Banking & Finance

Global private equity has a long reach

by Imad Ghandour
written by Imad Ghandour

The Middle Eastern Private Equity Internationalconference, held each year in the third week of March inDubai, has become the annual hotspot for the region’s PEindustry. Heads of international PE funds, like Carlyle’sDavid Rubenstein and CD&R’s Joseph Rice, descended on Dubaito explore how to expand their sprawling reach to one of thefew remaining untapped markets. In addition, rising PE starsfrom the region lectured about their experiences and theirvisions, eyeing further international expansion, and aimingto attract the attention of global PE giants.

Carlyle’s Rubenstein, in his keynote speech, predictedthat the Middle East will be the fourth pillar in the globalPE industry after US, Europe and the Far East. The region,loosely defined from India to Morocco, has more than 2billion inhabitants, $1.5 trillion GDP, and is one of themain exporters of capital. Rubenstein is practicing what hepreached by setting up a $1.8 billion fund targeting theMiddle East and Turkey.

Sarah Alexander, President of Emerging Market PrivateEquity Association (EMPEA), noticed the remarkable evolutionbetween the first conference in 2005 and the 2007 edition. In 2005, the local presenters were inquiring if it can bedone, how it can be done, and how lucrative it will be ifdone well. Today, local PE champions are speaking withconfidence about deals closed, problems overcome, exits madeand real realized returns. Between 2005 and 2007, theprivate equity industry has quadrupled in size, and controlsnow more than $15 billion in assets under management.

Where to go from here?

Rubenstein and Rice’s appearance at the conferences onlyhighlight the increasing attractiveness of the region as atarget for global PE funds. Other PE heavyweights have beenscouting the region and assessing its potential. Secondtier global PE players, like 3i, Ripplewood, Actis, CVC,HSBC and Emerging Market Partnership, have already starteddeploying funds since 2003. By tying up the region to theglobal PE network, regional investment practices will besignificantly alleviated, and PE will rise further invisibility.

In 2007, the $2 billion fund benchmark will probably besurpassed with the closing of Abraaj’s Infrastructure fund.In 2005, PE practitioners could barely identify a dozensmall-size deals. Today, the prospects have improvedsignificantly. A multi-billion privatization program, a direneed for infrastructure investment, an active need forpre-IPO institutional investors and a relentless need forequity financing to support corporate growth are presentingfunds with a continuous stream of investment opportunities. Infrastructure funds will become larger and larger in orderto finance the privatization and infrastructure programs,but the mid-cap market targeting investments in the $25-150million range will remain very active as well.

Global private equity has been under scrutiny bygovernments and media in both US and Europe. However, localPE leaders have been from the onset more proactive,advocating the benefits of PE for the region’s economicdevelopment. PE is frequently prescribed as a remedy for the“unemployment bomb” threatening the social and politicalstability in the region and the institutionalization of theprivate sector.

Access to capital was definitely not an issue that cameacross the conference speakers’ minds. Unlike other parts ofthe emerging world, the GCC is one of the largest exportersof capital. This excess liquidity will fund PE investmentsand their IPO exits.

UAE as the fourth capital of private equity

UAE is already the regional capital for private equity:three quarters of all PE funds are managed out of UAE, andthe UAE is the largest recipient of PE investments. AbuDhabi Investment Authority (ADIA) is also rumored to be theworld’s largest investor in private equity funds.

But reaching global prominence over the next few years is,to a large extent, in the hands of the leading firms. Themacro environment is expected to remain favorable in themedium term and investment opportunities will be abundant. The biggest challenges for PE firms are to identify, train,attract and retain talented and experienced professionals,and build a competitive advantage through the development ofsystems and operations at par with international standards.

Imad Ghandour is head of strategy and research at Gulf Capital

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Iraq needs its own Ataturk

by Claude Salhani
written by Claude Salhani

Some months after the fall of Saddam Hussein, I found myselfin Kuwait sharing a taxi from the airport to my hotel withan Iraqi journalist who had just come from Baghdad to attendthe same conference. We talked about the situation in Iraq,the violence and how it should be dealt with.

One of the first questions I put to my Iraqi colleague waswhat he thought should be done to bring stability to Iraq.Without a moment’s hesitation he said, “Iraqis need a‘Saddam-lite,’ a benevolent dictator. Someone not as bad andpowerful as Saddam, but someone who can frighten the peopleinto accepting discipline.”

It was a strange but nonetheless realistic point of viewthat chaos in Iraq could only be contained by installing aleader who could rule with an iron fist, while working tobring democracy to the country—an Arab Atatürk if you will.(Mustafa Kemal, better known as Atatürk or “father of theTurks,” emerged as a military hero in the Dardanelles in1915. He led the founding of the modern Turkish republic in1923, after the collapse of the 600-year rule of the Ottoman Empire. After a three-year war ofindependence, Atatürk led Turkey into the 20th century andmodernization, and did so with a firm rule.)

Indeed, at a time when President George W. Bush had highhopes that Iraq would be the new shining light from whichdemocracy would spread throughout the Arab world, similarthoughts were being put forward by moderate Arab countries.One was King Abdullah II of Jordan.

Abdullah saw that a possible solution out of the Iraqiquagmire would be to install a strong military leader. Sucha leader, said the king, could instill law and order in thechaos that is Iraq today.

“I would say that the profile would be somebody from inside,somebody who’s very strong, has some sort of popularfeeling,” said the Hashemite monarch in the InternationalHerald Tribune, on his return from Washington where he metwith President Bush. “I would probably imagine—again this isoff the top of my head—someone with a military background who has the experience ofbeing a tough guy who could hold Iraq together for the nextyear.”

Today, four years on, Iraq is experiencing an unprecedentedcrime wave. Aside from the politically-related violence, which is claiming hundreds of lives on adaily basis, the country is being hit by organized and pettycrime and the contrast between Saddam Hussein’s 30-year rule as an absolute dictator who cracked down hard oncrime, and the sudden void of authority felt in the countryafter the dissolution of the army and the Baath Party couldnot have been greater.

I remember asking my traveling partner what he expectedwould happen when the US-led coalition handed over partialsovereignty to an Iraqi government. “I fear there will becivil war,” he replied. “Perhaps not immediately, butcertainly in due course.”

He was equally skeptical about democracy. “Forgetelections,” he said.

“They are simply not ready for it,” he said, and then,echoing King Abdullah’s sentiments, he went on, “Give them astrong army man who can pull it together. Someone who canrule with an iron fist and bring back law and order. Someonenot as bad as Saddam, but who has experience in themilitary, and in getting respect. That’s what we need.”

But there are two problems in putting such an idea intopractice. First, it would be in-your-face evidence that theBush Doctrine of freedom for the Middle East, with Iraq as ashowpiece, was a failure—something this White House wouldsavagely oppose. And second, the mechanism needed to realizesuch a venture—mainly a strong military—is no longer present in today’s Iraq. Alas, this means Iraqmay be destined to live through more years of instabilityuntil a strong figure can emerge to lead the country out ofthe darkness.

