly related to parochial concerns. The enemy was Israel between the 1950s and the 1990s, so it was natural to lean in the direction of those who were most antagonistic to Israel’s leading sponsor after the 1960s: the United States. Perhaps, but if that was the case, then this was a remarkable example of how so many people in the Middle East allow their agendas to be shaped by what they are against, rather than what they are for. And this may be one explanation, among others, for why the region ends up being so tolerant of its foul regimes. This was certainly true in Iraq. That the US was responsible for a bloody war and its aftermath is entirely possible. That this could have been avoided had the Bush administration made less of a mess of its postwar policies cannot be denied. But the removal of Saddam was, in and of itself, a necessary step toward any realistic chance of achieving a democratic Iraqi future.
That future may come or it may not come, but under no circumstances could it come while Saddam Hussein was in power. Yet how many Arabs would admit this is true? A tiny minority. For over two decades, since the start of the war against Iran, Saddam was a hero to the Arabs. And if they could once laud the “anti-colonial” posturing of the mad Idi Amin Dada, for example, then we know why they had no problem with a Saddam Hussein. By the same token, if they could stomach a Hafez Assad or a Moammar al-Qadhafi, there was no reason for them not to look with sympathy on places like North Korea and North Vietnam, or to list Chavez today as their favorite foreign leader.
The writers Ian Buruma and Avishai Margalit put their finger on the problem in their essay ‘Occidentalism: The West in the Eyes of Its Enemies’. They wrote of liberal civilization that “[i]t is a threat because its promises of material comfort, individual freedom, and the dignity of unexceptional lives deflate all utopian pretensions.”
Indeed, the populist autocrat has in him the promise and excitement of the boldly unachievable. Many Arabs may never have been convinced that Brezhnev would bring on a bright millennium of justice, even though they sided with the Soviet Union in his day. Yet, somehow they could convince themselves that Castro would move us all closer to it, or Ho Chi Minh, or Chavez today. These all seem to be men of which dreams are made, charismatic men, though their legacies have often been nightmares. The path to utopia is usually paved with repression.
It’s a pity that so many Arabs should still believe in false utopias, but also a sign that when it comes to their own polities, they have nothing to believe in at all.

