Banking & Finance

Wanted: Alternative investments

by Toby Stevens
written by Toby Stevens

The Middle East continues to experience unprecedented interest in alternative investments as regional institutional investment in hedge funds is expected to surge to $140 billion, or 14% of the total $1 trillion forecasted institutional investor capital in hedge funds by 2010, according to a report by the Bank of New York.

The report said global institutional investor capital in hedge funds will increase from around $360 billion today to more than $1 trillion in 2010, and institutional investors will account for more than 50% of the total flows.

On this premise, the Middle Eastern institutional investors will increase their exposure to worldwide hedge funds almost five times from around $29 billion today, mainly because the willingness of regional institutions to invest in hedge funds will outpace the expected near tripling of the industry portfolios.

While noting that the vast majority of institutional investors worldwide – Bank of New York estimates 85% – do not currently invest in hedge funds, the report sees alternative investment tools of the industry move into the mainstream of financial management practices. Institutions using hedge funds are in the large majority satisfied with their performance, and only 3% of surveyed institutions said hedge funds they were invested in had underperformed.

To better understand investment tools used by hedge funds, institutional investors will be pushed towards those comparatively aggressive funds by a growing need to achieve higher returns than those offered by more traditional strategies, such as equity and fixed income investing. The increased demand for hedge funds in the Middle East is the result of investors searching to diversify portfolios into investments that are not linked with volatile equity markets.

The report, based on interviews with 101 senior professionals in the fund management industry and updated from a 2004 study, shows Middle East institutional investors make up around 8% of the global institutional market, while the United States and Europe – including Japan – represent around 40% each.

“Investors are looking at hedge funds as an investment that has a lower correlation with other assets in the portfolio. Diversification is the single most mentioned reason for investing in hedge funds,” the report said.

Leader of the pack

According to David Aldrich, Bank of New York managing director, the GCC, with its serious liquidity and high oil revenues, is expected to take the lead for the bulk of the region’s 14% worldwide institutional hedge fund investments.

“Middle East institutions are adopting a more aggressive approach to investment, and you’ve got big government-backed investors who are not constrained by investment fund trustees,” said Aldrich. He noted that regional investors have been on the lookout for better return on investment for some time, especially after the exceptional performance by the GCC stock markets in 2004 and 2005.

Historically, regional investors have preferred mutual funds and until recently, hedge funds have appealed to those willing to take big risks. But, since governments continue to reap the benefits of high oil prices, the hedge fund market has taken on a new dimension for institutional investors in the Middle East. Coupled with the current downturn or volatility of the region’s stock markets, investors are keen to explore the potentially rewarding investment alternative.

“Bull markets don’t really encourage people to move into alternatives,” Aldrich said. “A lot of institutions have just moved into hedge funds globally and these investment decisions were triggered by the bear market in global equities.”

Many institutions view traditional fixed income as a low return asset class. Low yields across the developed world have created a huge gap between fixed income returns and investors’ needs. The report pointed out that the vast majority of those surveyed, 72%, said their hedge fund program has performed within 1% of their target expectations; 25% said that their hedge fund exceeded their return target by 1% or more.” Only 3% of investors said that their hedge fund program has underperformed versus their expectations.

The UAE, and specifically Dubai, has been aggressively at work to position itself as a one-stop-shop for the hedge fund industry. The UAE recently issued and passed the Collective Investment Law 2006, in the DIFC as part of a strategy to provide solid infrastructure and incentives for fund managers to operate. “Dubai can offer the proper administration and the location for investment advisors. This is a more complete package than the Cayman Islands, which is currently the domicile of choice,” Aldrich explained. “But this will be a slower process than people would like. Returns are more important than infrastructure.”

 

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Banking & Finance

Saudi arabia – Just say ’no’

by Executive Staff
written by Executive Staff

A decision by Saudi authorities to put a temporary halt to licensing of new foreign banks until the country completed an evaluation process for those issued in the past few years was something of a surprise. This could be a blessing in disguise for the sector, however, because it offers bankers and the international financial industry a chance to re-evaluate the sector and gain insight into the Kingdom’s future demand for new foreign banks.