It wasn’t exactly what President Bush had in mind,especially as it would mean accepting that the democracyexperiment in Iraq has failed, at least for the moment, butamid the mounting chaos that is gripping Iraq today, theidea of a benevolent dictator—an Iraqi Atatürk—is beingtouted as a genuine option, one that was even debated—“Thishouse believes only a new dictator can end the violence inIraq”—recently on the BBC’s Doha debate.

Identifying an Iraqi “Atatürk” might not be all that simple—just think of the ethno-religious hurdles: a Sunni would be rejected by Shi’ites and vice versa. For sadly, Saddam’s over-inflated megalomaniac ego did not leave room for any Iraqi heroes—at least not any whose hands are not stained with Iraqi blood.

CLAUDE SALHANI is international editor and a political analyst with United Press International in Washington

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Banking & Finance

Regulating the shadows – Hawalas test global financial system

by Executive Staff
written by Executive Staff

During a recent conference at the Abu Dhabi Central Bankattended by members of the financial sector and experts fromthe region, Europe and the US, a focus was on how to betterregulate the informal money transfer system of hawala, whichhas been linked to money laundering, organized crime andterrorist financing.

Hawala, which can be traced back to the 8th century, is apopular, cheap and effective way to send money that isfrequently used by the Gulf’s massive expatriate Asianpopulation.

Money is transferred through a network of hawala brokers,or hawaladars. A customer approaches a broker in one cityand provides a sum of money to be transferred to a recipientin another country. The broker who has received the moneycalls his counterpart in the recipient’s city, providinginstructions on the disposal of the funds and promising tosettle the debt at a later date.

Although much of the money transferred is legitimate, adrug bust by the Italian police late last year connectedseveral Pakistanis with a Dubai-based Indian who receivedmoney through his informal bank to channel funds to drugcartels and arms dealers.

This incident is far from unique, with the UAE and Britishauthorities busting a drug network operating between the UKand Afghanistan only last month (March) that used the UAE asa ’cash pool’ to launder an estimated $194.7 million.

The ancient versus the modern

The problem facing central banks and regulatory bodies isthat the majority of hawala transactions are completelylegal and a primary source of income for many people aroundthe world. According to the UN, in 2005 there were 175million migrants worldwide sending remittances in excess of$300 billion, of which some $167 billion went to emergingeconomies and accounted for up to two-thirds of GDP incertain countries.

That trend is likely to increase, particularly as thedemand for young workers spikes in the aging populations ofEurope and North America.

The issue is of particular importance in Somalia, where upto 15% of the population lives abroad and remits $1.5billion annually to the Horn of Africa.

“The Somali economy is more dependent on remittances thanany other country on earth,” said Muhammed Djirdeh of theSomali Money Transmitters Association. Around 40% of theSomali population is reliant on remittances from relatives,and remittances are a source of finance for up to 80% of newbusinesses.

But with the recent clamp down on the hawala system,hawaladars are feeling the heat.

“We suffer, like all others in this business, from animage problem,” said Djirdeh, citing the example of theMogadishu-based Al Barakat money transmitter that was closeddown after 9-11 by the US authorities for connections toterrorism.

“Our problems are regulations, forcing some of us to quitthe business or work without compliance. The US is veryprohibitive for us to work in and with as we are the smallboy in the neighborhood—banks close our accounts, and wecannot do without working in the system. On top of that,transaction costs are going up. We charge 5% to send$100-$150, but have to pay agencies and commissions, so theoperator gets a small income,” added Djirdeh.

By comparison, a bank in Europe or the UAE will charge upto 20% for a transaction of the same amount.

But low costs are not the only reason for using the hawalasystem. In many developing countries, the banking system isso underdeveloped that informal money transmitters are theonly means to transfer money. In addition, hawala is highlyefficient, taking a maximum of two days to get to therecipient.

“What’s amazing is in today’s electronic world it takesfive days for a check to clear in the UK,” said ProfessorHannah Scobie of the European Economics and Financial Centerin London. “If there were hawala brokers between the UK andItaly, we would use them, as banks can take up to twoweeks,” she added.

Some observers also believe that hawala has been unfairlysingled out as a system abused by criminals and terrorists.As World-Check, a British company that runs an intelligencedatabase on financial risk, has pointed out, 60% of all bankfraud is internally driven. Equally, other forms oftransmitting funds are widely used but garner less attentionby regulators, the financial system or the press.

For instance, settlements can also be made via a cashcourier, as cargo, via diamond smuggling or through multi-country settlements.

“The latter is particularly popular as it is a way to cutcosts and make money on currency exchanges,” said NikosPassas, professor of criminal justice at NortheasternUniversity.

“The money of migrants wanting to send money goes into acash pool. The dollars go to an exporter of goods, and thenrupees go to the families—that’s how you minimizecross-border transactions and score tons of money,” headded.

As another example of avoiding cross-border transactions,Passas said Taiwanese boats going to meeting points ininternational waters to trade narcotics for commercial goodsthat will then enter Hong Kong, which acts as the financialhub to effectively launder the money.

“The other ways are through goods. The value of a good mayofficially be declared at $30, but only worth $1.20, whichis fraud,” said Passas.

Finding the right balance

The struggle for regulators is to find the right balancebetween over- and under-regulating informal moneytransmitters.

“It is difficult to regulate hawala without driving itunderground,” said Jean-Francois Thony, assistant generalcounsel of the financial integrity group at the IMF.“Regulations are not the panacea to avoid misuse,” he added.

If a regulatory body is particularly zealous, it will notonly be hawaladars and low-income workers that areaffected.

“Over-regulation can lead to capital flight,” saidProfessor Scobie. “But banks and regulators have gonecompletely wild following 9-11. Every time you turn around,there is a new form to fill in. This is very disturbing forcustomers, and on looking closer, these forms are for banksto get more information to sell more products.”

So what is the solution between excessive regulation thatcould drive informal transmitters underground and bankstrying to flog extra services?

In the UAE, the central bank has started encouraginghawaladars and exchange commissions over the last threeyears to come forward to register themselves.

“We realize hawala could be used to launder money andfinance terrorism, so we want to control—not end—hawala, asit is important for people in poor countries,” said AhmedIsmet of the UAE central bank

Initially expecting around 100 applicants, 215 dealershave been officially certified and 43 applications are stillpending.

“The first stage is registration [by hawaladars]. Morestringent and restrictive regulations will come in time asit could be counterproductive if done earlier,” said IbrahimAl Hosani of the UAE Central Bank.

Countering terrorist financing and money laundering is notconfined to reining in the hawala system, as such informalmoney transmitters also use official banking channels. Sothe financial community also needs to be brought onboard.

