Lebanon

Paris III comes and goes with massive aid pledged

by Executive Staff
written by Executive Staff

As far as allegories to dance movements go, the Paris III conference was a grand ballet. President Jacques Chirac pirouetted as leading man and the 37 assembled nations and multilateral institutions performed their numbers for the guests of the hour, namely the Lebanese delegation of Prime Minister Fuad Seniora and his cabinet confidantes. By the evening of Jan. 25, the meeting had it all: grants, project-tied aid for social, educational, and infrastructure projects, and soft loans at advantageous conditions.

Ranging in size from $1 million donations by Latin American, Eastern European, Asian, and Arab countries to a $1.1 billion commitment by Saudi Arabia, the total result of the aid meet was amazingly close to the $8 billion need estimate that government economists in Beirut had circulated several months ago when the Paris III preparations were starting to take shape.

The commitments flowed with ease and elegance. Speakers from countries around the world followed one another in short succession and presentations were astoundingly succinct. There even was a bit of amicable cultural alignment when the host asked for French timing on the lunch break but seemed happy enough to go with the Middle Eastern late break instead.

Details hazy

The details of some interest rates, disbursement conditions, and repayment schedules were admittedly hazy during the conference itself (and not available in detail when Executive went to print) but with total international pledges of $7.6 billion and a paper full of Lebanese commitments to fiscal improvements, privatization, social measures and overall reforms, satisfaction ruled all around. Conference participants assured the media in the closing press conference that they were fully aware of the political problems faced by Lebanon and the deplorable street fighting that had erupted in Beirut on the actual of the Paris III, but reiterated their confidence that the country would achieve new internal calm.

In this regard, the convening of Paris III was a success in itself. In late December, there were enough reasons for local and international experts to seriously question the likelihood of the conference even happening. The confrontational positions of the opposition—Hizbullah, Amal, Michel Aoun’s Free Patriotic Movement and their allies—and the March 14 forces of Saad Hariri’s Future Movement, Walid Jumblatt, and assembled Christian groups on the other side, displayed the kind of intransigence that required doubt over the mutual will for communication in the two camps. The likely outcome of such mental conflicts and spiritual warfare is physical escalation, as happened in the conference week. But the key conference parties, comprising the French host, the Europeans, the United States, the Arab League and most Arab countries, stayed committed.

Paris III was set up and implemented along a formula similar to the one used to rally international powers to Lebanon’s support in the Paris II conference. That conference benefited from the friendship between Lebanon’s then prime minister, the late Rafik Hariri, and President Chirac, whose term in office ends this spring. In closing the Paris III press conference, Chirac paid tribute to Hariri as a “man of peace” and “the cause and author of Paris I and II.” It was Rafik Hariri who had traveled to the capitals of the West and the Arab world in preparation for Paris II, and Seniora has now retraced his footsteps.

But was Paris III the final chance to tango with international aid givers in exchange for reforms?

What makes this question inevitable is the fact that Lebanon’s government has failed in its obligations to live up to the privatization and reform promises made in November 2002. Paris II was hailed as a big success at the time, one that would not be followed by another conference of the same cut.

The disarmingly simple argument presented by Seniora in asking funds at Paris III was that this will cost money now, but it will cost more if the problem is left to be addressed later. That is correct, but only when adding that, in the end, it will be three times as expensive if a solution cannot be found now.

Many concerns about Paris III

Some economists cautioned that Paris III could go the way of Paris II with only half of the promised funds making it to Beirut and financial support getting lost in the inefficiencies of implementation. However, predicting an automatic repeat of this pattern is unproductive, and the lesson of Paris II should be to eliminate the reasons which international donors cited for cutting the funds.

Other concerns are technical. Besides following the process of Paris II, a number of the reforms proposed by Seniora’s team for Paris III were adopted from the plans that have been around since the start of the millennium. While the fiscal and macroeconomic logic of handing the phone networks over to the private sector and getting rid of Electricite du Liban as fast as possible is as valid today as it was five or six years ago, the lack of new ideas and concrete development concepts for economically underprivileged areas are grounds enough to call for further deliberations. Also, the proposed fiscal measures and debt reduction mechanisms made some competent analysts comment that things are not as simple as they appear in the Lebanese government’s paper.

But the main issue of 2007 is political consensus. It was not achieved in 2003, and it seems out of sight today. To stay in step with the dance, the biggest question forcing itself on the evaluation of Paris III is how can people tango when they are locked in political fights? It takes two, but conditions in Beirut leave no doubt that a whole dance-athon of serial political tangos would be needed to create the kind of agreement needed for implementation and probably expansion of the reform platform and a new start in Lebanon.

Seniora and his cabinet members have said often enough they want to invite all groups in the national spectrum to present their proposals for upgrading the reform project that is Lebanon 2007—but could Seniora and the many heads of opposition interests ever see eye to eye (or, to stay with the dance motif, dance in step)?

The reaction from Lebanon immediately following the conference was ambiguous. Some was exuberant, some cautious, some undecided and some simply mistrustful of the government’s reasons for holding the event in the first place.

In its more tangible way, the Beirut Stock Exchange gave off mixed reactions. The BLOM shares index climbed above 1,200 points for the first time in more than a month, as Solidere shares appreciated by 4.4% and moved close to $17 with some of the strongest trading volume in the stock since before the start of anti-government demonstrations in the Beirut central district.

Banking sector sticks its neck out again

Brokers and investment advisors for local financial firms were quick to say that Solidere’s momentary gains were related to the good numbers from Paris, but by the following Monday, the mini-surge abated as quickly as it began. Furthermore, in the banking sector, shares of Byblos, Audi, and BLOM dropped between 1 and 2.5% on January 26. That and the following trading day suggested no new wave of investor enthusiasm.

For the banking sector, the danger of a failure in Lebanon’s recovery looms large because exposure of commercial banks to government debt is still immense. Thus it is no wonder that, as ABL chairman Francois Bassil confirmed to Executive, the banking industry is willing to play an active role in the reform process through financing infrastructure reconstruction and by finding investors for government projects.

However, as Bassil also made clear, banks would not agree to providing funds to the state through zero-coupon treasury bills again as they did after the Paris II conference, following a request from the Lebanese government. Bassil conceded that the banking sector will be affected if fiscal reform is not accomplished, because it is a main lender to the government.

The challenge of Paris III is assuring that this conference, in which a vast range of international and Arab governments showed massive support for Lebanon and—there can be no uncertainty about this—its current cabinet will be part of a formula for national benefit. Cash and projects are necessary for Lebanon’s future, but they alone will not suffice.

The violent demos of Jan. 23 and the all out street fighting of Jan. 25, both the result of weeks of worsening relations among the divided Lebanese political factions and religious communities, illuminated with stellar intensity one fact already known by the Lebanese people: that pushing divisions, emphasizing differences, and maximizing irreconcilable demands into shapes of belligerent political positions is a poison that can kill Lebanon.

