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Conflict vs. Growth: Political Threats to a Bullish Region

by Executive Staff
written by Executive Staff

The Middle East looks like a paradox: On the one hand the high oil prices boost the regional economies, financiers are running out of investment projects, Gulf stock markets are recovering from the 2006 slump and one of the last “closed economies,” Syria, is opening. However, all this economic development occurs in the shadow of a whole number of political Damocles’ swords. External threats – an American war with Iran, which would affect the Gulf, and an Israeli-Syrian conflict that could draw in Lebanon — and domestic quandaries — ranging from out-of-control population growth to sluggish bureaucracies and the Islamist challenges to ruling elites — could all spoil the current growth.

The twin forces of oil money and attractive economic policies have boosted the region’s economic outlook and general confidence. Mega-scale infrastructure, tourism, and real-estate projects — like the Abdallah Economic City near Jeddah and the Dubai Metro — are springing up, not just in the Gulf, but also beyond the boundaries of big oil-producers. In Damascus we find the Eighth Gate and in Amman there are the Abdali projects.

It’s easy to see from whence this bullishness came. In 2006, MENA oil revenues stood at a staggering $510 billion, $75 billion more than the previous year. With the barrel of oil hitting $75, oil producing nations are swimming in a cash surplus, while remittances and foreign direct investment (FDI) to resource-poor countries have also risen to historic levels.

A time to boom

The current high oil price was caused, mainly, by expectations of continuing strong demand, especially from the fast growing economies of China and India, fears of supply disruption in a number of hotspots such as Iraq, Nigeria and possibly Iran, concerns about the reliability of major oil/gas supplies in Russia and Venezuela, as well as general capacity constraints on the hydrocarbon sector’s infrastructure.

OPEC even estimates that, because of increased demand (reaching 95.8 million barrels per day), falling supply in mature areas such as the North Sea and Mexico, and delays in new projects such as Russia’s Far East, there will be an oil supply “crunch” five years from now, leading to even higher oil prices. The same is forecast for the gas sector.

Buoyed by this dramatic rise in hydrocarbon revenues the MENA region’s real GDP growth stands at 6.3%, up from 4.3% during the first half of the decade, and an even lower 3.6% during the 1990s. In 2006, remittances, flowing from oil- to labor-exporting countries in the region, have reached $19.3 billion for MENA recipient countries, while the tourism sector saw solid growth of 14.5% compared to a 12.6% rate in 2005.

High oil revenues have also spurred FDI, which reached more than $24 billion in 2006, triple the 2004 level. The main recipients are Egypt, Lebanon, Morocco, Tunisia Jordan and the UAE. This intraregional flow of FDI is not stopping any time soon as it finds homes in energy, infrastructure, real estate, and tourism sectors.

Most of the region’s countries have managed to expand their fiscal surplus or, in case of state deficits, significantly reduce debt. In 2006, MENA current account surplus rose to 23% of GDP or $280 billion. This has had positive effects on the labor market, pushing the unemployment rate from 14.3% in 2000 to under 10% in 2006.

The World Bank, in a study released in June 2007, predicts that “prospects for MENA are potentially favorable for the period through 2009.” While an easing oil price might slow down growth among the producing countries, the non-producers are expected to compensate with stronger growth with the region holding steady at over 5%.

Investment data shows that the countries in the region are aggressively pursuing exploration for oil and gas deposits. The Maghreb countries are prospecting new blocks, Egypt is searching on its northern coast and southern border, Jordan — perilously dependent on external supplies — is investigating to exploit oil shale deposits, and even Lebanon has drawn up plans to develop offshore gas reserves.

Much of the surplus wealth is re-invested in the region. By 2010, the GCC countries plan to have spent $700 billion in the MENA oil and gas sector, infrastructure, and real estate projects. Parallel to the oil price hike, the region has also undergone a phase of economic liberalization, partially owing to the demands of globalization and partially owing to the realization even by such nomenklatura states as Syria and Libya that clinging to the old ways would spell certain economic (and with it political) demise.

But wait

Yes indeed, the region is enjoying an economic prosperity last seen in the heydays of the 1970s oil boom. Everywhere one travels, from hyper-rich Dubai to “If-Egypt-is-3rd-World-then-this-must-be-6th” Khartoum, construction sites are buzzing, consumer goods are in demand, and confidence is high. Yet, there are clouds on the horizon. Politics — both global and domestic — could spoil the party and throw spanners into the spinning wheels of the economic boom.

This summer, hints by the advisors to George W. Bush that the U.S. government would like to “solve” the question of Iranian nuclear facilities (read: Iran’s attempts to produce nuclear weapons) before the administration leaves the White House in early 2009, were answered by Iran’s Supreme Leader, Ayatollah Ali Khamenei, with an ominous warning that in the event of a US/Israeli attack, the Islamic Republic would close the Strait of Hormuz, highlighting, yet again, the vulnerability of the Gulf’s main oil and gas export route. The body of water, at its narrowest point barely 34km (21 miles) wide, is the gateway for one-fifth of the world’s oil supply, which in 2006 amounted to 17 million barrel per day (bpd).

This particular threat — coupled, for good measure, with that of retaliatory attacks against US military bases in GCC countries — is certainly the darkest case scenario. Iran will no doubt think long and hard before it decides to jeopardize its good relations with the UAE and Qatar and the oil-hungry economic powerhouses of East Asia. Nevertheless, the chance that Tehran, if it feels cornered, may resort to such an act of despair, or that in the event of a military confrontation, elements within the Iranian army or Revolutionary Guard may take unilateral action, cannot be dismissed as the stakes are too high. In fact no one is taking any chances.

Securing alternatives

Pipelines that bypass the straits already exist while others are on the drawing boards. Because of already existing political upheaval and discord, however a number of already existing pipelines — like the Trans-Arabian Pipeline going from the Saudi Gulf coast through Jordan and Syria to Lebanon’s Mediterranean coast or a number of pipelines running through Iraq — are unusable.

Saudi Arabia’s East-West Pipeline, running from the Abqaiq oil complex on the Gulf across the peninsula to Yanbu on the Red Sea, is currently underutilized, as the shipments via Yanbu add up to five days to the travel time to the Asian customers, but could easily be brought to its full capacity of 5 million bpd.

In the UAE, Abu Dhabi’s state-owned oil investment company has just tendered the engineering and design contract for the Abu Dhabi Crude Oil Pipeline (ADCOP), which will carry 1.5 million bpd — over half of Emirates’ production — to the oil terminal in Fujairah on the UAE’s eastern coast, thereby circumventing the Strait of Hormuz. Another project, at this point only in the pre-planning stage, is the Trans-Gulf Strategic Pipeline (TGSP), which would run along the southern Gulf coast all the way to the Indian Ocean, connecting the “inner” GCC countries Kuwait, KSA and UAE with the “outer” member state Oman, eventually even including Iraq and Yemen and stretching up to 1,500 km. This Strait-of-Hormuz-Bypass is envisioned to carry as much as 5 million bpd.

Eventually, when the two new conduits are constructed in many years to come, those three pipelines could take two-thirds of the oil currently carried by tankers, thus cutting shipping costs, reducing traffic in the narrow straits and busy oil terminals and — by offering a safe route — ensure continuity of oil and gas exports.