Michael Young

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Fortress America in Baghdad

by Paul Cochrane
written by Paul Cochrane

Opened in the midst of the slaughter in Gaza and the twilight of Bush’s presidency, the new American embassy in Baghdad garnered less coverage than when its astronomical budget was first publicized in 2005.
The opening was more than the completion of the largest and most expensive embassy in the world. It marked the day the US diplomatic corps moved out of Saddam Hussein’s former palace and handed it over to the Iraqi government, five days after US forces officially came under an Iraqi mandate on New Year’s day.
Many Iraqis are eyeing warily the move from one palace to what is essentially an even larger one. The embassy is far grander — albeit minus the gold plated bathroom fixtures — than anything Hussein ever built during his nefarious reign.
It is on a level of Cold War era grandeur, similar in scope to the colossal project Nicolae Ceaucescu attempted in Bucharest, the centerpiece being a palace the Romanian leader wanted to be seen from space.
The 104-acre embassy complex, which is the size of approximately 80 football fields, nearly turned into a similarly sized white elephant as costs ballooned to $700 million and the project taking nearly two years longer than expected. In that time it became a symbol of the quagmire Iraq has become for the US, with no end in sight and costs spiraling upwards. But with the embassy finished and operational, it now represents the most prominent symbol of ‘fortress America’ today and, moreover, that America wants to stay in Iraq for longer than Barak Obama’s presidency will last.
As the International Crisis Group commented in 2006, “the presence of a massive US embassy co-located in the Green Zone with the Iraqi government is seen by Iraqis as an indication of who actually exercises power in their country.”
Visible from space and larger than the Vatican, the embassy draws historical comparisons to the Crusader castles of the middle ages. All that is missing is a crocodile infested moat around the walls.
But secure it certainly is, nestled inside the Green Zone, with a 4.5 meter thick perimeter wall to protect this city within a city that includes a power station, a water treatment plant, schools, restaurants, swimming pools and a shopping area.
With an annual budget of $1.2 billion, the 5,550 Americans and Iraqis working at the embassy — half listed as security — are certainly not roughing it. The residence of the US ambassador to Iraq is 1,500 square meters, while the deputy chief of mission has a “cozy cottage” measuring 900 square meters.
Tough though a posting to Baghdad may be for the diplomats, State Department, FBI, and federal agents that are to work out of the embassy, it is far from the realities of the “red zone” that lies beyond the walls, of power cuts, broken sewage pipes and violence.
That the US needed a secure site is understandable, given the track record of attacks on US embassies. In Beirut, the Americans are in their third embassy in less than 30 years, while the former US embassy in Tehran stands as a memorial to the overthrow of the Shah, and resultantly the American presence in Iran, the walls covered in colorful murals depicting the US as an oppressor, imperialist and warmonger. As Ayatollah Khomeini said in December, 1979: “This place is not to be considered an embassy but rather a ‘spy center’.” Following the US embassy hostage crisis in Tehran, the US had to resort to the somewhat farcical position of operating out of the Swiss embassy.
A drive past other embassies in the region indicates how seriously security is taken, with the Istanbul compound a veritable fortress, as is the one in Amman, with armored personnel carriers lined up outside and reportedly surface- to-air missiles within the sandstone complex.
But as Niccolo Machiavelli points out in the section on fortresses in that Bible of realpolitik, The Prince, “If they are beneficial in one direction, they are harmful in another.” Indeed, despite US ambassador to Iraq Ryan Crocker saying at the launch that the new embassy is a testimony to America’s commitment to a “long-term friendship with Iraq,” given the US role in the country over the past nearly six years it is hard to see the embassy as a symbol of friendship. Furthermore, with the embassy a fortress, it doesn’t exactly give off the impression of amiability. But that is the Catch-22 situation in which America has placed itself due to its foreign policy decisions over the years in the Middle East. At the same time as presenting itself as a beacon of hope, democracy and freedom to the world, to gain access is akin to entering a maximum-security prison.
As Machiavelli remarked: “So, all things considered, I commend those who erect fortresses and those who do not; and censure anyone who, putting his trust in fortresses, does not mind if he is hated by the people.”

PAUL COCHRANE is a Beirut-based journalist

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Power for a Persian rapproche

by Riad Al-Khouri
written by Riad Al-Khouri

As instability in the region shows no signs of abating, the launch of a dialogue between the new administration in Washington and Iran is seen in the West and the Middle East alike as important for durable peace. While helping to solve long-standing regional issues, including problems like Gaza that affect stability in the Levant and beyond, talks between Tehran and the US could also shore-up the iffy American position in the region.