It is a fundamental rule that when governments or religions fail to practice good governance, people suffer and prosperity declines. Where the Cold War between the East and West was a precarious balance that could function on the military basis of Mutually Assured Destruction (MAD, as it were), the closeness of coexistence among Lebanon’s familial, tribal, religious, and political communities does not allow for a balance of destructive potentials. Instead, it requires a balance based on finding commonalities and emphasizing shared denominators, of which many potent ones can be found—given that the searching parties are willing.

Huge need for understanding

It is said the there is a huge need in this world to repair not only the relations between nations and religions but also between spiritual values and principles on the one hand and governments on the other hand. That means new openness must be cultivated between religious communities and within them, among their leaders and members.

Lebanon is a case study for this mandate of the 21st century. The capacity for peaceful coexistence among the Lebanese is a proven reality. Whatever their political side and religious background, the opposition and the March 14 leaders have said and shown that they disavow the use of violence for gaining the upper hand.

But still the danger remains that the forces unleashed in their power struggles may break out of their control, with momentous consequences. Political and religious leaders barreling down the road of political confrontation and vitriolic propaganda against one another in Lebanon’s tight mosaic of communities, to the point of more open violence will inevitably lead to Mutually Assured Self-Destruction.

On the side of hope, Paris III added to an already astounding level of financial commitment to Lebanon’s future that now reaches beyond $10 billion. The total includes the more than $900 million pledged in the emergency recovery conference at the end of last August in Stockholm and additional funding worth $1.5 billion provided by Saudi Arabia and Kuwait, as well as funding that Hizbullah provided in emergency relief from its sources.

Also not to be forgotten are the donations that Lebanese overseas communities and individuals wired to the aid account of the Ministry of Finance in Beirut, and projects such as the distribution of medicine and milk and the rebuilding of homes and communal centers, which are financed and carried out by civil society, NGO aid initiatives and local businesses, often without much ado.

These are massive signs of trust in Lebanon, and the business community has every reason to be emboldened by its will to succeed in private sector initiatives as by the outcome of Paris III.

Equitable economic development is a clear priority in reducing the potential for further unrest; thus, good business sense and private sector initiative are crucial for the equation that will return Lebanon to a path of growth, provided that the political parties and religious communities and their leaders are willing to dance.

To be successful, this collaboration has to involve all parties, not by the status quo-return of saying “no victor, no vanquished,” but by discovering the ultimate value of a dance that many can share. Nay to the need for tango. The Lebanese dance, after all, is the dabke.

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Days of decision for damascus

by Andrew Tabler
written by Andrew Tabler

Few Syria observers ventured a guess at the New Year as to what the coming 365 days may hold for the country. The region’s topsy-turvy politics is the primary reason, but so is a trait unique to Syria: its seeming inability to set targets and meet them. The final date of the June 2005 Baath Party conference (where a “great leap forward” was promised to take place) was officially set only a week before the meeting began. To date just one of the conference’s edicts—proclaiming Syria a “social-market” economy—has made it onto paper.

It’s election year in Syria, however, and some events penciled into the country’s agenda for 2007 are noteworthy. Sometime before July 10, President Bashar al-Assad is expected to win a (still officially unscheduled) referendum on a second seven-year term in office. In parliamentary elections slated for the second half of April, the ruling Baath Party, which leads the National Progressive Front (a coalition of nine parties), is all but certain to capture its constitutionally mandated two-thirds majority in the Peoples’ Assembly.

Due to be released ahead of each of Syria’s polls are results of a different type: the last two reports by Belgian investigator Serge Brammertz into the murder of the late Lebanese Prime Minster Rafik Hariri. While the investigation’s recent releases note Syria’s compliance with the probe, they also cite “converging evidence” pointing toward Damascus. Whatever Brammertz has up his sleeve remains to be seen, but the announcements provide the opportunity to meddle in Syria’s internal affairs. The big question remains, however, is how the regime and its opponents will play it.

During Syria’s last parliamentary elections in 2003, big Syrian businessmen running for office spent millions of Syrian pounds (now capped at 3 million) on massive outdoor advertising campaigns. The electioneering raised eyebrows at the time not because of its scale (in one Damascus neighborhood, candidates’ advertising outnumbered photos of the president by as much as 30 to 1), but because hopeful candidates bothered to campaign at all. The days under Hafez al-Assad where candidates were pre-selected have given way to a sort of popularity contest where businessmen from powerful families can enter the political realm.

Once in office, representatives are expected to work with the government of Prime Minister Naji al-Otari to draft legislation to overhaul the country’s ailing economy. After passing laws in 2006 to approve the Five-Year Plan and the country’s first stock market, private insurance companies, Islamic banks and private foreign exchange houses, parliament is expected to issue laws this year on mortgage finance, leasing, public sector reform and the issuance of treasury bills.

All of this seems like inside political baseball, and not the kind of thing that might be affected by international pressures bearing down on Syria. But a December report in Time magazine, citing leaked Bush administration documents, claims that Washington has something in store for the assembly poll. It will launch an “election monitoring” program in Syria ahead of the elections together with elements of the exiled opposition National Salvation Front, involving “Internet accessible materials” that can be printed and distributed, as well as a “voter education” campaign. The article even claimed Washington plans to fund at least one candidate for parliament. Those accused of involvement in the scheme have denied the report’s authenticity. Such pressures, however, combined with a dramatic announcement by Brammertz in his next report on March 15, is likely to set off regime paranoia (already running high) ahead of the poll.

The presidential referendum that constitutionally must take place sometime before Bashar al-Assad’s first term ends next July seems much more susceptible to international pressure. Once the new parliament approves Assad as a candidate, Syrians are offered the choice of yea or nay. 97.29% voted the former seven years ago. A mere three weeks before Assad’s term ends, Brammertz is scheduled to release his final conclusions on June 15 before handing the Hariri case over to an international tribunal. If the Belgian fingers senior members of the regime as suspects, and calls them to trial, it is hard to predict what would happen. Syrian referendums are not free and fair, but they are rare moments of mass gathering in Syria—and therefore laden with nationalist sentiment.

Will Assad use the referendum to rally the Syrian people against the Israeli-American “conspiracy” behind the investigation? Or will former Vice President and now National Salvation Front leader Abdel Halim Khaddam use the probe’s results to rally citizens around the flag? If a report in the pan-Arab daily al-Hayat last month that the Syrian leadership has decided to reschedule the referendum for late May is any indication, Assad isn’t taking any chances. Another report in the Israeli daily Ha’aretz leaking a “track two” peace plan with Israel initiated by Assad himself shows the inscrutable president may go for broke. Hold onto your seats folks!

ANDREW TABLER is a Syrian-based journalist and political commentator 

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Lebanon

Shifting trade winds Blowing Lebanon’s way

by Thomas Schellen
written by Thomas Schellen

Lebanese trade patterns are in for further changes in 2007, but it’s not armed conflict that will force alternative trade routes on the country’s many importing merchants and exporting manufacturers. Change will come because of world market realities.

Overall, according to the numbers currently available from Lebanese customs, the nation’s exports last year developed handsomely despite war, blockades and overall strains on GDP. In the first 11 months of 2006, the official statistics counted an export value of nearly $2.1 billion, driven by industrial exports and 24.7% better than in the same period a year earlier.