But in the meantime all eyes are on the deployment plans of the American aircraft carriers and the training exercises of the Iranian navy.

Heating up

Further west, in the Levant, the external threat is not so much from a direct US intervention — with almost all ground troops busy in Afghanistan and Iraq, the Americans have only capacity for air-strikes and thus the cup of regime change has passed by the Syrian government — but for the time being the frontlines of the Arab-Israeli conflict could easily heat up.

We have already seen what a “heating up” can do in Lebanon, where in the summer of 2006 the economy was brought to its knees within a month and projected growth of 6% was cut down to zero. The Cedar Republic remains in the throes of internal quarrels and external interference.

In a way, Damascus in summer 2007 resembles Beirut 2006 before the Summer War: bullish about its economic future, with drastic upsurge in consumption, real estate developments and other FDI-fuelled projects springing up, yet all linked to the “IF no war breaks out” caveat. Investors, even those who like to take a punt with their diversified portfolios, don’t like war.

However, that might not be Syria’s biggest problem. Following the, albeit slow, economic opening, this infitah policy is not a sure bet. Out of an estimated 20 million people living in Syria today (including up to 1.5 million Iraqis), 1 million are now doing better than under the old socialist economy — but for the other 19 million the situation is remaining stagnant or getting worse in relative as well as absolute terms. Today’s conspicuous consumption — almost unheard of a decade ago — is not only a sign of the country’s economic prosperity but, in a society still officially cherishing social equality and solidarity, also breeds resentment among the have-nots. It remains to be seen if the Syrian government will be able to contain the social tensions in the way Egypt and other socialist-gone-capitalist countries of the region have, or if economic stratification will accomplish what secular and Islamist opposition never could: break the regime.

The other domestic challenge that Syria, together with a whole number of countries in the region, faces is that of rapid demographic growth not matched by a similar rate of job creation. Major oil producers like Saudi Arabia and Libya have the money to absorb job seekers into the state bureaucracies and pay them meaningful wages. Less affluent economies also provide university graduates with public sector employment, but at salaries that force many bureaucrats and teachers to take second jobs to make ends meet. Egypt is a prime, and through its film industry a well-known, example.

However, economic disaffection is brewing in all but the super-rich GCC countries. So far, many of the region’s regimes have benefited from a tight policing of their population and fear of the alternative — as cited in Iraq — has prevented the social upheavals predicted by political pundits at least every six months from breaking out. But the social problems — growing populations and rapid urbanization — will not just go away and can only be addressed by solid economic growth across all social strata.

Dealing with demography

In the Gulf countries, particularly Saudi Arabia, policies of “nationalization of the work force” are seen as a way out of the dependency on foreign labor and expertise and prepare the countries for the time “after the oil” when their economies will have to generate revenues from other sources. The smaller Gulf nations have minute populations relative to their GDP, whereas Saudi Arabia, with a current population of 22 million nationals (plus 5.6 million foreigners) and a 3+% population growth rate is facing a true conundrum. The strong rise in oil revenues has alleviated the pressure for the time being, but contrary to its brothers in the GCC, in terms of demographic challenge it belongs more in the “Egypt, Iran, Syria, Yemen” camp.

Across North Africa, the story is similar: demographic growth unmatched by creation of jobs that pay livable wages breeds discontent within the political system, regardless whether it is monarchist, republican, or whatever. Libya is the 18th-largest oil producer in the world with a small population of just 5.6 million. After it had “come in from the cold” and rapidly developed economic ties with the West — the UK signed a $900 million oil and gas exploration deal — domestic challenges replaced foreign politics as the No. 1 threat to the stability of Qaddafi’s regime with criticism about government policies and social disparities increasingly based on an Islamist worldview.

Indeed, throughout the region, variations on the Islamist theme of politics have become the most pervasive ideology. “New veiling” and the surge of “Islamic finance” alike are markers of this development. This political phenomenon is by no means homogeneous — ranging from the Islamic capitalists of Kayseri (Turkey), whose “If you are successful, God loves you” outlook mirrors the Protestant work ethic, to the anti-business extremists of the Taliban. However, regardless of the specific flavor, it is the followers of political Islam who challenge the status quo across the region and in countries as diverse as Morocco, Egypt, and Saudi Arabia.

It remains to be seen whether the powers that be can successfully accommodate or even integrate these Islamist currents. Turkey is a good example that business-friendly Islamists in power can actually be beneficial to economic prosperity in contrast to overly state-focused secular and military elites, whereas Khomeinist Iran proves that dirigiste Islamist regimes could cause the exact opposite — an ossification of the economic sectors. Of course, then there are the hard-line ideologists who oppose and attack anyone who doesn’t follow their own model. With these, dialogue is impossible and it is they who pose the greatest threat to prosperity, since they do not care about the economic, and thus social, repercussions of their actions, exemplified by the terror attacks against tourists in Egypt and the 2006 summer war in Lebanon. Both — one extremist group and one mainstream parliamentary party — carried out actions that had negative impacts on the local economies of their respective countries.

As all countries in the region, including Gulf states, are enlarging the percentage of tourism revenues within their GDPs, they become more and more reliant on their image as “safe” locations. Whereas the infrastructure can be quickly repaired after war or a terrorist attack, convincing tourists and businessmen that it is again safe to visit is a much harder task. Just look at Lebanon this summer. The place should be full of tourists but they chose to stay away.

Hard to predict

There is no inevitability of disaster. Indeed, warding off those threats doesn’t need magic and the region’s governments and business leaders have all the means at their disposal to shield their countries against outside perils and solve domestic problems.

Prudent allocation of the last years’ high revenues, such as strong debt-reduction and a build-up of financial reserves, give the region’s economies — and their political establishments — good positions to absorb unforeseen shocks and ward off possible threats. Apart from Iraq, Lebanon, and the Palestinian Territories, racked by long periods of political instability and war, most of the countries in the region should be able to weather even a worst-case scenario, on the condition that it is short-lived and followed by an almost immediate recovery.

However, they are not (yet) geared to withstand any major long-term instability.

As long as the current situation prevails — even with Iraq mired in occupation and fratricide, Iran playing with the nuclear option, the Arab-Israeli conflict nowhere near a solution, etc. — the region’s economies will continue to prosper. In fact, countries in the region have a vested interest to maintain a certain “balance of risk” — they profit from a political situation volatile enough to keep the price of oil at the current high but not too unstable to (1) threaten continuity of prosperity and (2) push consumers to look for alternatives to the Gulf’s (and North Africa’s) oil and gas.

The oil producers are keen to keep the price within a band of $50-80 per barrel (pb). If it drops lower, they will face significant financial problems for two reasons. The first is the break-even factor. Qatar, with a break-even price of $47 pb, would be the first to suffer. Oil economies Algeria, Saudi Arabia, UAE and Kuwait have more leeway, since their break-even price is between with $38.80 (KSA) and $22.40 (Kuwait). However, for the countries whose economies are essentially oil-based, any decline in the oil price automatically translates into a significant drop in GDP. Thus, a 10% decline in world oil prices would cut Saudi Arabia’s current account as percentage of GDP by 5.2%, and Qatar’s by 5.1%.