At the same time, Tehran’s need for friends and partners internationally will nudge it along the path to Washington. As with any sound diplomacy, a new approach to Iran needs sticks as well as carrots. Regarding the former, Germany said late last year that it wanted further sanctions to be imposed against Iran, hitting the bank and transport sectors. The suggested new measures aim to give the incoming US administration further means of pressure on Iran in any future dialogue, offering the carrot of incentives along with the threat of tougher sanctions over Tehran’s nuclear ambitions.
Iran, a leading oil and gas producer, denies seeking atomic weapons and says that its nuclear program aims to provide energy for a growing population when reserves of fossil fuels run out. At first glance, such an argument may appear strange, given that Iran has a massive reserve of hydrocarbons — especially gas, in which it is a world leader. For the time being, however, Tehran’s internal energy equation is precarious, but not because of lack of gas or crude oil underground. Rather, it is a question of politics and pricing.
One problem in this respect is that Tehran’s populist government tries to keep the poor happy through a subsidy system. Direct and indirect subsidies on goods in Iran amount to the equivalent of many tens of billions of dollars a year. However, under increasing financial pressure, Iran is considering a measure that would abolish costly subsidies on fuel and electricity, while compensating poorer people with cash. Currently falling oil prices encourage this and similar steps, which are part of a wider plan to make the country more efficient. Gasoline and electricity, among other basic items, are very cheap in Iran, but if the proposed measure comes into effect, prices of such vital supplies will rise at least fourfold.
Yet the point is being made in Tehran that prices need to become a reflection of real economic forces for the system to be reformed and that 60 percent of the money saved would, in any case, be used to boost the spending power of people with low and middle incomes. One of the basic problems of the Iranian economy is that despite the country’s wealth of varied natural resources, oil revenues still account for 80 percent of foreign currency receipts, making Tehran highly vulnerable to petroleum price shifts. The inability to diversify is partly due to lack of foreign investment and other forms of failure by Iran to engage with the world economy.
Meanwhile, crude output might fall drastically and the Islamic republic could even cease exports because of ageing oil fields and a lack of foreign technology. Crude oil production may drop to as little as three million barrels per day (bpd) by 2015 from over four million last year and the country could even halt petroleum exports (having shipped about 2.3 million bpd overseas in 2008).
Is this unthinkable? No. Without major new investments in Iran, its output and exports of crude oil will surely drop over the next few years. Though the Iranians are the second-largest producer in the Organization of Petroleum Exporting Countries, Tehran faces the prospect of an eight percent annual decline in production over the next decade because of the twin problems of lack of investment and old technology. Sanctions by the West and the tight credit market resulting from the global crisis have continued to cut financing for Iranian projects, while a lower demand for energy has already caused crude oil prices to sink. As a result, Tehran is looking for new partners to develop major projects, but because of sanctions, cannot find them in the technologically advanced West.
One of the problems for Iran’s energy sector is that it extracts less oil from the ground because of lack of adequate projects to enhance recovery. New developments using high technology could help compensate for natural declines in mature oil fields. But unless current impediments facing the oil industry are removed, rising internal demand may force crude exports down to one million bpd by 2015. This makes reconciliation with the West even more urgent.
The alternative is more Western-Iranian enmity, which risks destabilizing the Levant, the Gulf and eventually the whole world.

Riad al Khouri is senior fellow of the William Davidson Institute at the University of Michigan in Ann Arbor