Lebanon’s outbound trade remained concentrated within the region, with four out of the five top destinations Middle Eastern countries. Saudi Arabia and the United Arab Emirates in the Gulf, and Syria and Iraq in the Levant together received 27.9% of Lebanon’s exports, or $579 million in goods. Switzerland, the Lebanese destination for jewelry and precious metals, was the big exception to the regional rule and returned to first place among export destinations with $431 million in goods sold or 20.8% of total exports.

Imports showed more of an impact from the summer war and remained below $8.5 billion but the ratio of exports to imports climbed to a record of 24.4%, more than double of what it had been five years ago and almost five percentage points better than in the first 11 months of 2005.

The two countries that improved their position as sources of Lebanese imports last year were the United States and China. In the first 11 months of 2006, the US was the main source of Lebanese imports, accounting for $894 million or 10.5% of total imports. After France, which sold $699 million in goods to Lebanon, China was the third supplier with $674 million, ahead of stalwart trade partners such as Italy ($622 million) and Germany ($600 million).

According to Salim Zeenni, the chairman of the American Lebanese Chamber of Commerce (AmCham), the inbound trade from the US doubled in 2006. Citing US trade statistics for the first nine months, he told Executive that Lebanese imports from the US increased by “exactly 107%” over the period.

That would mesh nicely with a new agreement that Lebanon and the US signed in December, with the optimistic-sounding name of Trade and Investment Framework Agreement, short TIFA. The abbreviation even contains the same letters as the coveted FTA, Free Trade Agreement, for which some countries have given very much to reach.

TIFA not an FTA

But the TIFA is much closer to a letter of good will than a true real-life FTA. The US State Department describes TIFA as a non-binding “consultative mechanism” of the US for discussing issues of trade and investment with another country, stating clearly that TIFAs are usually signed with nations that are, well, “in the beginning stages of opening up their economies to international trade and investment, either because they were traditionally isolated or had closed economies.”

The reason that Lebanon’s US imports soared in 2006 was purely commercial rather than linked to any negotiations, confirmed Sami Haddad, Lebanon’s minister for economy and trade. He said the increases in Lebanese imports from the US in 2006 included purchase deals for refined mineral oils as well as machinery and food stuff or the usual frontrunners, cars and cigarettes.

So in search for answers to the shifting of trade winds, one has to look to the euro, which appreciated again in 2006 and pushed the cost of deals with European traders up. Since the dollar is predicted by some international finance houses to weaken further this year, potentially causing the euro to cost more than $1.35 by the end of 2007, Lebanese importers in search of the cheapest supplies will, by necessity, seek out US prices, not to mention that they are likely to see further new offers of unbeatable prices from China.

If Lebanon wants to strengthen its trade with the US at this time, it should first seek to demonstrate its resolve to join the World Trade Organization, Zeenni said.

US diplomatic sources familiar with Lebanon’s economy agreed, on the condition that they not be named. “The WTO will help Lebanon promote itself because all international investors will be more encouraged to come and invest in Lebanon. If Lebanon is not part of the WTO, then there will be a problem,” said one US official.

“Sometimes because of political problems, there is no consistent, continuous push for WTO membership. We should do better homework because the world is giving us a chance,” Zeenni said.

Jordan, which signed an FTA with the US in 2001, is often cited as the example for the benefits of privileged trade relations with the US The country’s exports to US markets multiplied from $301 million in 1999 to $1.9 billion in 2005. Foreign Direct Investment increased by almost 500% and close to more than 45,000 jobs were created due to expansion of trade with the US.

However, it has to be noted that much of the boom in Jordanian exports to the US is in products manufactured in so-called qualifying industrial zones (QIZs.) The QIZ manufacturers can supply US customers free of tariffs and quotas if they meet requirements for joint Jordanian and Israeli value added.

A similar agreement has been implemented in Egypt but is out of the question for Lebanon, which is in an official state of war with Israel. But an FTA with the US also faces other hurdles.

One of the main barriers to joining the WTO and ultimately an FTA with the US are Lebanon’s high import tariffs and a protectionist policy that make it difficult for foreign companies to enter freely or to start a new business here, Zeenni said.

Demand to change Lebanon’s laws

It is a long-standing demand by foreign manufacturers and particularly by the US that Lebanon needs to improve and amend some of its laws regulating investment and trade as well as speed up legal and administrative procedures. The problem highlighted specifically in this context is Lebanon’s poor record of enforcing intellectual property rights.

Pirated material accounts for 75% of all software and music sales in Lebanon, while illegal cable TV connections comprise almost 100% of all connections in the country, said the International Intellectual Property Alliance (IIPA), putting a figure of more than $25 million in 2005 as trade losses that American companies incurred as a result of piracy in Lebanon.

Lebanon is a signatory to the Paris Convention for the protection of industrial property, the Madrid Agreement for the repression of false or deception indications of source on goods and the Nice Agreement concerning the international classification of goods and services for purposes of the registration of marks.

A new copyright law, No. 75/99, entered into force in 1999, which extended copyright protection to computer software, video software as well as all audiovisual works in addition to protection of literary and artistic works.

The Ministry of Economy says the law provides stronger penalties for violators and better compensation for victims of infringement. Lebanon also approved a patent law in 2000, but nonetheless IPR infringement rates here have remained above 70% while other countries in the region succeeded in significantly lowering their piracy rates that were of similar severity a decade ago.

Because of its high infringement rate, Lebanon in recent years almost lost its membership to the US’s Generalized System of Preferences, GSP, under which Lebanese companies can export to the US with nearly no custom duties.

Around 60 American companies have a direct presence in Lebanon in addition to some 300 agents of American companies, but if Lebanon were to modernize its laws and stabilize its political scene, many more investors would come, American officials have suggested, putting a decidedly optimistic spin on the outlook for bilateral economic relations.

The question is if Lebanon will gain much in outbound trade from being on the good side of Washington. Lebanese exports to the US, which consist mainly of foodstuffs and jewelry, amounted to $70 million for the first ten months in 2006, about 1.5% below 2005 levels, according to US statistics. The Lebanese customs statistics showed an even lower number, describing exports to the US in the first eleven months of 2006 as $48 million, or just 2.3% of all exports.

Even though it signed a TIFA with the US, Lebanon does not have a declared policy aim to prioritize the improvement of trade relations, Haddad said. He added that the US is the world’s number one market, and, “We are very interested in increasing our exports and establishing the best relations possible.”

Growth of exports is a very good thing. However, as the US State Department said, a TIFA in some cases can lead to an FTA, and as Lebanese officials and AmCham agree, reaching an FTA with the US will take time. A whole lot of time. Without holding its breath for such a marvel, Lebanon’s private sector can continue to develop their market powers and capabilities that allowed them to increase exports in recent years, while working and perhaps saying a prayer or two that the national conditions will improve to become conducive for smart industrial activities economically, politically, and security-wise.

 

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Banking & Finance

European – Lebanese partnership on tap

by Executive Staff
written by Executive Staff

New seeds for economic growth were engineered last month in Beirut when the European Investment Bank and Byblos Bank Group announced that their collaboration had progressed another step towards establishing an investment company, which will take private equity stakes in small and medium enterprises in Lebanon and three other Middle Eastern countries—Syria, Jordan and Egypt.