The issue is of major significance for banks, as evenallegations of being a channel for criminal activity couldhave long-lasting effects on a bank’s reputation and brandequity. Equally, Arab banks with branches in the US have tobe proactive in countering money laundering and terroristfinancing to comply with the USA Patriot Act’s InternationalMoney Laundering Abatement and Anti-Terrorist Financing Act of 2001.

But figuring out the bad transactions from the good is noeasy task.

“If every A4 paper transaction made by LloydsTSB worldwidewas piled up over a week, it would endanger a 747 jet flyingto the US—that’s 35,000 feet of paper. To single out one badtransaction is very difficult,” said Richard Stockdale, headof LloydsTSB Global Services.

Agreements between banks and central banks for automatedclearing houses to reduce the cost of money transfers inbanks was suggested as one way to wean customers off thehawala system.

Alex Cunningham, head of the New York-based Middle Eastand Balkans Program at the Financial Services VolunteerCorps, thought that one way out of the dilemma was a morerepresentative banking system.

“Banks need to become more focused on low-income bankingand offer different products, such as lottery tickets andphone cards in low-income branches,” he said.

Greater transparency between the private and public sectorwas also highlighted as necessary to make it easier to spotsuspicious activities.

“The whole financial control framework does nothing if tradeisn’t transparent,” said Passas. “Despite all thisinfrastructure for anti-money laundering and counter-terrorist financing, take a look at the business environmentand there are huge holes—not loop holes—but black holes thatany half-decent criminal entrepreneur can take advantageof.”

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Bush understands Lebanon

by Lee Smith
written by Lee Smith

The US’s former ambassador to the UN, John Bolton, recentlyconfirmed that Washington rejected calls for a ceasefirethis past summer and let Lebanon wither under Israeli attackfor several more weeks. An early cessation of hostilitieswould have been “dangerous and misguided,” said Bolton, whowas “damned proud of what we did.” So, maybe it’s worthwhileasking, with friends like the Bush administration, who needsenemies?

And yet strange as it may seem, certainly to thoseunfamiliar with the tangled relationships that constituteMiddle Eastern politics, this White House, having sponsoredor backed a series of UN resolutions supporting Lebaneseindependence and pledging almost $1 billion in foreign aid,is probably the most pro-Lebanese US administration inhistory. And that’s no small feat, since the US has had astake in Lebanese affairs ever since it became thepre-eminent Western power in the region shortly after theend of World War II.

The key date is 1956, after the Suez crisis, leaving the USwith the primary responsibility for containing Sovietinfluence in the Middle East. Eisenhower’s sending troops toBeirut to shore up the Chamoun government suggests that forWashington, clarity in Lebanon has tended to look like twosharply polarized sides, with one clearly pro-Western, andthe other decisively not. When the internal Lebanesesituation is muddier, as it was during the fifteen-year-long civil wars, US officials have had a much harder timefiguring out where American interests lie—and hence whataction to take. Indeed, when Ronald Reagan dispatched theMarines in 1982, the only clear divide was in theadministration itself, which debated the wisdom of gettinginvolved for as long as US troops were based here.

It was partly because American blood was shed in Lebanonduring the ’80s for no apparent reason, as well as placatingHafez al-Assad, that the current president’s father showedvirtually no interest in Lebanon, a state of affairs thatcontinued through the Clinton years. And without aremarkable chain of events these last seven years, thingsprobably would’ve remained the same during the tenure ofthis administration.

It may seem paradoxical in light of last summer’s war withIsrael, but as I was reminded recently during the annualAmerican-Israeli Public Affairs Committee (AIPAC) PolicyConference, it was largely the power of the Israeli lobbythat kept Lebanon a live issue here in Washington when noone else was paying attention. In 2003, the US House ofRepresentatives passed the Syria Accountability and LebaneseSovereignty Act, largely meant to force the Executive branchto reconsider its dubious policy of constructive engagementwith Damascus.

Still, it wasn’t until the Iraq war that Washington realizedwhat it had in Lebanon—not just a staging ground to rollback a confrontational Syrian regime and a fight aregion-wide Iranian agenda, but a high-profile showcase forthe keystone of the administration’s new national securitystrategy: Middle Eastern democracy. It is hardly lost onthe White House that to date, Lebanon, for all its problems,is the most successful part of its regional portfolio.

What’s bizarre is not Washington’s support of Lebanesedemocracy, but that so much of the rest of popular USopinion seems to have turned its back on Beirut. Ever sincethe formation of James Baker’s Iraq Study Group, there hasbeen intense domestic pressure on the White House tonegotiate with Damascus. Though seriously weakened with itsfailing position in Iraq, the Bush administration does notbelieve that solving Baghdad means acquiescing to Bashar in Beirut.

And then there’s the American media. Bush, explains theclueless Seymour Hersh in a recent New Yorker article, isbacking Al-Qaeda militants through the offices of theSeniora government. Other media reports also contend that USfunds used to shore up the Internal Security Forces areessentially being used to create Sunni death squads to waragainst the Shia.

Through it all, the Bush administration has brought Lebanoneven further within the fold. To date, in addition todiplomatic support and financial aid, Washington has devotedan unprecedented amount of White House prestige to Beirut. And as for Lebanese officials making their way toWashington, the State Department, Pentagon and White Househave all thrown open their doors to leaders from every sect,including a host of younger Shia hopefuls who seek anotheroption for their community other than that articulated bythe grim Islamic resistance.

And now with Bush having only a little more than a year leftin office, the natural question is, what happens to the Washington-Beirut relationship when the most pro-Lebanese president in the shared history of the twocountries leaves the White House? As today, Washington’sinterest will be determined by circumstances, and mostimportant among them, it is the will of the Lebanese peoplethat will decide if in, say, 20 years time, we will lookback on the beginning of the 21st century as the goldenyears of the US-Lebanon alliance, or as merely the start ofa beautiful friendship.

LEE SMITH is a Hudson Institute visiting fellow and reporter on Middle East affairs. 

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Banking & Finance

Nixing GCC monetary union, Oman charts own way

by Jason J. Nash
written by Jason J. Nash

Oman’s decision in early 2007 to opt out of the GCCmonetary union project has come as a blow to efforts by GCCstates to establish closer economic relations. However, thedecision was not necessarily based on a complete rejectionof the scheme. Rather, it is a reassertion of Oman’s need tofollow a different path until a more solid set of monetaryunion objectives is implemented by the other GCC states. Ithas also put under the microscope the GCC’s level ofpreparedness in dealing with its 2010 deadline for theproject.