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Death and deceit for Gazans

by Peter Speetjens
written by Peter Speetjens

Whatever happens in Gaza, blame Hamas! That was the official line of Israel’s well-oiled PR-machine and it was largely swallowed by most Western politicians and mainstream media. Hamas started it, so the argument goes, and if you hit someone, you may expect to be hit back. Hit Israel and expect to be hit back hard.
This is of course a quite simplistic view of things. First of all, Hamas did not start it. As Israeli columnist Uri Averny pointed out, the cease-fire between Hamas and Israel held for months. It was Israel that provoked Hamas by sending an army patrol into Gaza killing three Hamas militants allegedly digging a tunnel. Gaza’s ruling party replied by firing a salvo of Qassam rockets into Israel.
Now, one may argue that shooting homemade rockets into Israel is not the most effective way of promoting one’s cause and that it is time to find another method, but one is on thin ice to claim that Hamas initiated the conflict. In fact, as Averny also pointed out, it was predominantly Israel that did not live up to the conditions of the cease- fire, as it refused to lift the economic blockade that has strangled Gaza since 2007.
Nearly every international aid agency last year sounded the alarm. UNRWA reported last summer that half of Gaza’s population lived on food handouts, while unemployment amounted to 70 percent and that 87 percent of the population lived under the poverty line of $2.40 a day. The World Bank last year warned that the Gaza economy ran the risk of “irreversible collapse.”
Yet these gloomy observations hardly made headlines and they fell on deaf ears among Israel’s diehard supporters — and Hamas’ many enemies — who claim Hamas is to blame for the sorry state of Gaza’s economy. The fact that Israel has failed to implement the Oslo Agreement since 1994, long before Hamas even came to power, does not change things a single bit. That’s just politics, stupid!
The 1994 Paris Protocol on Economic Relations between Israel and the Palestinian Authority stipulates, “there will be free movement of industrial goods, free of any restrictions, including customs and import taxes between the two sides,” and “the Palestinians will have the right to export their industrial produce to external markets without restrictions.”
More importantly, the question of who is responsible for what in the latest wave of death and destruction in Gaza cannot solely be answered by determining who started it. Even if Hamas initiated the Israeli attack by firing rockets, that does not justify disproportional military retaliation. No courtroom in the world allows one to endlessly stretch the required link between cause and effect, as the right to self-defense is limited by the principle of proportionality. Yes, Israel has the right defend itself. No, it cannot respond in any way it wishes.
To put it in simple terms: if you hit someone in the face, the recipient is entitled to hit you back. They, however, are not entitled to bring out a crowbar to break both your knees, bomb the electricity plant in which you work and kill your whole family. On January 18, the day Israel unilaterally announced a cease-fire, Hamas rockets over a period of some three weeks had killed three Israeli civilians and 10 Israeli soldiers were killed. Over the same period, at least 1,300 Palestinians were killed, an estimated one third of whom were children. The immense material damage has since been estimated at nearly $2 billion.
Finally, the role of international media, such as BBC and CNN in the spectacle of death was highly embarrassing. Not allowed into Gaza, their reporters stood quite literally on the Israeli side of things. Their job was essentially to read out Israeli press releases and make sure that any accusation of wrongful conduct from Palestinians or the United Nations was countered by a smooth-talking Israeli press officer who, no matter what happened, blamed Hamas.
Israel bombed not one, but four UNRWA schools filled with refugees? Hamas is known to fire rockets from UN sites. Israel bombs a UNRWA truck killing its driver? Hamas is known to have fired at UN trucks in the past. Israel bombed a mosque filled with people? Hamas is known to hide weapons in mosques.
The Western media proudly claim to be objective, as they show both sides of the story. Yet, giving equal attention to both sides of a conflict that is essentially unequal, means taking sides. The war takes place in Gaza, Palestinian victims outnumber Israeli casualties by at least 100 to one and yet the New York Times publishes an equal number of photos of destruction in Gaza and Israel, therefore producing a false impression of the conflict.
To me, the war and its coverage are best summed up by a fragment starring BBC reporter Bethany Bell. Standing inside Israel, she first told us that some 60 air strikes hit Gaza overnight. We see black smoke behind her. Meanwhile, she continued, 12 Hamas rockets were fired into Israel. One of them hit a kindergarten. The kindergarten, Bell said, was empty.