Non-producers, while having to foot larger energy bills, will profit overall from high oil and gas prices, since the vast amounts of petro-dollars that are flowing into their economies in the shape of FDI and remittances outweigh rising energy costs.

Furthermore, cautionary tales like those of Iraq and Lebanon, and incidents of Islamist terror serve the region’s political and economic establishments — often one and the same and in all other cases symbiotically connected — to curb domestic dissent and prevent it from gaining mass appeal. However, the only way to ensure that the current calm, after a decade of trouble in the 1990s, isn’t just a temporary lull before the next storms is if the region’s leaders rapidly create and maintain the frameworks for a self-sustained continuous economic growth. In order to achieve that, they have to significantly decrease reliance on the essentially unpredictable price of natural resources and put less emphasis on the state as the main driver and provider of social prosperity.

It remains to be seen if the balance of risk can be maintained.

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If you think getting a resident’s visa to the Emirates is difficult try being a pet!

by Executive Staff
written by Executive Staff

Years ago cats were the easiest pets to take on an airplane. They were small enough that most airlines let them on as hand luggage. Because of their size and disposition they were rarely scrutinized in the same way dogs are for health certificates and vaccine cards when they arrived at airports, particularly outside Europe. That has all changed, especially in the UAE.

Last year, the small matter of a war forced me to relocate my family to Sharjah. Getting the paperwork — work permits and residents visas — in order is always a headache but I groaned when I learned that pets, in this case our Siamese cat Simone, were not exempt and needed their own papers.

To avoid having your pet quarantined on entry here are the steps one needs to follow: make sure your pet’s vaccines are up to date. Then, take said pet to its vet and have a micro-chip implanted in either it’s neck or behind the ear verifying that the information on the vaccine card tallies. In Lebanon, the cost for the chip is around $40. Once that is done, you (or your vet) need to get a “Good Health Certificate” from the Ministry of Agriculture in the country you’re travelling which states that all the health documents are legal and that your pet is in good health. It is advised to get that document within five days of departure. In Lebanon, the “Good Health Certificate” costs around $20. Then you need an import permit from the UAE Ministry of Agriculture. To get that you need to fax the vaccine card, the Good Health Certificate and a copy of your passport. If you have no one in the Emirates to pick up the permit your pet will, on arrival, be detained at the airport until you can produce the import document, which costs AED200 or $56.

On landing in the UAE, you must proceed to the veterinary clinic in the cargo section of the airport to pick up your pet. If all your paper work is in order you need to sign a few more documents, pay an additional AED 100, ($28), and you and your animal are then free to leave.

To avoid putting Simone in the hold, I called all the airlines in Beirut that have flights to the United Arab Emirates to see which one would accept my cat inside the cabin. I didn’t think much of it because I am used to seeing cats, sitting in cages on their owners’ laps on aircrafts. I called about 10 airlines that make the Beirut Dubai/Sharjah run to learn that only Middle East Airlines (MEA) allows pets on board. All the others said that animals have to be checked in as cargo and put into a pressurized, temperature-controlled section in the cargo area of the plane. Poor Simone. They added that the rule was imposed on them by the Emirates port authority. The only odd exception other than MEA was Emirates Airlines which forbids all animals inside the cabin except falcons and even they need a ticket. This, by the way, is nothing new. In the mid-1980s when Emirates was in its infancy, I was lucky enough to return first class to Dubai from Pakistan. A lucky break, I thought as I turned left, past the curtain into the world of privilege. Or so I thought. I had been allocated a window seat and my fellow passenger was a cage with four hooded falcons returning from a hunting trip in the Punjab. Their masters were relaxing in the row in front of me.

Back in Beirut, I proceeded to the airport with Simone and his accompanying paperwork. The check-in was simple (apart from the $70 weighing fee) and the flight went well with Simone sleeping the entire journey. After retrieving our luggage in Dubai I thought we were home free but at the last control, one of the customs agents saw the cage and escorted me to an office. “Why had I been allowed to carry the cat on the plane,” I was asked. Simone was promptly taken away to the cargo area where I had to go and rejoin the formal process before I could take her home.

We brought our cat back to Lebanon with us for the summer and the vet at the Dubai airport assured us that all her papers were in order. He said that all we need to take her back is a re-entry card, which we got, and a new health certificate issued no more than 5 days before we travel. When we called our vet in Beirut to ask how long the health certificate will take, we were told that there are new UAE regulations requiring a blood test for rabies. This test cannot be done in Lebanon and the blood sample has to be sent to France, a process that takes eight weeks. I’m praying Simone is exempt.

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Saudi Arabia‘s rising need for private sector healthcare

by Ziad Fares
written by Ziad Fares

Over the coming years, Saudi Arabia is likely to experience a sharp increase in its healthcare needs. Most observers believe that population growth, a slowly aging society, and the conditions that affluence often exacerbates, such as obesity, diabetes, and cardiovascular diseases, as well as cancer, will create a tremendous new demand for healthcare services.

“Saudi Arabia’s healthcare system is ripe for investment opportunities,” according to a senior associate at Booz Allen Hamilton. “The growing affluence of Saudi Arabia and the GCC region as a whole will mean that the healthcare systems of these nations will need both money and expertise from outside sources in order to cope with an aging, yet well-to-do population.”

At present, the Saudi Arabian government funds most of the demand for healthcare capital and operating expenditures. However, analysts believe that government alone will struggle to continue to meet this demand. They have concluded that the only way to ensure that Saudi nationals’ health needs will be met without adversely affecting economic progress is to increase private sector participation in the health care system. The Saudi government has recognized this situation, and has identified healthcare as one of the key sectors targeted in its wide-ranging privatization program.

Today, the Ministry of Health (MOH) is working to prepare the sector for this essential but difficult transition. As a first step, the MOH has studied the best practices of the countries with the most successful healthcare systems and drafted plans that adapt these practices to the unique needs and circumstances of Saudi Arabia. The underlying goals have already been established:
 

 Create a stronger institutional setup and effective regulatory framework to promote private sector investment in healthcare, including the production and distribution of pharmaceutical and medical supplies,

 Develop a business environment that will make Saudi Arabia a more attractive destination for private healthcare providers, and

 Attract investors and other partners to the Middle East’s largest market for healthcare

The takeaway for healthcare providers and suppliers is clear: the Middle East’s largest market of healthcare consumers will become increasingly open to private investment.

Growth unsustainable without increased private sector participation

By the year 2020, the population of Saudi Arabia is expected to reach 30 million. Over the next decade, health expenditures are expected to increase dramatically, even faster than the rate of population growth. Demand for hospital beds is likely to grow from 51,000 to 70,000, demand for physicians is likely to rise from 40,000 to 54,000 — and the number of hospitals is likely to rise from 364 to 502. There are several reasons MOH planners see such a sharp rise in health needs:

 Saudis will become older. The percentage of the population over 60 is rising, and is expected to more than double by 2020. By 2020, the number of old people is expected to grow from approximately 1 million (4% of the population) to roughly 2.5 million (7 % of the population). At the same time, as incomes increase, Saudis are likely to spend an increasing amount of money on healthcare treatments, such as leading-edge therapies.