Prime candidate to join… on paper

With the most conservative GDP growth of the GCC memberstates, Oman seemed likely to benefit from the much-vaunted ‘catch-up effect’ of monetary union, as seenfollowing the introduction of the euro. Oman was certainlynot struggling to meet the negotiated requirements in termsof fiscal policy: budget deficits are required to be cappedat 3%, while Oman had a fiscal surplus in 2005 of over 11%;public debt was well below the limit the GCC imposed onitself; and Oman’s foreign exchange reserves could easilyfinance four months of imports. Although Oman was meetingthe initial entry criteria, Ahmed bin Abdulnabi Macki, theminister of national economy, announced in January that thesultanate had decided to withdraw from the monetary unionproject.

He affirmed that Oman had reservations, both with the lackof progress made on obtaining prerequisites for successfulunion by 2010 (no agreed regional headquarters or commonmarket) and also cited Oman’s aversion to surrenderingeconomic sovereignty. He stated to Reuters that, “Thesultanate has its own economic and financial compulsionswhich do not offer room for meeting the criteria set for thesingle GCC currency.”

Oman has always sought to distinguish itself from its GCCpartners, both in its approach to oil and industry, and howit is now marketing itself as a tourism destination. Thegovernment is aware that the country does not have the samedepth of oil and gas reserves that most other GCC stateshave, and that the sultanate’s economic diversificationefforts could perhaps lose market competitiveness under aunified regional currency. The slowness of the other GCCstates to move on readjusting their currencies in step withone another to help fight dollar-inspired inflation wouldseem to validate its approach.

Interestingly, the other GCC state not flush with oil andgas reserves, Bahrain, is also now beginning to voice itsown concerns over the prospect of monetary union. Commonthemes of discontent include a lack of preparedness and theincomplete implementation of a common economic marketbetween the member states. At the same time, Kuwait ishoping its fellow GCC members will move faster onreadjusting the currency peg with the US dollar to helpstave off inflation.

Oman’s voice speaks strongly of independent economicconsiderations, and this is also reflected by itsindependent partnerships outside of the regional bloc.Recent bilateral developments have given Oman a new platformfor trade and investment. Whilst this may have not beenwell-received by some GCC member states, it has opened up anumber of opportunities for the sultanate’s economy.

The Oman-US FTA has so far generated large bilateral tradereturns for Oman (45% increase in export revenues from theUS over the last 12 months). This agreement also gives Omanunrestricted access to the US market, and eliminates the 5%tariffs previously in place. This is particularly useful asthe US is Oman’s fourth-largest import partner, responsiblefor $538.7 million worth of imported goods in 2005,according to the central bank of Oman.

Ties beyond the Gulf

The so-called “FTA effect” is evident across the region,with Bahrain also entering bilateral agreements earlier lastyear. FTA countries in the MENA region have experienced anaverage 33.5% increase in trade with the US during2005-2006. Although the FTA effect may well slow down incoming years, the extra trade created will remain. However,revenue is not the only factor to be considered in Oman’scase, as strategic partnerships with the US would stand tobenefit diversification options in the country.

Oman’s intra-regional trade ties should not be forgotten.The sultanate has significant trading interests with its GCCpartners, accounting for 18% total imports and 10.7% totalexports. The UAE is Oman’s fourth largest trading partnerand still a key part of the GCC market area. Should themonetary union continue without Omani membership, thesultanate may well find itself facing higher transactioncosts to deal with the Gulf Dinar.

Oman has managed to create new space for itself in theglobal trading network, establishing bilateral agreementsand partnerships promptly and efficiently which fulfill itsdevelopment criteria. Comparatively, the GCC as anorganization has repeatedly prolonged negotiations to forgeUS-GCC arrangements and has encountered many points ofcontention in aligning members’ independent economicpolicies. Bahrain was the first to observe that going italone on a trade deal with the US might better serve itseconomic need to generate growth and jobs, and Oman’s FTAreiterated the concern that the differing priorities of GCCmember states may be hampering the growth of the smallerplayers.

Oman also seems to be bearing its Asian priorities inmind, since its three major trading partners are Japan,China and Korea, who account for a collective 44.5% of totaltrade (21.5% total imports and 58.0% total exports). This isa regional alliance that Oman has successfully enticed andis continuing to pursue. Sinopec is the sultanate’s largestexporter of crude oil (30%) and has recently announced aproposal to increase term purchases by up to 20% for thisyear. China is also bidding on industrial contracts in thecountry and is seemingly paving the way for a longrelationship with Oman.

Asian loans have proved crucial to financing governmentprojects: the Japan Bank for International Cooperation(JBIC) loaned $150 million to Oman as contribution tofinancing part of the project of the second phase of Soharport, financing construction as well as infrastructure.Japan also participates in a “human resources transfer”program, dispatching ‘experts’ in response to requests madeby the government. The Omani-Asian links continue tostrengthen and Oman is taking care to ensure that thispartnership does not become neglected at the expense ofregional economic cooperation. The GCC priority is inestablishing a trade agreement with the EU, something whichhas moved very slowly since the opening of negotiations in1990. Despite the EU being Oman’s fifth-largest trading partner, the essential composition of theGCC presents many institutional barriers to trade alliances,and Oman’s branching out may indicate its lack ofwillingness to keep on waiting.

Although there has been criticism of Oman’s decision towithdraw from the monetary union process, the move may cometo be seen as very sensible regarding the sultanate’seconomic position. Oman has sent a clear message to the GCCthat it will not marginalize its domestic concerns for thesake of regional unity. This decision has already encouragedGCC scrutiny of what many now agree are unrealisticdeadlines and criteria. The concept of a fully operationalGulf Dinar by 2010 looks unlikely, though an ECU-styleaccounting unit used as a precursor is one course now leftopen for the GCC partners. As for Oman, it seems more intenton developing on its links with the US and Asia, increasingits competitiveness to benefit from more diverse foreigninvestment and partnerships. And just perhaps, through theOmani move, the other GCC states may take a long look at themonetary union plan and revise the steps needed to achieveit.

Jason J. Nash is Head of Research at the Oxford Business Group

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Syria not yet folding its cards

by Nicholas Blanford
written by Nicholas Blanford

Like it or not, Syria’s leaders have no desire it seems toimitate Longfellow’s “Arabs” and “fold up their tents andquietly steal away into the night.”

Two years of diplomatic isolation and unrelentinginternational pressure have failed to persuade Damascus tosignificantly alter its course regarding key regionalissues: Lebanon, the Palestinians and Iraq. On the contrary,marginalization by the international community has had theeffect of drawing Damascus closer to Tehran. TheSyrian-Iranian relationship, one of the most unlikely andenduring alliances in the Middle East, has only grownstronger since the election of Iranian President MahmoudAhmadinejad in August 2005.

Both countries need each other. Syria allows Iran a toeholdinto the Arab-Israeli arena and serves as a vital conduit toHizbullah. In exchange, Syria has a powerful military andfinancial ally in Iran with which to face the cold shoulderof the West and the unease of other Arab nations.