The joint venture of Byblos and the EIB’s Facility for Euro-Mediterranean Investment and Partnership (FEMIP) involves EIB capital participation of up to 7.5 million euros ($9.8 million) in the private equity firm which plans to formally commence operations in the middle of this year.

According to Byblos Bank, the investment company by name of Byblos Ventures will initially work with a capital of $20 million, but the partners have made provisions to be able to expand this amount to up to $50 million if the project sprouts with full vigor.

Private equity projects taking off Private equity projects are a hot issue in the Middle East. A new lobby group for this financial method said last month that private equity funds in the GCC countries last year attracted investor interest to the tune of raising $10 billion in 2006, an almost 76% increase in new funding over 2005. As recently as three years ago, private equity funds in the GCC had to get by on managing only a handful of billions in investments, but this volume has grown to $18 billion last year and is poised to increase by further leaps and bounds, said the Gulf Venture Capital Association in January.

In this part of the region, Byblos Ventures is the third recent private equity project announced in Lebanon and the second that is funded in part by the EIB.

The first launch party happened last spring when Capital Trust and EIB teamed up for the EuroMena Fund, aiming at investments in companies in the Levant and North Africa that are ready to make the step from national to regional players and require funding for expansion. EuroMena was promoted at the time as EuroMena 1, to be followed by EuroMena 2. However, the fund’s growth seems to have been more cautious in its early phase as its managers told Executive at the Byblos Ventures press conference that they have so far entered into two participations ranging in size “between $3 and $15 million.”

The third new private equity fund that just started approaching hopeful investors is the Building Block Fund, which centers on companies with a Lebanese angle and new enterprises with emphasis on technology and services companies. It is a brainchild of Bader Lebanon, an initiative of young business personalities, and aims at raising a capital of $20 million, half of that before the end of March.

Bullish on Lebanon

Speaking to media at the signing of the partnership agreement with Byblos, EIB vice president Philippe de Fontaine Vive was all praise and cheer for Lebanon. The work on creating the private equity project with Byblos Bank Group took 18 months but was “not at all” delayed by the conflict between Israel and Hizbullah last summer and recent internal political disputes between Lebanon’s cabinet and opposition groups, de Fontaine Vive told Executive. “Lebanon will recover with Paris III and we have full optimism that this is the time to invest in Lebanon,” he said.

Byblos Ventures is based on a two-year-old ongoing technical collaboration for which Byblos, according to de Fontaine Vive, volunteered as the only Lebanese bank at that time. An earlier fruit of the collaboration was a $60 million global loan agreement, signed in February 2006.

Under a complex structure for creation and management of Byblos Ventures, the Lebanese banking group will take responsibility for supplying 50% of the capital in the new firm while FEMIP is committed to a 25% stake. Both will adjust their actual dollar contributions in the equity of Byblos Ventures to reflect the percentage stakes agreed upon. This would set the practical ceiling for the project at closer to $40 million, based on a statement by de Fontaine Vive that the capital participation authorized by EIB is capped at 7.5 million euros.

According to Paul Chucrallah, assistant general manager for Byblos Invest Bank in charge of managing Byblos Ventures, the structure to establish and manage Byblos Ventures will entail the creation of another new subsidiary in Byblos Group, which will be named Byblos Management and run Byblos Ventures on the legal basis of minimal stake holding.

As a time-limited project, Byblos Ventures has an investment horizon of ten years, maximum twelve years, divided into two stages of activity. These stages—that can partly overlap—are an investment phase of three to five years and an exit phase for the remainder of the project’s lifespan.

Expanding Byblos Management’s mandate

Byblos Management, however, could pursue projects beyond this first private equity undertaking, Chucrallah told Executive. He characterized the transfer of knowledge and the development of advanced professional skills as benefits from the collaboration between the Lebanese bank and the EIB that are even more important than their financial cooperation.

Based on this knowledge transfer and skill development, Byblos Ventures will be able to participate in the equity of traditionally family-owned firms in the region on an unprecedented level and function as accelerator for the growth of invested companies, Chucrallah said.

In other practical manners, investments into individual companies will vary between $1-2 million in size and no single investment will exceed 10% of Byblos Ventures’ equity base. Per sector, investments will be limited to 40% of the investment company’s equity, and its private equity participations are intended to focus 50% on Lebanon but this rule is flexible.

Byblos Ventures is geared to help in the development of companies by contributing both funding and expertise and Chucrallah said the project team could start engineering equity participations even before the formal launch later this year. No one could have appeared happier about this than an exuberant Joseph Raidy, the chairman of Beirut-based Raidy Printing Group.

“Byblos Ventures will help industrialists in two ways, through bringing money and through improving the structure of companies, because these are very professional people,” Raidy told Executive, adding that his company will be perhaps the first to benefit from the equity participation. He called the arrival of Byblos Ventures, “a great step for Lebanon.”

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Retrospective

Saddam Hussein: 1937-2006

by Executive Staff
written by Executive Staff

In February 1991, former Indian Prime Minister Rajiv Gandhi, visited Tehran and met with Iran’s president, Ali Akhbar Rafsanjani. Neighboring Iraq figured high in the conversation. The US and its allies had just launched the ground war to liberate Kuwait from Iraqi occupation forces, this coming three years after the end of the disastrous Iran-Iraq war which cost over a million lives and devastated the economies of both countries.

During the meeting, Gandhi asked Rafsanjani whom he thought should and could rule neighboring Iraq. Rafsanjani thought for a moment and then replied, “Saddam Hussein.”

What a depressing assessment it was that, in the mind of Rafsanjani, only a pitiless despot like Saddam could hold Iraq together and prevent its sectarian and ethnic divisions from plunging the country into a Hobbesian bloodbath.

Doubtless, that was one of Saddam’s final thoughts as he meekly accepted the noose around his neck and scoffed at the jeers and taunts of his Shi’ite executioners, telling them that Iraq today was like hell without his iron grip.

An apposite finale

Still, his execution—for all its sordidness—was perhaps an apposite finale for a man whose brutal role over Iraq and reckless foreign entanglements shaped the course of history in the Middle East for over a quarter century.

“He was a catalyst, he made things happen and usually they were not positive and constructive but he constantly kept the Middle East in a state of turmoil,” says Gary Sick, professor of International Affairs at Columbia University.

Saddam was perhaps the last of the ‘great’ Arab nationalist dictators, his rule being founded in an ideology of left-leaning secular and militaristic nationalism; he became little more than a vicious sectarian mafia boss, plundering the wealth of his country and murdering its people to maintain his grip on power.

Iraq was always fated to play a key role in the Middle East due to its massive oil wealth, geographical proximity to non-Arab, mainly Shi’ite Iran, and potential financial and military weight in the Arab-Israeli conflict. But it was the potent mix of Saddam’s over-arching ambition and sense of destiny combined with an impulsive and vengeful nature that propelled Iraq into a series of disasters that has left an indelible mark on the region.