 But wealth will not always bring health. As most countries have learned, affluence is not an unmitigated benefit to health. Today, the average Saudi national is overweight. The average Body Mass Index (BMI) of Saudi nationals 15 years and older is 30 kg/m2, far above the global average of 23. A score greater than 25 is considered overweight. Such personal choices are likely to continue to translate into expensive and chronic conditions.

 And the costs of treatment will continue to rise. Paying for care of such chronic conditions is difficult now and is likely to grow worse.

Past experience at MOH suggests that the long-run trend is toward rapidly increasing expense for healthcare. Between 1999 and 2005, government saw a 7.2% annual compounded annual growth in its healthcare budget. The Kingdom spent $13 billion on healthcare in 2005, and this spending is expected to grow to over $20 billion by 2016.

A blueprint for change

Currently, the government dominates the healthcare sector in Saudi Arabia. Private sector spending for health care in Saudi Arabia accounts for 25% of the total. Increased private sector participation in healthcare is generally accepted as essential to achieve the Kingdom’s objective to increase the efficacy of the Saudi healthcare system while reducing the burden on government spending. Present plans call for a transition of the Kingdom to a mixed healthcare system, in which government participation is limited largely to healthcare coverage of the poor and military, with a variety of private healthcare options available to everyone else.

The plan for this transition calls for the following main changes in the current MOH healthcare system:

1. MOH will concentrate its healthcare provision activities on preventive and curative primary care

2. A new government entity will be established, the General Organization for Hospitals, separate from MOH, and all MOH hospitals assets will be transferred to this new organization to prepare the ground for increased public private partnerships in healthcare provision

3. A National Health Fund will be established under the Ministry of Finance, also separate from MOH, to fund directly healthcare services provided to patients

All these changes are likely to create vast new opportunities for international healthcare companies and other healthcare providers. Over the coming decade, a variety of opportunities are likely to open up in virtually every aspect of the Saudi healthcare sector, including tertiary care, secondary care, ambulatory care and testing centers, generic pharmaceutical, medical devices manufacturing, insurance, e-Health and education.

Conclusion

The fully nationalized system that served an earlier era well is no longer suited for the complex, dynamic country that Saudi Arabia is now becoming. For both economic and public health reasons, the government is committed to a course of change that will in the end create a system that is more responsive to the health needs of Saudi consumers.

“A market-driven healthcare system means competing groups providing the best care possible,” adds a senior associate of Booz Allen Hamilton. “In order to cope with the future needs of the country, Saudi Arabia is finding that it must make substantial changes to the way it conducts healthcare.”

This transition to a market-driven healthcare system will not only be good news for Saudis and the Saudi economy. For international healthcare providers and investors, the coming liberalization of the sector will mean increased access to the largest healthcare market in the Middle East, and an exciting opportunity to help millions of Saudis live longer, healthier lives.

Ziad Fares is a Senior Associate at Booz Allen Hamilton. He is a member of the Global Health team at Booz Allen and is currently responsible for growing the health practice, leading engagements and consulting teams in various countries in the GCC and MENA regions.

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Overcoming the debt trap in Lebanon: from a rent-based to a productive economy

by Georges Corm
written by Georges Corm

Any proper understanding of the debt phenomenon in Lebanon requires a short historical review of how this huge amount of debt could have piled up. It is to be noted here that the Lebanese public debt stood at the equivalent amount of $2 billion at the end of 1992, representing approximately 50% of GDP at that time. By the end of 2006, this debt stood at the equivalent of $40.5 billion representing 200% of GDP. During this period of 14 years, the total fiscal deficit of the state and the public sector (without debt service, but including all reconstruction expenditures and expenses outside the budget) did not exceed the equivalent of $4.7 billion.

This means that the cumulated annual amount of debt service during the period 1993-2006 reached the astronomic figure of $31.4 billion, while the capital of the debt at the end of 1992 ($2 billion) plus the fiscal overall primary deficit ($4.7 billion) during this period did not exceed $6.7 billion (2 + 4.7). The cumulated amount of debt service was higher than the total of all other budget expenditures during the period and represented 87% of the cumulated overall Treasury fiscal deficit including debt service for the period 1993-2006 ($36.9 billion).

The main factor leading to such a staggering figure is the level of interest rates on the T-bills issued in domestic currency between 1993 and 1998. Rates have reached levels of more than 35% in 1995 and of more than 20% in certain years between 1993 and 1998. Real interest rates have been almost above 10% of the local CPI throughout the period from 1994 to 2002. Although the level of yields on domestic T-bills declined substantially in 1999 from 18.6% to 14.4%, it is only after 2002 that it was reduced again to below 10%. In fact, the average annual interest rate paid on the capital of the debt was 14.6% during the period 1993-2006, a very high average compared to the level of international interest rates and to the domestic CPI.

It will be very important to be explicit in the future why interest rates increased so dramatically in Lebanon during the 1990s. After all, during this decade interest rates were declining worldwide, domestic inflation was coming down substantially, there was a surplus in the balance of payments and the Central Bank was piling up foreign exchange reserves without being indebted to the domestic banking system, as is the case today. If the average annual interest rate on the public debt in Lebanon had been set at 5% above LIBOR during the period 1993-2006, the cumulated debt service would have reached only $16 billion, compared to the $31.4 billion effectively paid by the Treasury. In fact, in this case, we can estimate the overcharge of interest rates to the Treasury at $15 billion. A calculation of such overcharge, in case of an average interest rate on the public debt during the same period at the level of 3.5% above LIBOR, shows that the amount of debt service during the period would not have exceeded $11.2 billion; in this case the public debt today would be standing at $19.7 billion only, i.e. at less than 100% of GDP instead of 200% as is currently the case.

Resolving the debt trap

During the last few years, the government was able to continue to refinance its huge debt due to two positive factors. The first one is the decline in interest rates since 1999 which contained increases in the annual debt service. In addition, the Treasury receipts were substantially strengthened both by the implementation of VAT and the cancellation of the two cellular phone companies’ BOT allowing the Treasury to cash 100% of their profits. However, in spite of these positive developments, the vicious circle was not broken and the ever-increasing amount of debt is still the biggest obstacle to a return to full economic health.

In fact, to reduce the level of indebtedness, the rate of growth of government receipts should have surpassed the interest rate paid by the Treasury on the public debt. This is why what is needed to get Lebanon out of the debt trap is a combination of an extremely high rate of growth, more interest rate reduction and a well designed and properly timed privatization program.

It should be noted, however, that due to the present level of Treasury indebtedness ($41.5 billion), whatever privatization receipts could be generated, they will not be able to substantially reduce this level. One can anticipate at best an amount of $6 to $8 billion in case the Lebanese government nomenklatura could agree on implementing a privatization program. This amount could stop the debt increase for maybe two years, but no more. In addition, to be effective, this program should be properly planned and implemented. There should be an adequate timing whereby privatization receipts would be an additional element in creating a positive dynamic to get out at once of the debt trap.