The US effectively severed relations with Syria in the wakeof the assassination of former Prime Minister Rafik Hariri.By February 2005, the Bush administration’s patience withDamascus had waned considerably over a number of issuesincluding Syria’s support for Palestinian militant groupsand foot-dragging over a troop withdrawal from Lebanon, butchiefly over its unrelenting opposition to theAnglo-American invasion and occupation of Iraq.

The European Union, following the US lead, also distanceditself from Damascus, influenced by French President JacquesChirac who does not even try to hide his antipathy towardthe regime of Syrian President Bashar al-Assad.

The US told Syria that it must change its behavior beforethe Bush administration would consider re-engaging with it.An uncowed Syria instead turned toward Iran and embraced animage of Arab steadfastness against the bullying dictats ofthe West, a stance that resonated among many Arabs.

But the cracks in the edifice of isolation began to emergeat the end of last year with the release of the Baker-Hamilton commission’s report on Iraq, which recommended aresumption of dialogue with Syria and Iran. The Bushadministration initially dismissed the commission’s advice,insisting on its demand that Syria must take the first stepby changing its behavior. But several US senators,emboldened by the Democrats’ success in the mid-term US elections in November and by the findings of theBaker-Hamilton commission, traveled to Damascus, the firstsuch visits in two years. In November, Syrian ForeignMinister Walid Muallem visited Baghdad, which paved the wayfor a restoration of formal diplomatic relations betweenSyria and Iraq in December and the signing of a jointsecurity agreement. In January, Jalal Talabani visitedDamascus for the first time in his capacity as president ofIraq. The biggest indication that Syria could be coming infrom the cold was its invitation in February to attend—alongwith Iraq’s other neighbors—a conference in Baghdad todiscuss how to help stabilize Iraq.

The Europeans also have begun retreading the path toDamascus, most notably Javier Solana, the EU’s foreignminister.

A general rapprochement between Damascus and the West stillseems a long way off and will probably depend on the outcomeof the United Nations investigation into Hariri’s murder.But the tentative steps toward re-engagement has revived thedebate between those that believe that jaw-jaw is alwaysbetter than war-war and those who argue that talking toDamascus is futile. Both arguments have somejustification.

Syria’s critics maintain that the Syrian leadership has ahistory of frustrating and infuriating its internationalinterlocutors by making promises that go unfulfilled.Recommencing a dialogue with the Syrians, they argue, willbe taken as a sign of Western weakness and suggest thatDamascus has no need to change its policies. Much better,they say, to at least maintain and possibly increase thepressure on Syria in a bid to break the will of the Syrianleadership.

Supporters of dialogue, however, argue that the policy ofisolation over the past two years has not only failed topersuade Syria to yield to Western demands, it has had theopposite effect of helping cement the Syrian-Iranianrelationship. That strengthened bond forms the backbone ofthe anti-Western alliance spanning the Middle East fromTehran to Beirut’s southern suburbs. The alliance isdetermined to check the regional ambitions of the US andlies at the root of mounting Sunni Arab alarm at Iran’sgrowing reach into the Middle East.

A serious re-engagement with Damascus, they argue, wouldhelp pry Syria away from Iran, breaking the anti-Westernalliance and weakening Tehran’s ability to influence theArab-Israeli conflict. The bottom line, they say, is thatSyria cannot be expected to dance to the Western tune ifnothing serious is offered in exchange.

The debate over how to handle Syria remains heated andunresolved. But there is little doubt that it is hard toignore a country that lies at the nexus of so many of theregion’s conundrums.

NICHOLAS BLANFORD is a Beirut-based journalist and author of “Killing Mr Lebanon: – The Assassination of Rafik Hariri and its impact on the Middle East

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Consumer Society

High-end watches prove time is money

by Executive Staff
written by Executive Staff

The actor Daniel Craig made one of the most shamelessproduct plugs in the history of cinema when he flashed andthen further name-checked his Omega Seamaster mid-waythrough his debut as the new James Bond in Casino Royale.The Omega has been the standard issue timepiece for thelatter-day Bonds (though in the early films, and in the IanFleming novels on which the 007 film franchise is based,Bond never wore an Omega but rather a Rolex Oyster Perpetualor a Rolex Submariner). Still, whatever the watch, themessage remains the same—nothing bespeaks style and statuslike a wrist thrust from beneath a cuff to flash a majorpiece of high-end Swiss precision.

Watches dominate luxury goods sales

The wannabe Bonds of the world—and in the current globaleconomic climate there are many, both aspirers and oldmoney—are likely to start with the tailored suit and endwith the Aston Martin. But in between they will have toshell out for the watch. Perhaps as a result, within thegreater luxury goods market, the watches and jewelrycategory is surging, particularly in emerging markets suchas Russia, China, India and the Middle East.

“We have witnessed huge growth in the market for luxurytimepieces in the last three years, and it is clearlyshowing in Swiss exports to the region,” says George Becharaof Zenith, the high-end and venerable watchmaker now ownedby LVMH (Louis Vuitton Moet Hennessy) and which arrived inthe Middle East market early in 2004.

Regionally, says Bechara, who is based in the booming UAE,“Dubai is our … biggest market in terms of presence. Thegrowth in Dubai in units between 2005 and 2006 was up 78%,and in terms of turnover it was up 33%.”

Zenith’s parent company, LVMH, is widely considered theindustry leader in the global market for luxury goods. Withscores of brands under its name, LVMH holds a diverseportfolio that ranges from wines and spirits (Moet Chandon,Veuve Clicquot) to high-end fashion (Louis Vuitton, MarcJacobs) to fragrances and cosmetics (Christian Dior,Guerlain) to watches and jewelry (Zenith, Tag Heuer,Chaumet).

In 2000, watches and jewelry contributed only 5% of LVMH’soverall sales. By 2006, however, the category trumped allothers in terms of growth as sales increased 26% on theprevious year. A joint venture between LVMH and De Beers,the largest diamond supplier in the world, has no doubtcontributed to the category’s newfound muscle. Notcoincidentally, De Beers opened its first boutique in Dubailast year.

The market for luxury watches—defined as timepieces thatretail for upwards of $2,000—moved into the Gulf en massearound 2002. That year, Dubai imported some 700,000premium-quality Swiss watches, which at the time was roughlyequivalent to the size of the city’s population.

All major players make it to Dubai ontime

All the major players in the luxury watch market are nowpresent in Dubai—Rolex, Cartier, Chopard, Omega, Cartier,Patek Philippe and the Richemont Group—another global luxurygoods powerhouse, with its regional headquarters in theHazel W. S. Wong-designed Emirates Towers. Richemontincludes IWC, Piaget, Jaeger-LeCoultre, A. Lange & Sohne,Vacheron Constantin, Officine Panerai, and Baume & Mercier.