Peter Speetjens is a Beirut-based journalist

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Terror.com

by Mohanad Hage Ali
written by Mohanad Hage Ali

Last November, senior military leaders in the United States took the unusual measure of briefing the president on “a severe and widespread electronic attack on Defense Department computers.” According to a Los Angeles Times’ report, the attack, which was believed to be originating from Russia, targeted combat zone computers and the US central command overseeing operations in Iraq and Afghanistan. Nevertheless, the security services’ primary concern was whether its non-state enemies could acquire the capability to conduct cyber attacks against Western targets.
More than two years earlier, US authorities warned there was a threat, posted on a website affiliated with Al Qaeda, to attack the stock market and banking services online. The threat was apparently issued as revenge for the detentions in Guantanamo Bay. The US Homeland Security Department called it an “aspirational threat”.
The magnitude and consequences of such attacks are best comprehended when the Internet economy’s size is taken into consideration. Internet dealings and transactions today are a vital part of Western economies. According to a University of Texas at Austin study, the Internet economy “supported an additional 650,000 jobs in 1999 as revenues soared to $523.9 billion” in the US alone. The same study, conducted just under a decade ago, noted that even then the Internet economy “directly support[ed] 2.48 million workers, more than the insurance, communications and public utilities industries and twice as many as the airline, chemical and allied products, legal, and real estate industries.” This growth has prompted the Organization for Economic Co-operation and Development (OECD) to ask in a 2008 report, “has the economy become an Internet economy?” The OECD also stated, “increasingly, the largest productivity gains for businesses come from using online networks in some form.”
The online economy is growing to the extent that hacking a single company’s website for a day costs millions of dollars. For instance, BBC news reported in 2004, “three- quarters of UK companies have been hit by security breaches in their computer systems over the past year, costing billions to industry.” It was noted in the same report that “the average computer incident costs large companies $165,000 a time.”
The US warning against Al Qaeda cyber attacks in 2006 held some credibility as the Internet played an increasingly significant role in its operations. The new threat cyberspace poses was also shown when U.K. based extremists used the Internet to recruit other members, including teenagers. Through password protected web forums and chat rooms, they indoctrinated and prepared those recruits to launch suicide operations. Even the explosives used were home prepared according to “recipes” widely distributed on Al Qaeda web forums.
The militants’ success in exploiting the Internet was most apparent in last year’s failed Exeter bombing. Nicky Reilly, a 22-year-old of Irish background, entered the Giraffe restaurant’s toilet in Exeter to assemble his bomb before detonating himself. A slight mistake in his “internet bomb recipe” prompted an early explosion inside the lavatory, which left him with facial injuries. According to the police investigation, militants situated on the Pakistan-Afghanistan border area “groomed” Reilly through online chat rooms to become a suicide bomber. Sitting on his computer for long hours everyday, he watched more than 2,000 Al Qaeda videos, researched possible targets and then downloaded a bomb recipe.
In that same year, the trial of Aabid Hussein Khan’s Bradford terrorist cell exposed the Internet’s extended or unconventional use. This cell, which was plotting to attack the Queen and members of the royal family, not only compiled detailed information about different targets from the Internet, thus lessening the need to physically survey the area, the cell members also allegedly sought recruitment and training from the World Wide Web.
This British online terror saga started right after the Afghanistan and Iraq invasions, with the case of a young Moroccan immigrant named Younis Tsouli — whose online alias was Irhabi 007 — who dazzled the Western intelligence agencies for years before his capture in a tiny West London flat. For two years, Western intelligence services chased the 22 year-old Internet hacker, trying to uncover his real identity. Irhabi 007’s Internet activities involved propaganda, distributing training manuals, instigating others to commit acts of violence, hacking websites and distributing a hacking manual online. He was dubbed “the master” of online attacks, hacking, programming, and digital media design.
According to some reports, Irhabi 007 was making “explosive new use of the Internet,” specifically through websites and password protected forums that “cater for would be Jihadists.” Tsouli disseminated training manuals and propaganda material online, and then began helping radicalized youth to perpetrate attacks.
So far, Internet staged and planned attacks have failed to achieve their goals, but will 2009 be the year cyber terrorism makes its mark?

Mohanad Hage Ali is political editor at al-Hayat newspaper

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Society

IWC – Gianfranco D‘Attis (Q&A)

by Executive Staff
written by Executive Staff

IWC brand manager, Gianfranco D’Attis and famed IWC watch designer Kurt Klaus recently made a stop at Cadrans in downtown Beirut to promote their new Vintage line in commemoration of the International Watch Co.’s 140th anniversary. The Swiss company has a long history in the Middle East. Executive Magazine sat down with D’Attis to discuss customers, sales and strategy.

E What is IWC’s best selling model in the Middle East market?
We have a number of watches in our portfolio. The basic watch range includes the Aquatimer, the Ingenieur, the Pilots and the Portofino. That is the basic entry price, from $3,000 to $10,000. Then we have the manufacture pieces, made with precious materials. These are basically the Da Vinci line, the Portuguese and some complications. The best selling line overall in the Middle East, with about 50 percent of commercial turnover, is the Portuguese. The second best selling line, with 25 percent of the market, is the Pilot. Together they make about 75 percent of the turnover, not only in the Middle East, in fact, but worldwide. These are icon products. These are products that are differentiating themselves from the competition, because they are unique.