To this effect, what is important for Lebanon is to change its economic mentality and for its public and private sector decision makers to realize how much the economic and human potential of the country is remaining untapped. This, in my view, is largely due to the rigidity that has affected the economic vision of Lebanon as being able to grow and develop exclusively through the banking and the real estate sector, in addition to tourism. In fact, reconstruction policies in the 1990s have reproduced and aggravated the vision of Lebanon being ideally and exclusively suited to be a financial and commercial entrepôt for the region. It contributed to strengthen the wrong belief that the economy could only prosper if based on intermediation between supposedly underdeveloped Arab economies and Western or other more developed economies.

Keeping the brains here

In this respect, it should be noted that the reconstruction planners did not take into account all the changes that have affected not only the Arab region, but also the international economy. They also did not realize that the old regional role of Lebanon was over and that globalization and the electronic revolution were rendering intermediaries irrelevant. They did not realize that globalization requires a shift to high value added products and services in high demand in the world economy. Neither did they grasp the fact that the success in exporting such products and services requires any country to keep its best human resources at home instead of exporting them to other countries. Although many successful economic models could have inspired the Lebanese economic policy, like Malta, Ireland, Cyprus, Singapore and other larger economies like Taiwan or South Korea, the weight of the past seems to have been a fundamental obstacle to understand the urgent need for a change.

Creating artificial rent revenues in the country by increasing interest rates to the levels mentioned above was a high cost substitute to the lack of job creation and local economic dynamism outside the real estate sector. The traditional Lebanese wisdom about human resources is still based on the belief that it is more beneficial to the Lebanese economy to export brains than to devote efforts to keep them at home by creating locally new high value added activities securing enough employment opportunities for these brains. The regular remittance flow is viewed as an essential element of poverty alleviation and balance of payment equilibrium. It is not considered to be an economic waste, given the fact that the local economy supports the costs of educating and training these dynamic human resources, while countries receiving this educated manpower are getting the full economic benefits. The “brain exporting country” receives only a residual part of the revenues produced by these brains abroad through the flow of remittances.

This is why the quality and sophistication of economic thinking in Lebanon should be seriously addressed to get out of the debt trap. Now that the era of “crazy” interest rates is over, it is high time to look seriously at the comparative advantages that Lebanon enjoys in many fields. If properly used, these advantages will allow the country to compete successfully in the global market for high value added activities. Lebanon could become a very dynamic exporter of biological agricultural products, high-quality seeds, and plant-based medicine given its famous biodiversity and the existence of many plants with medicinal value. It could also much more develop its software productive capacities; it could attract sub-contracting of off-shored services activities in accounting, financial analysis, medical and biological research. It could also go into producing solar energy equipment in high demand worldwide, as well as into producing equipment for used-water recycling or solid waste treatment. It is only through sustained continuous high growth generated by a substantial increase in Lebanese exports of high value added goods and services that the country could break the vicious circle of ever increasing indebtedness.

There are, however, other actions to be taken simultaneously to get out of the debt trap, mainly reforming our dual monetary system whereby the US dollar and Lebanese pound coexist as legal means of payment. Reforming the tax system, as well as the public debt management, are two other key issues to get out of the debt trap. The part of the public debt, in the hand of Lebanese institutional holders, should also be progressively rescheduled through voluntary agreements between the state, the Association of Banks and the Bank of Lebanon. In fact, to be sustainable, the annual debt service burden should not exceed the level of 25% or 30% of public expenditures against more than 50% on average during 1993-2006.

But all this suppose a change of economic mentality and the adoption of a different reform program than the one developed with the help of international financial institutions. In the mean time, one should hope that the political situation will remain in control and will not spoil any chance of future reform of the Lebanese economy in a new direction.

GEORGES CORM is a former minister of finance and a professor at St. Joseph University in Beirut

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The Information debate

by Michael Young
written by Michael Young

In July, a controversy erupted when two Israel journalists traveling under foreign passports came to Lebanon to report on the country a year after the summer 2006 war. The pair, Lisa Goldman and Rinat Malkes, was taken to task by Nour Samaha of the Daily Star, who wrote that the journalists “not only broke Lebanese law, but also violated codes of ethics in journalism and endangered the lives of those they interviewed.”

Goldman defended herself against several of Samaha’s statements. But one phrase in particular stood out in her response: “Ramez Maluf, professor of journalism at the Lebanese American University, is quoted in the article as saying that Israelis interested in news about Lebanon should rely on the wire services. That sounds a lot like ‘let them eat cake.’ Me, I prefer a more substantive meal. Given the tsunami of congratulatory emails I have received from both Lebanese and Israelis, it seems pretty clear that there is a great hunger for human-interest reporting that goes beyond conflict and war — and that the average Lebanese and the average Israeli share a preference for a real meal over cake, too.”

This merits a closer look. Maluf’s point that Israelis should satisfy themselves with wire reports is more a political statement than a professional one. Journalists, at least the better ones, will rarely subscribe to constraints placed on them by governments. Indeed, should they? That doesn’t mean it’s the duty of a journalist to break the law, but one has to be realistic: to ask of individuals whose job it is to gather information that they satisfy themselves with stockpiling wire reports is a bit much.

The matter of Goldman’s ethics or whether she endangered the Lebanese she talked to can be debated. There certainly are dangers to interviewees if an Israeli journalist doesn’t work carefully. However, it is inconsistent to hold against Israelis that they remain ignorant about their neighbors in the Arab World, only to turn around and blame them for trying to remedy that failing. Most Arab television stations have correspondents in Israel, and all broadcasted live last year during the Lebanon war. Goldman’s impulse to be selective with the truth about herself in Beirut came from the lack of a similar opportunity afforded to Israeli journalists.

One of the questions raised by the discussion of Goldman’s and Malkes’ stay was whether it was time to grant Israeli journalists an opportunity to report from Lebanon, in the spirit of open communications. There are pros and cons involved, and the political implications are significant.

First, it’s time to dispel a myth. Israelis or correspondents for Israeli media have long been reporting from Lebanon. Goldman and Malkes did not invent the wheel. The journalists have done so by entering Lebanon on foreign passports, as Goldman and Malkes did, while showing credentials from newspapers of countries with which Lebanon has no problems. So, for example, a journalist might write for an American newspaper, but also file for an Israeli publication. The journalists’ chances of returning to Lebanon may be blown once the Lebanese find out, but that doesn’t change that the loophole is often exploited.

Second, for diplomatic and security reasons it would be absurd to expect either the Lebanese government or Hizbullah to sign off on opening Lebanon up fully to Israeli correspondents. It’s not going to happen, nor can we forget that the Israelis do censor news reports at their end. A free flow of information is unlikely, so we have to think of an alternative.

Is allowing tightly controlled access to Israeli journalists better than the current ambiguity? The answer will provoke hackles from those who believe the Israelis must make scarce. But what if Israeli journalists had been taken on a tour of the destroyed quarters of Bint Jubayl and Beirut’s southern suburbs last year? What if they were shown the bridges and factories needlessly destroyed because Israel didn’t quite know what it wanted to do in Lebanon once the war began? What if they were taken on a tour of Lebanon’s morgues at the height of the bombings?

Oddly enough, Hizbullah would have a much better sense of the latent advantages here than those who insist on remaining politically correct. In fact, once the political implications of allowing Israelis to enter Lebanon under some form of political control are grasped by Israeli officials, it is the officials themselves who might begin protesting the Lebanese sojourns. However, the Israeli media would insist the trips continue, because, as Goldman put it, journalists prefer a full meal to eating cake.