Dubai’s phenomenal growth is certainly fueling the market.According to a recent—and notably critical—article on Dubaiin the German newspaper Der Spiegel, there were just fourcompanies operating in Dubai 20 years ago. Now there are6,300 from more than 100 countries. The ruling Maktoumfamily expects the local population to grow from two millionto 10 million, and wants 20 million tourists to pass throughDubai every year. Given the potential for triggeringconspicuous consumption, it’s no wonder watchmakers havebeen flooding money into establishing headquarters andboutiques for themselves in Dubai, and then embarking uponan aggressive ad campaign.

“The growth of Dubai [has been] tremendous and crucial inbenefiting Zenith’s business,” says Bechara. “The hugeinvestments that are taking place here, the most importantcompanies setting [up] their regional offices here, the fuelprices, the attraction of tourists throughout the year—allthis brought us good business.”

Regionally speaking, the market for luxury timepiecesremains strongest in Saudi Arabia and the United ArabEmirates, though Kuwait, Qatar, Bahrain and the Levant offersizable room to grow. Rolex still leads the pack in terms ofmarket share (with 15% of the Saudi market alone). But whenit comes to the highest of high-end watches, market successisn’t always a matter of volume. Often it is a matter ofvalue.

Ziad Annan of Rolex in Lebanon says sales figures have beenimpacted by the political situation in the country, whetherthe war with Israel in the summer of 2006 or the oppositiondemonstrations that have, for four months and counting, madea ghost town of Beirut’s central district, where the upscaleRolex boutique is located.

Despite such extenuating circumstances, Annan notes that twonew Rolex timepieces have been particularly successful oflate—a Rolex Rolesor that was fashionable in the 1970s andre-launched last year and a new Rolex GMT Master II. Bothproducts have proven remarkably popular in the Lebanesemarket.

So where will the sector for exquisite watches—and bejeweledmobile phones—go from here? After five years of surginggrowth and breakneck expansion fueled by the outrageous paceof development in Dubai, it seems likely that the majorplayers in the region will turn their attention toconsolidating brand loyalties.

In 2006, says Zenith’s George Bechara, “we had a huge yearin terms of launching new products. This year we are morefocused on strengthening the existing collections, with somenovelties that will give a push to the brand.”

One factor that may contribute favorably to a period ofmarket consolidation is the arrival in the UAE of theauction houses Christie’s and Sotheby’s. Certainly much inkhas been spilled over the sales of international modern andcontemporary art staged by Christie’s in May 2006 andFebruary 2007. But it is worth noting that on Jan. 31,Christie’s held a major auction of jewels and watches in theEmirates Towers Hotel, a sale that trounced the totals ofboth art auctions by raking in $11.8 million. They were nomillion-dollar paintings on the bloc, but a marquise-cutdiamond ring by Van Cleef & Arpels went under the hammer for$1.2 million. The sale also featured watches by PatekPhilippe, Rolex, Cartier, Piaget, Chopard, and a limitededition Corum in 18-carat white gold, 20 jewels, and a whitedial with verses from “The Thousand and One Nights” in blackenameled Arabic script.

According to Michael Jeha, managing director of Christie’sDubai, there are 45 to 50 people working on the Dubai marketfor Christie’s. All the watches and jewels to be sold attwice yearly auctions will, for the time being, be sourcedfrom Europe to keep the material fresh. As a result, theauction houses could either edify Dubai-based enthusiasts ofluxury timepieces—or snag competition away from thetraditional watchmakers themselves.

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Jordan-US QIZ could be better

by Riad Al-Khouri
written by Riad Al-Khouri

The Jordanian economy has done pretty well recently, boasting high growth rates, attracting attention from regional investors, and enjoying increasing exports.Regarding the latter, the kingdom chalked up close to $4.1billion in national merchandise exports last year, up by almost 13% on 2005. Traditional Jordanian production such as fertilizers (the country’s second most important good sold abroad) still accounted for almost 8% of exports in 2006, with potash, another mainstay of the old Jordan economy, constituting over 6%. However, other products with a higher value added have become more prominent in the past few years. These include pharmaceuticals, currently the country’s third most important export, with a share of over7% last year, and most notably clothing, which has been number one for much of the present decade. Growing steadily from a very modest share in the late 90s, the clothing industry was responsible in 2006 for just over 30% of totalJordanian merchandise exports, a proportion roughly maintained since 2003, with the value of Jordanian clothing exported last year expanding by 18% compared to a rise of just over 5% in 2005.

So where are all these clothes sold? You’d think that shoppers in Lebanon, Iraq, or the GCC countries, traditional outlets for Jordan’s products, would see Jordanian garments in their local stores, but that is rarely the case.Actually, you would have to go to New York or LA to find most of these clothes. Is that a bizarre situation? Not at all, if you consider the importance of Middle East diplomacy to Jordan’s economy. In fact, Jordan’s success in this business rests on a break it got over a decade ago from its favorite uncle, a person with a red, white and blue top hat called Sam, with so-called Qualifying Industrial Zones(QIZs).

In the Zone

Under the QIZ—blatantly designed to reward Jordan for its pro-American stance and nudge the kingdom even closer toIsrael—a product with 11.7% added value from Jordanian, 7-8%from Israeli, and the balance of 35% from either country, the US or Palestine, enjoys duty-free entry into theAmerican market. For example, if a skirt costing $10 is imported into Jordan from India and dyed in Amman to raiseits value to $11.17, it cannot by such a transformation alone enter the US market free of duty under currentJordanian-American trade rules. However, if that same garment also gets, for example, Israeli zippers worth $0.80and American trim costing $1.53, then the finished product has added the necessary amount of value (in this case stipulated at a minimum of 35%) in the correct proportions to qualify for duty- free entry into the US market.

The roaring success of this arrangement has left the US as the main importer of Jordanian products last year, buying more than 31% of the kingdom’s exports, up from a derisory amount in the mid-90s. For various reasons, clothing has turned out to be the major exported QIZ item, with garments(most of which are produced in QIZs) amounting to almost 91%of Jordanian sales to the US in 2006.

Not that the QIZ deal has done that much for Jordan’s economy: for a start, most of the capital and many of the workers at QIZ factories are not Jordanian—as a lot of profits and wages are sent home outside the kingdom, Jordan gets that much less benefit. The other problem is that UncleSam in December 2004 also “rewarded” Egypt with a QIZ deal; as the Egyptians can more cost-effectively produce garments(and for that matter, other products) wanted by US consumers, Jordan QIZs had better watch out. Under theAmerican policy of “competitive liberalization” grantingQIZs to both neighbors seeks to make them more competitive, which is probably a good thing—if the Jordanians are up to it.

QIZ helps plug trade gap

Meanwhile, QIZ has helped Jordan to strengthen what would otherwise be anemic exports of goods, partially plugging a massive trade gap. In 2005, exports of Jordanian goods covered a mere 41% of the kingdom’s merchandise imports, but higher sales abroad from Jordan’s QIZs last year helped bring up the coverage to a little over 45%. The shortfall is partly made up by better figures in Jordan’s services trade balance, but in the end the kingdom regularly consumes more from abroad than it sells to the outside world, with the gap being made up by foreign largesse.