E How long has IWC had a presence in the Middle East?
IWC has been in the Middle East for over 30 years. Cadrans has already been working with us for 30 years. Richemont bought IWC seven years ago. Then we started integrating their platforms five years ago. So for the last five years we have been aggressive, expanding in the Middle East, increasing brand awareness, investing in marketing, and investing in boutiques and sales staff. The brand has really been developing quite fast in the last three to five years and it is performing extremely well. We have a team of six people in Dubai and we are constantly expanding. Now we are trying to penetrate the Indian market, which is a very strategic market for IWC in the future. As mature markets will be under pressure over the next two years, we believe that emerging markets will be absorbing the pressure and that they will deliver profits. This will help the brand to balance turnover and performance.

E What are the strongest markets for IWC in this region?
The strongest market is obviously the UAE. We have our largest regional distribution there with two boutiques and about five points of sale. The second strongest market is Turkey, because we also manage Turkey from Dubai. Then immediately after Turkey, you have Lebanon, because the Lebanese like IWC. They like it because it is also a strong brand in Europe, because it is understated, it’s chic, it is more or less what the Lebanese are looking for in a watch.

E How many points of sale do you have in Lebanon?
Right now we have two points of sale. We are working with two partners, Cadrans and Atamian. We are also planning to open a boutique sometime in the next 12 months. When Solidere opens its new addition, we will be present there.

E Does IWC keep the number of its points of sale low in order to maintain brand image?
We are actually reducing the number of points of sale and upgrading existing ones to boutiques. We really want to have a selective distribution network. For instance, five years ago we had 1,200 points of sale around the world and we are reducing that to about 800. The strategy is really to make it exclusive, selective and to upgrade the existing network to boutiques.

E Do you foresee a time when IWC watches will only be available in IWC boutiques?
That would be the ideal scenario. But obviously we need strong partners on our side in these special times. IWC is not a retail brand, IWC is a wholesale brand. That is why we need to find the right balance. Retail is for image, wholesale is to find a new customer that may not necessarily want to come down to a boutique. He likely has a special connection to our partner and we may not be able to reach him.

E What was IWC’s profit for 2008?
We do not publish profits or sales numbers. This is strictly forbidden by the group.

E Is IWC a publically traded company?
Richemont is publically traded. IWC is just one brand within this holding company Richemont. They hold brands like Cartier, Montblanc, Vacheron, IWC and Panerai.

E What percentage of totals sales does the Middle East represent for IWC?
We have aggressively developed the share of turnover in the Middle East. We started from nearly zero percent five years ago and today it is between five and 10 percent. When IWC got its start in the region 30 years ago, it had a small but important turnover. We had very personal relations in the Middle East with certain big families. In Oman, we were producing special quantities for the Sultan; in Dubai we were doing something for the sheikh. IWC was a very niche brand for special families in special quantities. So it was an important market, but the turnover was not very significant.

E What do you see as some of the biggest challenges that IWC will face in the near future in light of the ongoing global financial crisis?
Luxury in general will suffer because people are scared for the future. They don’t know when the economy will turn around. We feel that products in the price range of $7,000 to $20,000 will not be greatly affected and products below $5,000 will be much more affected. So this middle segment will be suffering, but the high-end should remain strong.

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Executive Insights

Talent recruitment for the human capital agenda

by Rabih Abouchakra, Bahjat el-Darwiche & Soon Rabb
written by Rabih Abouchakra, Bahjat el-Darwiche & Soon Rabb

In today’s economic environment it is easy to focus on a company’s financials and ignore what has for the past two decades been an increasingly challenging priority — talent acquisition. Given the number of companies reducing workforce numbers by the thousands or going out of business, it might even seem that human capital is in oversupply. While the immediate recruitment requirements of many companies may be more easily met these days, human capital issues still account for some of the greatest challenges businesses face. Recent Booz & Company research and experience with multinational clients highlight key challenges faced by human capital leaders.