That is assuming of course that the hypocritical equilibrium existing now is not the best solution for all. We call the Israelis scoundrels for entering Lebanon under false pretenses; they call us intolerant for failing to allow them into the country except under false pretenses; and everyone remains happy. Yet the point is being missed: information will cross borders whether we like it or not. Who will best get his information across?

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Putin’s gambit

by Claude Salhani
written by Claude Salhani

The Cuban missile crisis began in 1961 when the US started to deploy 15 Jupiter IRBM — intermediate-range ballistic missiles — in Turkey, close to the Soviet border. With a range of 1,500 miles and a flight time of about 16 minutes, the missiles threatened several cities — including Moscow.

On October 14, 1962, photographs shot by US reconnaissance planes and shown to President John F. Kennedy revealed similar installations being erected in Cuba, as a response to the American threat. Days later, on October 28, after a dramatic confrontation threatened world peace, Kennedy and Soviet premier Nikita Khrushchev, with the intercession of the Secretary General of the United Nations, agreed both sides would dismantle their installations.

Now 46 years later US President George W. Bush wants to install a missile defense system in the Czech Republic and a radar tracking station in Poland. News of US missiles being positioned so close to Russia triggered a “mini-Cuban missile crisis.”

Russia’s initial reaction was not surprising. As soon as President Vladimir Putin managed to overcome his anger, he said he would direct Russian missiles at European cities in retaliation to the US plans to deploy in Central Europe.

But then the Russian president surprised Bush when the two men met a few weeks later, in June, at the G-8 Summit in Germany. Changing tactics once more and sidestepping his earlier threats to target European cities, Putin suggested that Russia joins the US initiative. Instead of the Czech Republic and Poland being used as bases for the defense system he recommended the use of a former-Soviet base in Azerbaijan. The Russian president had even gone to his Azeri counterpart and already obtained an agreement.

“Interesting,” was how Bush replied to Putin’s offer. That’s the diplomatic way of saying “thanks, but no.” Bush and his advisors probably never gave the Russian offer very serious thought. In any case it did not take very long for the United States to deem the Russian offer invalid on grounds that the Azeri station would not be acceptable from a technical point of view. The Americans said it was outdated.

But the Russian president, whose years in the KGB must have taught him how to remain cool under duress, was not so easily dissuaded.

In early July he flew to the United States and spent a weekend at the Bush family estate in Maine, in a relaxed atmosphere for what was, without a doubt, very stressful talks that even a fishing trip off the Atlantic coast on the Bush Sr.’s speedboat did little to smooth over.

And once again the Russian president came up with a new plan. This time Putin proposed to join the project as a partner and base the tracking station in Russia.

Meanwhile, Bush Jr. kept trying to convince the Russian president that his country has nothing to fear from those missiles. The US president stressed that the defensive missile system is needed to counter eventual threats emerging from Iran, if and when it reaches the point where it can produce its own nuclear weapons.

Why then is Putin so persistent in trying to get Bush to back away from the Czech/Polish project? So adamant is the Russian president to prevent this from becoming a reality that he keeps coming back with a new offer at every meeting. The answer to Putin’s opposition to the Czech/Polish defense plan can be found in two factors; one is of a strategic nature while the other is more emotional, combined with a brisk of nostalgia for the Soviet past.

Strategically, the Russians share the same fears the US has of a nuclear-armed Iran. In fact, Russia has probably far more reason to worry of an Iran with nukes than the US. First, Russia is geographically much closer, needing only short or intermediary range missiles, which Iran already has, should it ever wish to strike at Russia. On the other hand, Iran would need to deploy intercontinental missiles, which it does not yet have, should it wish to strike at the US.

Second, Russia, a federal state, also has its share of problems with Islamist extremists operating from its southern Muslim republics, like Chechnya, who are seeking to break away from the motherland. In that respect Moscow and Washington have equal trepidation that a nuclear weapon would fall into the hands of Islamist terrorists, the consequences of which would be catastrophic for both.

On the emotional level, call it even a level of national pride, Moscow is highly reluctant to see two former Warsaw Pact countries enter into a defense agreement which may be viewed by many Russians as ganging up on Russia. Moscow still has a hard time digesting the fact that its former satellites states are now members of the European Union and, to add insult to injury, also members of NATO.

Still, despite Putin’s ongoing objections Bush said after meeting his Russian counterpart, “I think the Czech Republic and Poland need to be an integral part of the system.”

If for the Russian president the week got off to a bad start with his failure to convince the American president to change his mind and back away from the Czech Republic and Poland, at least it ended on a positive note as he managed to convince the International Olympic Committee to designate the Russian city of Sochi as the site for the 2014 Winter Olympics. This is the first time in the history of the Winter Games that Russia is chosen as a host and the second time, after the 1980 Moscow Summer Olympics, that Russia will host the Games.
 

Claude Salhani is International Editor and a political analyst with United Press International in Washington, DC. He can be reached at [email protected].

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Roads to nowhere

by Alex Warren
written by Alex Warren

DUBAI: “First Salik violator spotted,” read a prominent headline on one Gulf daily last month. It led into a description of how a renegade Nissan Altima driver had been caught on CCTV crossing one of Dubai’s new toll gates without the requisite badge, just minutes after the system came online at midnight on July 1.

Salik has been gripping the nation for some time — and not just due to the lack of more interesting local news. The new road toll system, which is the first in the Gulf and one of a handful in the Arab world, has found itself at the center of much controversy and criticism.

In short, it works by scanning vehicles at two toll gates on the city’s main drag, Sheikh Zayed Road, charging a little over $1 a time. If drivers want to use the tolled roads, they buy credit for a special badge which is fixed to the windscreen. If you don’t have a badge, you pay a $27 fine every time you go under a toll. You are a Salik violator.

The scheme is expected to generate annual revenues of about $160 million for its creators, the Road and Transportation Authority (RTA), although it is unclear what proportion of that will come from legitimate use and what proportion from fines.

But whatever its business model, the new system’s purported aim is an ambitious one: to tackle some world-class traffic problems in one of the most rapidly-growing cities on earth.

A recent survey found that the average commuter spends one hour and 45 minutes in traffic everyday, a statistic which made Dubai the most congested city in the Arab world. Cairo took second prize. Another study claims that $1.2 billion is lost from the Emirate’s economy every year due to traffic inefficiencies, and that the resulting stress is having a negative impact on the productivity of employees.

Something, then, needed to be done. But Salik has come under heavy fire from many quarters. Many say it has actually made congestion worse, cramming up smaller streets with queues of motorists unwilling to pay for the convenience of the main roads. Cynics say it is another stealth tax imposed by the authorities. Car rental agencies moan that they are losing business and suffering from a constant headache of administrative paperwork.

Others complain that Salik, like many other things in Dubai which sound very sophisticated, just doesn’t function properly. Irate drivers say that customer helplines are constantly busy, that they receive erroneous text messages about the amount of credit in their Salik accounts, and that some have been charged without ever using the tolls. The Salik website has apparently been receiving over a million hits a day, which could make it a fortune in advertising if its owners signed up to Google.