RIAD AL KHOURI is an economist, and Director MEBA Ltd Amman/Senior Associate BNI Inc New York; He can be contacted at [email protected]

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Dubai asks the question, Yes, but is it art?

by Executive Staff
written by Executive Staff

Until recently, Dubai seemed content with its reputationas a booming former backwater, flush with oil revenues andripe for investment, but absent of any culture saveconspicuous consumption.

Having firmly established its identity as a tax-freecommercial oasis in a politically volatile region, in 2005,the UAE’s second largest emirate decided to accelerate thediversification of its economy away from oil revenues andattract a new breed of foreign capital—artworks.

Riding the wave of skyrocketing international contemporarysales, and underpinned by an emergent class of buyers fromRussia, China, and India, Dubai would position itself as aglobal hub linking hungry, if undiscerning collectors inburgeoning non-Western markets with their more establishedcounterparts in London and New York.

To this effect, Christie’s Auction House opened regionaloffices in Dubai in 2005, and has held three auctions sincethen in which, according to Michael Jeha, Christie’s Dubaimanaging director, 90% of the lots were sold, even if cynicspoint out that between Christie’s twin inaugural auctionsheld last February, jewelry accounted for almost 60% of the$20.5 million revenue. Meanwhile, Christie’s equallyvenerable competitor Sotheby’s has also announced plans toset up shop in Dubai, and sponsored a local educationinitiative for Emirati collectors, artists and galleryowners.

Ambitious art fair

On March 8, the Dubai International Financial Center(DIFC) sponsored the inaugural DIFC Art Fair, moving theemirate one step closer to its goal of becoming what formerBritish galleriste and fair director John Martin calls “acenter of art commerce.”

Nothing if not ambitious, fair organizers expect Dubai’sart market to mimic its rapid commercial growth, and“strategic partner” DIFC reckons the event will become oneof the top five art fairs in the world within three years,rivaling the reigning international triumvirate of Art Baselin Miami, the Armory in New York and Frieze in London.

Given the absence of a thriving gallery scene, anup-and-coming group of local artists and collectors, or arenowned art institute in the deserts of the GCC, the claimmight be dismissed as unrealistic at best and bombastic atworst. But if Dubai has learned anything during its rapidrise to become the Las Vegas of the Arab world, it is how tosell. And once stripped of its cultural pretensions, what isan art fair if not an aesthetically pleasing market?

While, the jury may still be out on both the DIFC fair andDubai’s ability to cut it culturally, its first outing wasnonetheless a good start. The three-day event (andconcurrent global art forum) brought cult galleries togetherwith the marquee names of the art world. Some were drawn bycuriosity, others by the promise of a new class of spender,spawned by a $500 billion oil boom, and others by what werevariously referred to by Ben Floyd the fair’s financedirector as the “incentives,” “bursaries,” and “smallsubsidies” given to a handful of galleries “that we reallywanted on board.”

The 40 exhibitors assembled in the Arena of the MedinatJumeirah resort included Hoxton Square-heavyweight WhiteCube and its slightly less cutting-edge, yet prominentMayfair counterpart Albion; Chelsea mainstay Max Lang andSeoul’s Gallery Hundai. Over $100 million worth of art wasassembled in the chinzy hotel conference center, butgalleries and fair organizers alike declined to reveal thetotal value sold.

“There are different ways to measure success,” Jeha saidwhen asked the total volume of sales. “The attendance andcontent was good, and I know a lot of Indian and Arab artsold, but I don’t know the tallies from western galleries.”

However, based on reports, it seems unlikely thatpetro-dollars, an all-star roster, and a media blitztranslated into bumper sales this time around. “There havebeen a lot of conversations and we’ve sold a few things, butit’s not like the usual levels we see at art fairs like theArmory or Basel where we sell millions,” explained GrahamSteele of White Cube early on the first public day of thefair, who admitted that the customers lacked knowledge.

“They didn’t prepare collectors and there is a lot ofexplaining. People don’t know that this is an iconic DamienHirst,” he says gesturing to an installation of a medicinecabinet stocked with pills. “Or they don’t understand whythis costs £850,000,” he says referring to another signatureHirst butterfly piece hanging nearby. Indeed, none ofHirst’s work—including the most expensive piece at the fair,his “Spot Mini” car owned by British collector CharlesSaatchi and insured for $2 million—sold. White Cube, like Albion, tailored its display toperceived demand, leaving the racy Tracy Emins at home, infavor of more “universal” pieces like a colorful painting ofthe Luis Vuitton symbol.

By Saturday afternoon, 12 of the 30 pieces Albion shippedto Dubai—including eight edition pieces from the Campagnabrothers—chairs covered in a furry orgy of stuffed animalspecies and sold for $18,000 each—had been snapped up, “andnot just by expatriate residents of Dubai,” said stafferMatt Langton, “but by locals too.”

Wide range of interests, but few sales

Elsewhere, interest in a photograph of Yasser Arafat and avideo installation of oil being spilled over a pile of sugarcubes by French-Algerian artist Kader Attia, both selectedbecause they were thought to be “appropriate to the area,”was muted, while at a booth shared by Max Lang, Malca FineArt and Enrico Navara, where pieces ranged from $25,000 to$2 million, reaction was “mixed.”

“We’ve had offers from European, Russian, and Indiancollectors but haven’t closed anything yet,” reported adecidedly unimpressed Lang, adding that Andy Warhol’s iconicdollar sign has had a lot of interest. Navara said localswere remarkably curious about contemporary art, and the“clueless were willing to find out why.” He plans to attendin 2008, and reap the rewards of the education dispensedthis year. Indeed, it was this level of phlegm that was theorder of the day as exhibitors, who forked out between$20,000 to $50,000 for a stand, took the lackluster sales instride. One gallery owner who huffily declared that he had“never lost so much money at a fair” in his career,grudgingly said he would return.

That smaller, regional galleries like Third Line, thefair’s sole Emirati exhibitioner, outperformed theirwestern counterparts (it sold at least half of its 23 works)bodes well for the sustainability of the fair, and theMiddle Eastern art market in general, according to AndréeSfeir Semler, the grand dame of Beirut’s fledgling galleryscene. “Its easy to attract international galleries thefirst year, and maybe the second, but most of them won’texhibit the third year unless the fair offers somethingdifferent from the others,” she explained. “Basel getsstronger every year because it has an identity. They’vestarted nicely here because they have Indian, Persian,Turkish galleries, and we’re from Beirut. And having theinternational galleries attend raises the standard of theevent, but no one is going to come to Dubai to see theWarhols. Regional artists have to draw on their own cultureto make a name from themselves and stop trying to imitatethe west,” she says.