Saddam’s rise to absolute power began in 1968 when he participated in a bloodless coup that saw his cousin Ahmad al-Hassan al-Baqr become president. In the 1970s, Saddam, who gradually came to overshadow the president, helmed an economic modernization program, funded by the proceeds of the 1973 oil boom. Iraqis were granted free education and hospitalization and campaigns were launched to eradicate illiteracy. Saddam also helped forge a sense of national unity rooted in Baath Party ideology, smothering Iraq’s diverse ethnic and sectarian composition.

Despite his later tendency to make colossally bad foreign policy decisions, he had some success during the mid-1970s in outflanking Israel and US Secretary of State Henry Kissinger. In the wake of the 1973 Arab-Israeli war, Kissinger conspired with the Shah of Iran and Israel to foment a Kurdish uprising in northern Iraq. The goal was to tie down the Iraqi army and prevent it from coming to the assistance of Syria if another war with Israel were to break out. But Saddam made a separate deal with the Shah, offering to share the Shatt al-Arab waterway between their two countries if Iran dropped its support for the Kurds. Iran closed its border to the Kurds, allowing Saddam’s army to crush the rebellion.

However, Saddam continued to resent the deal he struck with the Shah and it was one of the reasons why he went to war with Iran five years later.

“He was able to bring to Iraq a sense of development for a period … Then it was all destroyed year after year with adventurous decisions,” says Shafeeq Ghabra, a Kuwaiti professor of politics.

Saddam pushed aside the ailing al-Baqr and became president in 1979, the same year that the Shah was toppled by the Islamic revolution that brought Ayatollah Ruhollah Khomeini to power. The rise of a militant Shi’ite theocracy in Iran alarmed the Sunni Arab Gulf. Saddam, fearing Khomeini’s influence over Iraq’s restless Shi’ites and tacitly backed by his Sunni Gulf neighbors, invaded Iran in 1980, setting in motion the devastating eight-year war.

Saddam intended to smash the disorganized fledgling Islamic regime in Iran, an act that would confirm his leadership of the Arab world and earn the gratitude of his neighbors in the Gulf. But the war had the unintended consequence of strengthening Khomeini’s rule.

“It forced the Islamic revolution to get out of its zealous craziness and begin to organize itself and pull itself together,” says Professor Sick, an Iran specialist. “In a way, Saddam stabilized the Iranian revolution and kept the mullahs in power.”

Bringing Iran and Syria together

The conflict also triggered an alliance between Iran and Iraq’s arch enemy, Syria, which was ruled by a rival branch of the Baath Party. The Iranian-Syrian relationship has proved enduring: in the past year, it has further strengthened to become one of the region’s most significant geo-strategic alignments.

When the Gulf war ended in 1988, the Iraqi economy was in ruins with some $75 billion owed to Iraq’s Gulf backers. Relations between Iraq and Kuwait steadily deteriorated over the next two years with the latter’s refusal to forgive the war debt and cut oil production to raise revenues for Iraq. A bitter Saddam sent his war-weary army into Kuwait in August 1990, triggering a fresh convulsion in the Middle East.

The US assembled an unprecedented coalition of Arab and European allies to remove Iraqi forces from Kuwait. The second Gulf war also marked the beginning of a prolonged US military deployment in Saudi Arabia, which would later be used by Osama bin Laden to partly justify his anti-American actions, culminating in the attacks of September 11, 2001.

The crippling UN sanctions on Iraq during the 1990s, the most severe against any country in UN history, devastated an already weakened economy, but failed to bring down Saddam’s regime.

Although the 2003 US-Anglo invasion of Iraq finally ended his long tyrannical rule, its aftermath has turned Iraq into a byword of sectarian violence and bloodshed with no end in sight.

Although Saddam is dismissed by most Arabs as a tyrant who ran a regime of unmitigated brutality and greed, some regard him as a champion of Arab steadfastness against American “imperialism” and Israeli aggression. Indeed, it is a telling indicator of how badly the Americans have messed up in Iraq that the cruel, corrupt despot they removed in the name of democracy and freedom ended his days akin to a folk hero for many embittered and nervous Arab Sunnis, who resent the empowerment of Shi’ites in Iraq and fear Iran’s hegemonic designs on the Middle East. The poor, crushed and abused Palestinians have long looked up to Saddam, gratefully receiving his millions of dollars and words of support while overlooking the fact that his actions were little more than a cynical manipulation of their plight to curry popularity and burnish his Arabist credentials.

Although the main pretext for toppling Saddam was his alleged arsenal of weapons of mass destruction, the American architects of the invasion also hoped that the Iraqi dictator’s demise would trigger a domino-effect in the Middle East, with other Arab autocracies falling to be replaced with Western-friendly democracies.

Saddam’s downfall empowered the despots of the region

But US mismanagement of occupied Iraq, the tenacity of the Iraqi insurgency and the rise of Shi’ite-Sunni hostilities has had the opposite effect, dealing a blow to the democratization project in the Middle East. Indeed, the violence has grown so bad that recent polls suggest that most Iraqis believe life was better under Saddam. The implicit message has reassured to the region’s autocrats, who can point to the chaos in Iraq to justify their own iron-fisted rule and clamp down on calls for democratic reforms.

“The downfall of Saddam and its aftershocks only empowered the regimes of the Middle East,” says Sami Moubayed, a Syrian political analyst. “Leaders can now say, ‘Look to Iraq. This is what the Americans will bring.’”

Truly, Saddam was a monster, but given America’s failure in Iraq and the sectarian disaster it has spawned, Iraqis and other Arabs could be forgiven for thinking that perhaps there was something after all to Rafsanjani’s discouraging recognition of Saddam’s qualities as ruler.

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Banking & Finance

Foreign firms ready to Bank on Egypt

by Executive Staff
written by Executive Staff

Egypt’s banking sector is set to become hotly competitive in 2007. Strong international and regional banks that have entered the market in the past two years are aggressively hunting for market share in what observers are calling a very “new and lucrative” market. These growth-hungry banks will meet new competition from big local banks whose survival after privatization will allow them to restructure and reinvent themselves as modern risk management institutions.

The new competitive environment goes hand in hand with the banking sector reform, and a reduction in the number of Egypt’s banks from 53 to 35 since the reform program was launched in 2004. Although it brought the number of operating banks down, the reform program’s consolidation of the sector was conducive to increased productivity and competitiveness because it forced inefficient state-run banks with opaque loan portfolios out of their pampered and protected positions into the harsh “real world” of commercial banking.

Seeing the fruits of reforms and privatization, Arab and other foreign banks have started to expand their presence in Egypt and established footholds by acquiring local banks.

Lebanese banks are at the forefront of the trend. BLOM Bank beat out competitors to take over Misr Romanian Bank in late 2005 and quickly announced that plans to develop the retail business of the renamed Blom Bank Egypt. Only weeks later, Bank Audi acquired Cairo Far East Bank for $94 million, and said recently that it wants to expand the branch network for the bank, now called Bank Audi Egypt, from the current three to 20 before the end of the year.

Other entrants include Bahrain’s Ahli United Bank which bought 89.3% of Delta International Bank in August for LE1.65 billion. And in July, UAE’s Union National Bank acquired the government’s stake in Alexandria Commercial & Maritime Bank for LE65.3 billion; it is now preparing to acquire Arab Investment Bank.