A lot of these issues are probably teething troubles which might iron themselves out over time. And, for now, the newly-tolled roads are less crowded than they used to be at the peak times of day. Yet it’s difficult to see how Salik, or indeed anything, can hope to permanently solve Dubai’s traffic problem.

This is a place where cars are cheap, petrol virtually costs less than water and having an expensive set of wheels is essential. Everyone is too busy making money to care about the environment, and the threat of global warming becomes slightly meaningless to those used to the climate in the Arabian Gulf.

But the real problem, and the reason why introducing Salik at this time makes so little sense, is that there is no practical alternative to driving. Taxis don’t solve anything. You can’t walk anywhere. And the few bus services that exist are unreliable, unpunctual and extremely hot. How can you hope to persuade the western expat to give up his Audi, the Lebanese housewife her Porsche Cayenne or the Emirati his Land Cruiser in favor of a sweaty communal cabin?

The Dubai Metro is currently under construction, and, once it comes into service in 2009, will surely be used widely. It would have been more sensible to postpone Salik until then, offering a practical alternative to driving, but even the metro’s appeal will be limited. It is difficult to imagine a suited executive walking to a metro station to commute to the office, as he would in London, for instance. Weather, the layout of the city, and inflated egos all preclude that in Dubai.

So if there is no way of reducing the number of cars on the roads, then maybe the answer is to build more roads. The RTA says that it is spending about $12 billion on trying to solve traffic problems, that a total of 100 lanes will run across Dubai’s creek by 2020 and that more bus routes will be launched.

Even so, all this will take time, and the never-ending population growth means that Dubai’s traffic woes aren’t going anywhere. As for Salik, it just seems to be one more thing for the city’s residents to moan about.

ALEX WARREN is a freelance journalist based in Dubai

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Oslo’s secrets

by Riad Al-Khouri
written by Riad Al-Khouri

Despite its title, The Secret Israel-Palestinian Negotiations in Oslo (Routledge, Oxford: 2007) is no potboiler, being a recent publication in the scholarly Durham Modern Middle East and Islamic World Series. Rather it looks at the topic against the background of negotiation concepts and strategies, focusing particularly on the timely issue of non-recognition. That was certainly a significant topic in the early 1990s when the book’s events are mainly set; but is an absolutely vital one today given the emergence of Hamas as a key political force and the soap opera currently playing in Palestine and world capitals, starring various forces and governments refusing to recognize each other.

The author Sven Behrendt studied politics and management before receiving a Ph.D. in International Relations. After the completion of his studies he joined the Bertelsmann Foundation and directed a project addressing Middle East issues. He has since 2000 been working for the World Economic Forum where he set up and directed numerous projects focusing on geopolitics and business strategy, including several in the Arab World.

Behrendt’s credentials are thus sound, on both theory and the real life issues of the region, and his description and analysis do not disappoint. The book starts by showing how Israel and the Palestine Liberation Organization were facing challenges in the late 1980s and early 1990s that drove them to start talking to each other. Though Arab-Israeli diplomacy was always there, what made the Oslo negotiations different were direct, face-to-face talks between Israel and the PLO.

Oslo called for withdrawal of Israel from Gaza and parts of the West Bank, affirming a Palestinian right of self-government within those areas. After an interim period, the two sides would negotiate a permanent agreement on deliberately excluded “final status” issues such as Jerusalem, refugees, and Israeli settlements. However, with these core topics off the table, what did Oslo actually accomplish? Most importantly, the two sides had engaged in formal mutual recognition. The Israelis officially accepted the PLO as the legitimate representative of the Palestinian people while the Palestinians recognized the right of the state of Israel to exist, and renounced terrorism and violence.

Though the accord aroused hope for an end to conflict, skepticism abounded. Subsequent negotiations were many, in Europe, the US and the Middle East, ending in the fiasco of the Camp David 2000 Summit, which failed to resolve final status issues. The al-Aqsa Intifada followed that, and the rest, as they say, is history.

In the final analysis, Oslo was an icebreaker. Not that ice breaking is not an honorable activity, or indeed a necessary one. The last chapter in the book is tellingly entitled “The Success of the Oslo Talks — and Why the Process Failed.” Behrendt correctly concludes that the lack of longer-term vision on both sides doomed Oslo, but which was in its own way a successful breaking of the ice.

Where are we today, 14 years later? James Wolfensohn summed it up by ending a recent interview on a note of exasperation: “Israelis and Palestinians really should get over thinking that they’re a show on Broadway. They are a show in the Village, off-off-off-off Broadway. I hope I don’t get into too much trouble for saying this, but what the hell, that’s what I believe, and I’m 73.” For those who may not get the thespian metaphor, “the Village” refers to downtown Manhattan’s Greenwich Village, where small audiences see obscure plays, as opposed to Broadway where big names star in grand shows.

Wolfie is a 21st century Old Testament Patriarch who will certainly not get into hot water over his outspokenness. I on the other hand, neither septuagenarian nor Jewish, hope I can stay out of trouble for repeating something I said, on the record, in late 1995 about Arab-Israeli rapprochement: “The ice has been broken but the temperature is still below zero. It could easily freeze over again.”

With Ehud Barak politically resurrected and Peres occupying the bully pulpit of the Israeli presidency, could we now be in for another, perhaps final, chapter of the Palestinian-Israeli show? Barak, the man who scuttled Camp David in 2000, is now presumably wiser; and Shimon Peres co-orchestrated the breaking of the ice at Oslo, so maybe… With the American position unraveling in the Middle East, and the majority of its inhabitants (including those of Israel/Palestine) fed up with the consequences of Zionism and its antitheses, it may be time for Israel to wind down its failed neo-colonialism. This would first involve real recognition of the Palestinians and their rights, instead of an Oslo-like public relations exercise. In any event, it will be interesting to see what the next phase of Arab-Israeli diplomacy looks like; and I for one would look forward to Behrendt’s sequel.

RIAD AL KHOURI is an economist who relaxes by reading books and sometimes reviewing them  

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Petrol rationing in Iran

by Gareth Smith
written by Gareth Smith

With Iranians’ view of unlimited cheap petrol as a birthright, rationing was never going to be easy. But the need for change grew as years of a pump price frozen at 9 cents a liter took the import bill to $5 billion with Iran’s refineries way behind increasing consumption.

Finally, the government of Mahmoud Ahmadinejad bit the bullet, first with a price hike to 12 cents a liter and then with the introduction on June 27 of a ration of 100 liters a month per motorist.

The torching of some petrol stations in protest made great television but has obscured, at least internationally, the palpable fact that the policy is beginning to work.

Anecdotal evidence is clear. Tehran’s streets are less congested and the air quality improved. Hoteliers on the Caspian Sea coast complain of a lack of summer guests. “We’re struggling to get petrol for our tour buses,” said one tourist guide, “and motorists are saving their petrol allocation in case they need it later.”

And with all the usual caveats over government figures, the numbers are starting to add up. The Environment Ministry reported after two weeks of rationing there was a daily reduction of 8.7 million liters in consumption previously running at around 75 million a day. This would shave $1.7 billion from an import bill projected to reach $7 billion this year.