The intersection of globalization and Islam threadedtogether the art on view, including a “Militant Snoopy”action figure wielding a beard and a gun, a $25,000gem-encrusted “Nation of Islam Knuckle Duster” with the wordAllah inscribed in Arabic, and “Diamond Head,” FarhadMoshiri’s glittery gold and black eagle painting, thatfetched $70,000 within two minutes of the fair opening.

John Martin said it is not unusual for new buyers toinitially invest in art from their country of origin, but astheir collection and awareness grow, the focus on aparticular geographic region melts away. “Most of the bigWestern pieces were bought by expats living in Dubai, justas Indian collectors bought most of the Indian work. But asfair gets bigger, Asian collectors will shift towardsWestern art, and vice-versa. We hope to position it as asandbar between the two cultures,” he added.

Most western galleries in attendance were not expecting bigsales, Marin insisted, but came to make connections in anart market with huge potential. Though he expects privatecollectors to be the engine of Dubai’s art market in thefuture, corporations setting up offices in the emirate areanother promising customer-base.

Art is a new staple of investmentportfolios

“Banks invest in contemporary art, not least because youcan hang it on your wall. Banks court wealthy clients, a lotof whom are private collectors, by setting up separate artconsulting branches. Art is becoming a staple of moderninvestment portfolios,” he said.

One needs to look no further than the growing number ofart investment funds for evidence of the growing appetitefor art as an investment vehicle. While the trend is by nomeans new, venture capital funds and financial institutionshave only recently begun to turn their gaze outwards toemerging markets. The question is whether the Middle Eastwill be next, and if Dubai will be able to assume a role asthe “third leg”—a title one gallery owner bestowed on HongKong—of the contemporary art market.

Much like Dubai itself, it is difficult to disengage thehype surrounding the fair from the reality, but Tim Harrisonof HSBC does not think the emirate’s potential as an artmarket has been inflated.

“If you look at the fair next to Christie’s successfulsales and the Louvre (to be built in Abu Dhabi), we areseeing a notable move towards investment in art,” Harrisonsays.

“There is a lot of art being produced in the Arab world,which will find more obvious channels for sale in theregion, and we have Indian collectors coming through. Dubaiis well positioned to be a trading hub for South-Asian,Middle Eastern, and Indian art.”

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Iran‘s home-grown auto market

by Gareth Smith
written by Gareth Smith

It’s an ill wind that blows someone some good. Tehran’s infamous traffic congestion may clog its roads and the lungs of its 12 million inhabitants, but it means big business forIran’s car makers.

Total production of new vehicles reached nearly 1 million for the Iranian year ending March 20, according to Ali RezaTahmasbi, the minister of industries and mines, makingIran’s output higher than Australia and three times that ofIndonesia.

The sector accounts for about 4% of GDP and 500,000 jobs, giving it a pressing importance for Iran’s rulers, while facing an unemployment rate officially at 11% and the prospect of further international sanctions over the country’s controversial nuclear and missile programs.

The strength of Iran’s car industry results not from a vibrant competitiveness geared to a tough world market, but rather from a mixture of high import tariffs, state ownership and petrol subsidized to the knock-down pump price of around 9 cents a liter (rising to 11 cents in May).

The government is keen for Iran to become a regional if nota world-wide auto manufacturer, and so Saipa and IranKhodro, the main domestic companies, are expanding business through exports, setting up overseas production lines and enticing foreign partners into joint ventures at home.

Renault returned to Iran in March after a 20-year absence, investing $150 million in a 51-49% partnership with Saipaand Khodro to make the Tondar-90, a version of the Logan, as mall family car first made by Renault’s Romanian subsidiaryDacia.

The car will have 60% local parts, rising in time to 80%,and Renault and its partners aim to make 300,000 units over three years. As the car went on pre-sale in March, with three models ranging from 82 million rials ($8,870) to 108million rials, Khodro claimed to be registering 22 buyers every minute. Business at the Khodro’s Tehran sales offices was certainly brisk, with customers relying more on memories of Renault’s past reputation in Iran than any detailed information on the new car.

The move is a clear challenge to Peugeot—the biggest foreign car manufacturer in Iran, assembling 400,000 cars a year in partnership with Khodro—and Renault has also decided to produce 15,000 Meganes, another small family car, in 2008, rather than importing the model from Turkey.

Renault’s decision raised eyebrows in Washington, where officials are trying to discourage international investment in Iran. But such was the French company’s commitment to the deal, first signed in principle in 2004, that it agreed to the Iranian demand that 20% of the 300,000 cars could be sold for export.

For the Iranians, such deals bring access to European technology, helping Iran in its aim to boost its non-oil exports.

Parviz Davoudi, Iran’s first vice-president, inaugurated a factory in Syria in March as a $60 million joint venture with Al-Sultan to make the Samands, Khodro’s budget family car, which will be re-branded as the Sham. Target production is 10,000 a year, a useful boost for the Samand, Iran’s only entirely indigenous model since production stopped in 2005of the Paykan, the model famously based on the UK’s HillmanHunter.

Iran also signed three auto making contracts valued at more than $1 billion with Russia and China during the Iranian calendar year ending March 20. Khodro agreed to export 6,000 Samand cars to Russia every year and to produce 30,000 inChina. Iran Khodro Diesel is to assemble 12,000 of a version of the Gazelle van, made by the Russian GAZ (GorkovskyAvtomobilny Zavod) company, beginning with importedCompletely Built-up Units (CBU) and gradually switching to50% of parts from domestic production.

Although the basic strength of the Iranian manufacturers remains a protected home market, there has been some easingof restrictions on imports.

Iran did lower slightly tariffs on imported vehicles in2006-7, allowing an increase from 10,000 to 26,000 andleading top-range manufacturers such as BMW and Mercedes-Benz to step up their limited efforts.

And domestic manufacturers have also brought in some models from their overseas partners Renault, Citroen and Hyundai.Khodro plans to add the Peugeot 407 to its sales line-up in2007-8, and will import a total of 2,000 Peugeots, with each priced at 300-400 million rials ($32,500-$43,500).

In another sign of improved fortunes for importers, Hyundai signed a contract to supply 13,450 CBUs worth about $227million to Iranian government agencies and official taxi operators, a move that came as a blow to Kerman Motors, which manufactures Hyundai models.

The relaxation of restrictions seems to have resulted from widespread public, media and even parliamentary criticism ofthe quality of Iranian-made cars.

But there is no sign of any serious challenge to the basic development model based on restricting imports. Parliamentdecided in February to keep a hefty 90% tariff in place for the coming year, ending March 2008.

Hence the cars clogging Tehran’s streets will likely for the foreseeable future, continue to be Iranian-made, even ifsome of the parts and a growing part of the technology that makes them are imported.

GARETH SMYTH is the Financial Times Tehran correspondent

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