Foreign players eager to enter market

Foreign players can currently only enter the Egyptian market by buying into existing banks. Thus international banks having acquired and rebranded local banks in a number of bidding contests.

In July 2005, Greece’s Piraeus Bank bought 70% of the Egyptian Commercial Bank and renamed it Piraeus Bank Egypt. The Greek bank increased its stake in the subsidiary to over 95% and announced plans to add 220 branches by 2010. The National Bank of Egypt (NBE) sold its 18.7% stake in Commercial International Bank (CIB) for $236 million in February of last year to a consortium led by American private-equity giant Ripplewood Holdings.

Some foreign banks saw 2006 as good year to grow their existing operations through M&A action. Paris-based Societe Generale, which already had a presence in Egypt through National Societe Generale Bank, last November received final approval for merging Misr International Bank into its operation—a move that made it the largest private commercial bank in the country. Credit Agricole, France’s largest banking group, likewise repositioned and expanded its Egyptian operation by creating Credit Agricole Egypt last year after its existing local subsidiary, Calyon Bank, purchased Egyptian American Bank. Credit Agricole Egypt is now Egypt’s third-largest private commercial bank by assets.

However, the biggest deal of 2006 was the sale of state-owned Bank of Alexandria (BA), the smallest of the Big Four state-owned banks, to Italy’s Gruppo Sanpaolo IMI. Sanpaolo purchased 80% of BA for a whopping $1.6 billion or six times the bank’s book value. The bank aims to double its size and market share in Egypt and also plans regional expansion.

With the rush of foreign banks to the market, government officials say that investments by foreign banks in 2006 increased by a sum of LE4.2 billion.

Solid grounds

Analysts consider the Egyptian banking sector under-penetrated, with only 10% of Egyptians having bank accounts. In general, private sector banks operating in Egypt are today financially more solid than they were, and the market can be considered a more competitive place compared to a few years back.

Egypt also offers growing potential to Arab regional banks and joint venture banks with Gulf-based partners.

Former president of the National Bank of Egypt Ahmed Karat sees the presence of Arab banks in Egypt as a natural consequence of the interest of regional and international players in this market.

Seasoned Arab banks that have been operating in Egypt for some time and have recently announced plans to increase the breadth and depth of their operations include Jordan’s Arab Bank, the National Bank of Abu Dhabi, and Faisal Islamic Bank of Egypt, which has Gulf-based shareholders.

Regional banks and governments also have stakes in Cairo-based commercial and wholesale banks such as the Arab African International Bank, Arab International Bank, Egyptian Gulf Bank, Egyptian Saudi Finance Bank, Suez Canal Bank, and the Arab International Banking Corporation. The National Bank of Oman added two more branches to its network in Egypt in 2005, and the Bahrain-based Arab Banking Corporation strengthened its presence under the name ABC Egypt to become the fifth Arab bank in the country.

More Arab banks

However, although Egypt has a substantial number of Arab banks, their total market share does not exceed an estimated 10%. Experts say that in light of the recent reforms, Arab banks would have no difficulties increasing their market share to between 25% and 28%, especially because these banks have enough experience in similar markets.

According to the experts, the weak performance of Arab banks is due to a structural obstacle, which these banks must overcome. If they succeed in opening new market segments, regional banks could benefit from customer sentiment that favors them over European or American competitors.

Opposition groups in Egypt have always resisted and attempted to block the sale of local banks to foreign concerns. However, banking experts say Arab banks in Egypt might be under threat from their bigger European counterparts who have longer experience in serving large markets and can provide financial services for corporate clients, investment and private banking, capital markets, asset management and, increasingly, also Islamic finance. A Fitch ratings report issued in late 2006 said that “foreign banks have brought in more innovative products and new delivery channels and are attracting the best skills.”

Most analysts agree that the presence of foreign banks is not a threat to Egypt’s existing public sector banks, and the government prefers buyers to be big name banks capable of introducing new technologies and developing banking services. “Foreign banks will create more competition that will force the local banks to shape up and improve their services,” explained Nabil Hashad, an Egyptian banking expert, adding that foreign investors are needed to “maximize the cost efficiency, productivity and profit efficiency of banks and not just reduce costs.”

Challenges for 2007

Credit must be given to the Egyptian government for sticking to its plans to open up the banking sector and forge ahead with its privatization program. Egypt has succeeded where several other countries in the region have failed. The challenge moving forward will be whether this momentum and excitement will continue. Although much has been accomplished—with serious delays—much more needs to be done. Several global rating agencies such as Moody’s are still cautious with their rating and assessment of the economic condition for Egypt.

One highly anticipated development for 2007 is the merger of Banque Misr and Banque du Caire, Egypt’s second and third largest banks, into the largest bank in the country. Both are state-owned and their merger and privatization will add an important milestone to the conversion of the backward state banking sector into a private sector powerhouse.

To sustain growth, another big push for consolidation, while improving supervision and solving the sector’s chronic NPL problem would do miracles. The government must also provide special incentives to Arab banks so that they can increase their market share. Currently, European banking institutions have the upper hand and benefited the most from the privatization drive. GCC-based banks have many opportunities to enter the market and efforts to encourage these banks to get involved should be priority for the Investment Ministry.

2007 should be the year the government completes it reform and privatization drive. Additional focus must be placed on creating an interbank market and pushing for more transparency and better laws to protect depositors. The big mergers and deals in 2006 must now be replicated in 2007, because these reforms are necessary to keep the economy and banking sector on track.

As Egypt’s Minister of Investment Mahmoud Mohieldin put it, “Today, we are talking about a banking sector that is not going to show any mercy to those who are incompetent, inefficient or unable to stand up to the challenges of competition.”

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The year that brought globalization to the Arab World

by Executive Staff
written by Executive Staff

Since the current wave of global change accelerated after the end of the Cold War, mention of globalization has tended to upset Arabs. However, 2007 could be the year that the Arab World really moved closer to the rest of the globe. Politically, this was evident in the Annapolis conference, where — under watchful American eyes — for the first time high-level representatives of Saudi Arabia and Syria sat down in public with Israeli officials, a powerful symbol of the region’s engagement with the West and its stepchild Israel. In the economic sphere, vast Arab investments were welcome in Western countries, sometimes as sizeable, controlling interests in big-name global companies. Not all deals went off without a hitch, witness the Qataris backing off over the takeover of the major British retail chain Sainsbury’s. But it will soon be forgotten, as the 2005/06 failed attempt by Dubai World Ports to invest in the US was forgotten, while Arab money poured into shaky Western stock markets. Moves in the opposite direction were also evident, as global businesses headed in greater numbers to Arab countries.

Along with these developments, the message that finally started to come across in 2007 is globalization is neither necessarily good nor bad, but it is here and it is important. The term still has negative connotations in the region, but 2007 has shown that to integrate into the world does not mean that Arab countries will have to surrender their identity.