More recent figures suggest the reduction in consumption could be higher. Mostafa Pour-Mohammadi, the interior minister, told parliament in mid-July that between 11 and 16 million liters a day were being saved. And Ali Akbar Mehrabian of the government’s fuel committee put the saving at around 18 million liters, which he said would cut $4 billion from the import bill.

In the face of growing international pressure over its nuclear program, the Iranian government has long seen importing around 40% of petrol consumption as a dangerous vulnerability. Israeli prime minister Ehud Olmert was among those arguing the volatile public reaction to rationing showed that existing sanctions against Iran were working and should be extended.

Hence Mr. Ahmadinejad wants the government to go further in reducing imports — shifting vehicles away from petrol to natural gas, improving public transport and increasing the output of Iran’s refineries.

Like many countries that failed to invest sufficiently in refineries in the 1980s, Iran’s capacity has struggled with rising demand. But Mohammad Reza Nematzadeh, managing director of the National Iranian Oil Refining and Distribution company, has said existing plans for improved refining would take production of petrol from today’s 1.6 million barrels a day to 3 million by 2012.

The government is also pushing for conversion of more vehicles to gas, already used by Tehran’s yellow taxis. Kazem Vazeri-Hameneh, the oil minister, said last month the number of gas fueling stations would reach 1000, from the current 250, by the end of the Iranian year, and the number of converted vehicles would rise from 115,000 to 500,000. The government would target Nissan vans, he said, of which there are 500,000 across the country and whose conversion could save 10 million liters of petrol a year.

Rather than collapsing from internal dissent as a result of growing international pressure, the government of Mr. Ahmadinejad is developing a greater sense of purpose. Many of its members, including the president, spent their formative years in the trenches of the 1980-88 Iran-Iraq war and seem to feel at home in a crisis demanding national unity.

Hence, contrary to expectation, the government decided not to allow motorists to purchase petrol above their allocation at a higher price. However unpopular among Toyota Prado drivers of north Tehran and those running unofficial taxis, the decision was not just counter-inflationary but in line with the government’s commitment to “social justice” and its skepticism about market economics.

Rationing is also a major challenge to the vested interests involved in smuggling petrol out of the country to Iraq, Pakistan, Afghanistan and the UAE. Some put the figure as high as 8 million liters a day and while some smugglers use mules others are well-connected enough to drive tankers.

It remains an open question whether Mr. Ahmadinejad will benefit politically from petrol rationing. It has certainly been a major jolt in popular feeling, even though some Iranians say the system is at least “fair.”

The government has asked parliament to allow three months before judging the success or otherwise of the move. Either way, the decision — which the supreme leader, Ayatollah Ali Khamenei called “historic” — is surely one whose consequences, for good or bad, will play out for years to come.

GARETH SMYTH is the Financial Times Tehran correspondent

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The Russians are coming

by Peter Speetjens
written by Peter Speetjens

Founded by the controversial Russian-born billionaire Arkadi Gaydamak, the Social Welfare Party (SWP) is but the latest gladiator to enter Israel’s increasingly fragmented political arena. For decades the Knesset was dominated by eternal foes Labor and Likud, yet today it is home to a dozen small and medium-size parties, while tens of others failed to meet the minimum amount of votes required to enter parliament.

Within this widely varied political landscape, the distinct “Russian vote” is of growing importance. Since the collapse of the Soviet Union in 1989, some 1.2 million immigrants of Jewish descent were welcomed in Israel. Note, however, that although a Jew is generally defined as someone born to a Jewish mother, the Israeli Law of Return grants anyone with a Jewish grandparent the right to live the Zionist dream. It is estimated that some 300,000 Russian immigrants are not Jews.

Note as well that not all immigrants are Russians. They are mainly referred to as such because of the language they speak, which today is a common feature of Israeli society. Representing at least 20 of the Knesset’s total of 120 seats, the Russians are also known as the “kingmakers” of Israeli politics, as they are able to make or break a coalition. Little wonder then that during the 2006 elections Israel’s leading political parties all ran Russian-language campaigns.

Like other Russian parties, the SWP appears to the right of the Israeli political spectrum. It aims to topple the Olmert government, because of its failures in the 2006 Lebanon war, and promises full integration and social justice for Russian immigrants, most of whom are secular, belong to lower and middle class income groups, and share a sentiment of being second-class citizens.

During past elections, Israel’s Russians have predominantly voted right-wing, and showed a preference for a strong charismatic leader most likely to deliver on the issues of security and stability. The self-made man Gaydamak seems to meet that demand.

Born in Russia in 1952, Gaydamak left for France at the age of 20. Having started as a day laborer, he worked his way up the business ladder by means of a translation and import-export firm working between France and Russia. Part of his fortune, worth an estimated $4 billion, may not have been earned legitimately, as French authorities are keen to interrogate Gaydamak about his role in “Angolagate,” in which hundreds of millions worth of arms were smuggled to the African nation.

Gaydamak expects the SWP to win no less than 40 seats, even though he himself will not run. He has also set his eyes on becoming the mayor of Jerusalem, banking on the fact he owns the Holy City’s leading football and basketball teams.

It remains to be seen if the SWP can indeed win up to 40 seats. Thus, Benyamin Netanyahu’s Russian-media strategist, Michael Falkov, told the Jerusalem Post that Gaydamak lost a lot of popularity trying to acquire the Russian pork-selling supermarket chain Tiv Ta’am and make it kosher. As the Russian vote is fiercely secular, that particular move was not appreciated.

What’s more, Gaydamak is not the first Russian to enter Israeli politics playing the immigrant card. In the mid-1990s, Natan Sharansky, a former Soviet dissident who spent years in the Gulag, founded Israel B’Aliya (Israel on the Rise), which promoted the rapid absorption of Soviet Jews and in 1996 won 7 seats. However, he failed to deliver and after a brief spell as minister under Ariel Sharon only managed to re-enter the Knesset as a Likud candidate.

Sharansky’s position as Israel’s leading Russian politician has now been taken by Avigdor Lieberman. Having previously worked as the Likud Party’s Director General, he participated in the 2006 elections with his Yisrael Baytenu (Israel – Our Home), which gained 11 seats. With the arrival of Lieberman, Israeli hard-line politics became a whole different ballgame.

Lieberman propagates positions considered radical even among the right wing. He was once quoted as saying that Palestinian prisoners should be drowned in the Dead Sea and that he himself would provide the buses. More recently, he called for a loyalty test for Arab-Israelis and for the execution of Israeli MPs who met with Hamas representatives. Despite these and other controversial remarks, Olmert appointed him as Minister of Strategic Affairs, a new cabinet position that solely deals with Iran.

At this point, it is unlikely that Gaydamak will be able to overtake the popular Lieberman as Israel’s leading Russian politician. Yet, whatever the face of the Russian vote may be, it is a vote that is here to stay and one that favors a hard line “safety first” approach in negotiations with the Palestinians and other Arab nations. What makes the Russians different from other right-wing voters is their as fervent disliking of the religious right.

And the latter is arguably the good news, as it is likely to prevent an ultra-right cocktail between Likud, the Russians and the Orthodox Jews to come into existence, for one need not be a genius to predict what that could mean for the future of the Middle East.

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