  • Escalating competitive pressures. These include the demand for new skills and capabilities, ever-higher standards for productivity and a less-benign regulatory environment that increases the need for employee education.
  • Labor market changes. These include an aging workforce, a lack of qualified workers in key industries and professions, and Generation Y workers’ expectations for employment relationships.
  • The changing nature of work. These shifts include greater emphasis on knowledge work, the extinction of the apprenticeship model, a lack of linear career paths and increased demand for immediate results.
  • Competition in a “flatter” world. This is shown in globalization, industry consolidation, collaboration across organizational and geographic boundaries and the need for rapid knowledge capture, dissemination and protection.

While these challenges are common across companies, industries and even countries, knowing how to respond to them has been and will be a source of competitive advantage. These challenges are as critical as ever in Middle Eastern and North African (MENA) countries. The global financial crisis offers organizations in the region the chance to build their talent pool. In a region of unprecedented growth that is experiencing talent shortages, it is crucial to invest in recruitment, nurture leaders, and redesign workforce practices to build capability and competitive advantage. Effective recruitment starts with a forward-looking vision and long- term plan for talent acquisition. For the past decade, finding enough of the right people has been a challenge. A key lesson for human resources is to develop “employee insight” by using employee segmentation. Employee segmentation is the basis for modern human resources and customized career alternatives for a diversified workforce. In the MENA, the primary effort has been to recruit and build capacity. Now, with its variety of talent segments (e.g. skilled expatriates, local workforce, interim employees), using employee segmentation may be an opportunity for companies here to build capacity and capability. Understanding employee segmentation is one strategy. Understanding and effectively using one’s brand is a complementary strategy. Employer brands that attract talent often articulate a clear, shared purpose above the profit motive. Few MENA companies take full advantage of employer branding, but those that do will reap the benefits of attracting and retaining the best people. Forecasting talent needs is essential. Organizations must be prepared to act whenever exceptional people appear — even in economic hard times.
One German industrial company, ThyssenKrupp AG, established a special hiring fund in its technologies business. The budget is dedicated to building the talent pool in that specific business and it is separate from the traditional hiring budget. The imperative is to find the talent, hire them and then decide how to deploy them in the business. In highly competitive talent markets such as the MENA region, strategies that focus on leadership, learning and adaptability will be critical to the human capital agenda, while successful leaders obtain higher levels of employee engagement and retention. The best training and learning programs are closely integrated with the business, driving change, innovation and value. While the learning function should resemble a sophisticated, efficient and cost-effective adult education enterprise with measured outcomes and ROI, the individual also takes an active role in learning. This linkage between individual learning and organizational goals is critical, as individuals begin to ask themselves what they need to learn to have an impact on the bottom line rather than being told by managers and trainers.
Human resource’s capabilities, competencies and focus must be tightly aligned with the company’s business priorities. A business savvy HR function will realize that people are competitive assets and will design a compelling strategy to realize that asset’s value. This strategy habituates high performance in the people who work in every function, region and business unit of the company. Saudi Telecom’s human resources strategy, like its operational strategy, is designed around the needs of customers. Using a shared-services model in which human resources is a strategic partner with the business units, human resources professionals think in terms of providing services. Either they are able to develop the right training for customers inside the company or the business units are allowed to obtain the training they need from outside vendors. Human capital development remains at the forefront of MENA’s development agenda. While the region has not been immune to the financial crisis, MENA organizations may still be able to use the crisis to move from more tactical recruitment efforts to developing and implementing a human capital agenda that builds and develops much needed workforce capability.

Rabih Abouchakra is a partner and Bahjat El-Darwiche and Soon Rabb are principals at Booz & Company

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