Nevertheless, the big deal for the eastern part of the Arab region remains the Israeli-Palestinian conflict. Annapolis has not of course resolved the problem, but things may be better after that meeting than they were before. In the Maghreb on the other hand, the major issue is closer relations with Europe and it is important that French president Sarkozy chose to roll out his Mediterranean Union initiative in that corner of the Arab World. Like Annapolis to the eastern Arab countries, the launch of the idea of a Mediterranean Union does not signal that all of the Maghreb’s problems are over. However, this indication of an increased European role in the region is critical. In the East too, greater EU involvement in the peace process could help. Europeans being involved more in the Arab World means more emphasis on the bright side of globalization and this seems to have gained ground in the Arab World during 2007.

Turning from the big picture to nitty-gritty issues at the center of globalization, such as logistics, is also revealing, in terms of changes taking place within the Arab World. For example, the World Bank’s first Logistics Performance Index ranked Lebanon 98th among 150 countries worldwide and 13th among 17 Arab states. The index covers ability to track and trace shipments, timely arrival, customs procedures, logistics costs, infrastructure quality, and competence of the domestic logistics industry. Globally, Lebanon tied with Zambia and ranked behind Papua New Guinea, and was below both the global average and the Arab score. Examples of Lebanon’s performance vis-à-vis Arab states in individual sub-indices were especially grim: tying Syria and behind Yemen on the customs sub-index, below Mauritania on the infrastructure measure, behind Tunisia on logistics competence, and weaker than Egypt on tracking and tracing. To mention Lebanon’s logistics in the same breath as most of these countries would have been unthinkable a generation ago. But today, while much of the region advances and globalizes, the Lebanese wallow in instability.

However, even considering Lebanon, the past year appears to have been better for the Arab World as a whole, at least in terms of macro-economic indicators. Was the same true regarding the average person living in the region? Maybe not, so how can the benefits of growth and globalization that accrue to the rich and well-connected help the average person in 2008? The answer may be larger doses of democracy and liberalization to bring the region into better harmony with the forces of globalization. Well thought out democratic practices and properly introduced liberalization are valuable in making the best of globalization. Take as an example the recent and continuing entry of Arab countries into trade agreements. The experience of various regions, including Latin America and South and East Asia, suggests that the negotiation capacity of states seeking to join trade pacts actually increases in the presence of pressure groups. By contrast, in many cases Arab negotiators themselves monopolize, and so weaken, their own countries’ negotiation position. The challenge remains to revitalize labor unions, professional syndicates, and business associations as partners in public decision-making, to make the best of globalizing. The alternative is globalization for the rich and powerful and a doubtful future for the rest of the population.

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Banking & Finance

Strong regulations benefit Turkey’s bank industry

by Executive Staff
written by Executive Staff

Foreign banks are continuing to show strong interest in Turkey’s banking sector, as demonstrated by the upcoming sale of state owned HalkBank and privately-held Oyak Bank. While the inflow of foreign blood over recent years has elevated the standards of the banking sector, Turkey’s bank regulator has forced local players into shape.

Since its establishment in 2000, some local bankers have lauded the independent Banking Regulation and Supervisory Agency (BDDK) for the discipline it has instilled in the sector. Non-performing loans (NPLs) have been whittled down and are not considered to pose a problem, while loan volumes—specifically retail loans and SME loans—have increased. The minimum capital adequacy ratio was recently increased from 8% to 12%. The sector is well regulated and the level of transparency and reporting mechanisms are extremely good, says Levent Celebioglu, the assistant general manager and head of the financial institutions group of TEB-BNP Paribas.

Regulatory scheme praised, but doubts remain

While the majority of market observers praise Turkey’s regulatory authority, others take a more qualified stance. The BDDK’s interventionist approach could be dangerous. Having broader and more sophisticated regulatory parameters—as for instance in Europe—is safer as it means that the entire sector will not suffer should the regulatory authority make a miscalculation or misjudgment, said a foreign bank executive. Control of interest rates on credit cards has also been a source of complaint for some in the sector, limiting returns and business expansion. This is not to deny that the regulatory authority’s more accommodating approach on card interest rates has offset much sector-wide disgruntlement, resulting in a broader consensus between the regulator and regulated. Restricted consumer credit though is still raised as an issue by some insiders. Limiting the total amount of credit available to each person protects those banks that already have customers. The emphasis rather should be on educating consumers on how to avoid debt, according to the observer. Providing safeguards against debt, regulatory fans retort, is the safest track.

Yet, the BDDK’s strong mandate as a hands-on regulator should be placed in the context of Turkey’s turbulent economic past, when stringent regulation of the banking sector was clearly lacking. Many observers blame the 2001 financial crisis on the lax banking safeguards of the time. While 85 banks were operating in Turkey in 2000, the number decreased to 51 by 2005 following liquidations, mergers and acquisitions.

An evolving industry

The industry has evolved since the BDDK emerged as regulator but risks nonetheless remain. A recent report by international ratings agency Fitch Ratings underlined that Turkish banks needed to closely monitor asset quality, diversify earnings and improve efficiency as the sector experiences rapid growth in loans and ever increasing competition from constituent players. In November, BDDK head Tevfik Bilgin also warned that money from deposits alone was currently not sufficient to fund the banks, with foreign borrowing filling the gap.

Foreign banks shrug at such concerns. The banking asset to GDP ratio Turkey is approximately 85 to 87% in 2006, whereas for the EU 15 members it is 280%, or 110% for the EU 25 members, said Celebioglu, pointing to the scope for growth in the Turkish market. Likewise, Bilgin underlined the fact that the market was potentially worth between $700 billion and $800 billion, as opposed to the $323.03 billion registered towards the end of 2006. Turkey had previously lived in a high inflation environment with high interest rates, which forced consumers to hold back on spending. But the tide has shifted, with consumers showing greater confidence on the back of the government’s economic policies.

Meanwhile, the sector as a whole will continue to benefit from the entry of foreign players. The total foreign shareholding at Turkish banks is expected to reach 18% of total paid-in capital by the end of the year, according to the 2006 Fitch report.

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Capitalist Culture

A step back for freedom? US must choose

by Michael Young
written by Michael Young

Amid all the hoopla over how the United States should conduct its war in Iraq, very little attention has been paid to what looked like a good idea when President George W. Bush first sought to justify his invasion of Iraq: the spread of democracy to the people of the Middle East.

Indeed, in recent weeks some American pundits and former officials have taken a decidedly dim view of US ambitions in the region. For example, in a much-listened-to radio program, Richard Haass, president of the Council on Foreign Relations and a former State Department official, pointed out that democracy should not be an American priority. More generally, Haass has been peddling a pessimistic line on American power, arguing in a recent issue of Foreign Affairs magazine that the end of US dominance in the Middle East had arrived. “[B]y tying down a huge portion of the US military, the war has reduced US leverage worldwide. It is one of history’s ironies that the first war in Iraq, a war of necessity, marked the beginning of the American era in the Middle East and the second Iraq war, a war of choice, has precipitated its end.”

Haass is a political ‘realist,’ one whose approach to foreign affairs is defined by advancing American interests rather than defending values. Realism was for a long time the foundation of US policy in the Middle East, and justified Washington’s interactions with despotic regimes; that is until Bush complicated matters by placing democracy at the heart of his regional agenda, even as he continued to uphold good relations with dictators in Arab countries from the Gulf to the Atlantic.

‘Realists’ on the upswing, but they’re still on the wrong track

Haass is not the only realist to take such a jaundiced view of democratization. In summer 2004, Brent Scowcroft, national security advisor to former President George H.W. Bush, had this to say to a reporter from the New York Observer: “It’s not that I don’t believe Iraq is capable of democracy. But the notion that within every human being beats this primeval instinct for democracy has not ever been demonstrated to me.” That Scowcroft and his onetime boss had sponsored a policy in the Middle East that granted America’s despotic comrades wide latitude to suffocate any “primeval instinct for democracy” was left unmentioned.

The question today, however, is whether the US has the same option as it once did to ignore the abuses carried out by its Arab allies—in effect to ignore a capitalist culture of free minds and free markets. The Middle East is changing, and while despotism endures, the alternative to despotism is far clearer today than it was when people like Haass and Scowcroft were at the helm. Against the dictators stand angry Islamists—themselves as undemocratic, if not more so, than the men in power, and often far more destructive. In other words, reheated realism is not really an option anymore in the shadow of the 9/11 attacks, when it has become quite obvious that despotism only makes violent Islamism stronger.

That message has yet to sink in among the halls of government and Congress in Washington, where the failure of one foreign policy school tends to mechanically lead to embrace of the other. Because the neoconservatives who gave ideological sustenance to Bush’s Middle Eastern policies after 2001 are said to have failed, the pendulum has shifted back to the realists. The fact is, however, that both sides are guilty of failure in the region. The neocons wanted grand change, but all they have ceded us until now is instability; the realists pray at the altar of stability, but left behind a Middle East with an anti-Americanism that made possible the attacks against New York and Washington. Neither side has offered a convincing template for a new US approach to the region.

However, the neocons did hand us something genuinely new in their defense, hypocritical or sincere, of democracy and human rights. For the US to give up on these values or practices is not only impossible at this stage (since, for all his faults, Bush has imperceptibly welded those concepts into the edifice of Middle Eastern thinking), it is also bad politics. Human rights and democracy are powerful ideas that, when properly defended, give the US considerable leverage in the Arab world. No sensible state surrenders a good thing, even if that means it has to reshape and refine an agenda to convince the agnostics or detractors.

Not many Arabs are willing to give the US the benefit of the doubt on democracy. But no one is particularly eager to be indefinitely ruled by the tyrants who hold sway in the region either. There is room in that gap for a liberal American approach to the region, one that first advances then defends democracy where possible. The approach might be haphazard, deliberate, and contradictory, but a return to a past of benign neglect for human rights in the Middle East is neither feasible nor defensible.

 

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Even big powers want friends

by Lee Smith
written by Lee Smith

A friend at the State Department relates a meeting he had recently with a high-level official from a one-time Soviet satellite state, one in fact where the US waged a major, and very unsuccessful, war. But with the Cold War over and the US having won it, this nation, like most others, wants a deal with Washington.

“We are looking for a Category One relationship,” the official told my friend. “But there’s no such thing as ‘Category One,’” the man from State explained. “Washington doesn’t work like that.” My friend continued: “The United States has bilateral relationships with a number of different countries and explores various ways of strengthening ties.” “Ah, OK,” the foreign official said, indicating that he fully understood. “But we want a Category One relationship—just like Israel!”

Israel is perhaps the US’s most famous—and most controversial—ally, but it is hardly the most privileged one. After all, Washington’s most enduring alliance is its “special relationship” with the United Kingdom, which partly explains why Tony Blair was one of the few European leaders to stick his neck out on behalf of the Bush administration and join the coalition of the willing.

The fact is that Washington has plenty of friends the world over—including the Middle East, though many of them think it best to play down their relationship with the Great Satan. For instance, the centerpiece of US-Middle East policy for the last 60 years has been the Kingdom of Saudi Arabia, home to the world’s largest known reserves of oil. And the US taxpayer keeps the Bahrain-based 5th Fleet afloat to make sure that Gulf Arab energy stays readily available, a boon to the US and Khaliji kings and sheikhs alike, as well as markets around the world.

The White House stands with the Seniora government not just because Lebanon is a front, among many others, to advance democracy and fight Iran’s project in the region, but because Washington believes business is good for America and Beirut believes doing business is good. Egypt is another regional ally, the second largest recipient of US aid, getting $2 billion a year, partly as a bribe to maintain its peace treaty with Israel, but also because the US thinks it wise to be on good terms with the most populous Arab state. Indeed, the US spends loads of cash on its friends in the Middle East, including non-Hamas Palestinian institutions, and has free-trade agreements with a host of nations here, like Morocco and Oman.

Washington is not friendly with the Jewish state instead of the Arabs, but in addition to them.

The fact is that the US does not see the world as a zero-sum equation. The United States is perhaps unique in history among all Great Powers insofar as its default strategy is not “divide and conquer”; nor, unlike many other actors, does Washington typically seek to destabilize other states to knock rivals and friends off kilter. Rather, the US usually seeks to keep the peace around the globe and maintain the balance of power by using local actors. And this brings us back to Israel.

It is true that the United States was the second nation in the world to recognize the State of Israel (the USSR was first), but the relationship didn’t kick into high gear until later. After the Arabs’ catastrophic 1967 defeat, Washington recognized that the Jewish state could be a useful ally against the Soviets’ Arab proxies. But it was the 1973 October War that really cemented the US-Israeli alliance.

The 1973 oil embargo keyed in on the Americans’ Achilles Heel—their dependence on Gulf energy sources. In turn, Washington took advantage of the Arabs’ glaring weakness—their fanatical hatred of Israel. By arming Israel to the teeth so that the Arabs had little real hope in driving the Jews into the sea, the US ensured that if the Arabs wanted concessions from Israel they would have to go through Washington to get them, thereby securing the Americans’ position as the region’s prime mover. In lesser hands, the “Peace Process” may seem a maudlin exercise in fruitless diplomacy, but it is a masterstroke of realpolitik—one however that has probably outlived its usefulness with a Hamas government in power and Israel coming off of two wars along pre-67 borders this past summer.

All this has thrown a number of US policymakers and other experts into a state of confusion. Pity poor James Baker and his stillborn Iraq Study Group report. And then there’s sorely confused ex-President Jimmy Carter, who owes his place in history to the Israeli-Egyptian peace deal and yet whose new book now describes Israel as an apartheid state. No one however has misunderstood the principles of American foreign policy as dramatically as the authors of “The Israel Lobby,” Stephen Walt and John Mearsheimer. In following the Aljazeera line, and recommending that dumping Israel will lessen anti-American terrorism, they have posited a superpower without a spine. Imagine if during the midst of “the Troubles,” the Irish Republican Army had targeted the US for its alliance with the UK—would any serious analyst argue that Washington drop the Brits because of it?

Great Powers, as we have seen, make all sorts of alliances for all sorts of reasons; however, they are no longer Great Powers once they begin to accept terms dictated to them by terrorist gangs.

LEE SMITHis a Hudson Institute visiting fellow and reporter on Middle East affairs 

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