The governor of the Saudi Arabian Monetary Agency (SAMA), Hamad Saud Al Sayari, said in early December 2006 that Saudi Arabia would not issue new licenses until it had reviewed the sector. Insiders told Executive that the outcome of this review is not at all a foregone conclusion.

“SAMA, which has issued full-fledged licenses to 11 foreign banks, has a committee reviewing these licenses to determine future demand. Even those in the committee do not know when they will finish the evaluation process. The only thing that is sure is that it will take time,” said an official close to the agency, who wished to remain anonymous.

It is clear that the Saudi market has a lot of use for advanced banking skills. With budget expenditures of $100 million scheduled for 2007, on the back of another $80 billion budget expenditure in 2006 (plus a 2006 budget surplus of an incredibly cozy $71 billion), the proverbial oil wealth of the desert kingdom is searching more than ever before for productive investment channels.

The Saudi banking sector is heading into a regional boom and expansion plan, especially in line with the joint government and private sector projects for building – until now four – giant economic cities. Over the next few years, these four new megalopolis projects in Rabigh, Hael, Medina and Jazan alone will require investments of more than SR155 billion ($41.3 billion).

Along the way, these cities will create a huge demand for financial advising, corporate financing and consultancy skills which are the domain of investment banks. But, smart banking is not only needed to help ascertaining that the humongous investments into the Saudi socioeconomic future will not be put into the sand wrongly.

Expansion boom 

The growing affluence of Saudi individuals and families and their retail banking requirements also have attracted new banks to the market after many years in which a small number of domestic banks served the country. On top of this, the opening of the stock market to new investors and the strong interest of local retail investors to buy and sell stock on the Tadawul stock exchange led to a push of new brokerage and financial services providers into the market. The authorities facilitated this by issuing a wave of new financial intermediary licenses in 2006.

In the premier league of investment banking and commercial banking, SAMA opened the sector to foreign banks in 2001, and it gave nine licenses to operate as investment banks (see table I) that can provide services in the Saudi stock market. It awarded ten licenses for foreign banks to operate commercial banks in Saudi Arabia (see table II) with retail branch networks.

“As the Saudi economy grows and we are experiencing a boom, there are opportunities for everybody. As the Investment banking sector attracts more attention and more participants, and then there is greater competition for the corporate world in Saudi Arabia,” John Sfakianakis, chief economist at SABB Bank in Saudi Arabia told Executive.

In his view, it is positive that SAMA wanted to take a comprehensive look at the market to evaluate the investment banking sector. “This in no way means that the investment banking sector will see a clamp down or suffer a setback in any way,” Sfakianakis added.

Sfakianakis said that the UAE market has attracted many investment banks despite its smaller size. “It is not a matter of numbers of investment banks but it is measured by how much the economy grows and it seems that the Saudi economy will be growing for many years to come,” Sfakianakis added.

The Saudi banking sector’s total deposits (which are the total of demand, time and savings and other quasi-monetary deposits) reached around 550 billion Saudi riyals ($146.6 billion) at the end of October 2006.

Other analysts said that the sector is saturated and there is no need for new entrants to the Saudi market. “I think the country is over banked because there is an influx of lots of banks and they are all focusing on corporate finance services, whereas many different corporate finance opportunities have surfaced,” said Peter Wright, managing director at Saudi financial firm, Capital Advisory Group.

Wright said that the provision of services like advisory and IPO management services in the past has not been massive but, claimed that international firms with such capacities have for a long time been present in the country, operating through representative offices. Before 2001, foreign banks were only allowed to provide financial consulting, advising but not brokerage, or IPO management services.

Expanding vertically

The opening of foreign banks started partially by allowing foreign banks to enter into the Saudi banking sector as joint ventures with minority stakes. But due to the astounding growth levels, these foreign banks now want to assume a bigger role and are trying to expand on their own.

Some of the operating 11 Saudi banks – National Commercial, Riyad, Samba, Rajhi, Saudi British (SABB), Saudi Fransi, Arab National (ANB), AlJazira, Saudi Hollandi, Al Bilad and Saudi Investment (SAIB), and Al Enmaa Bank (or Development Bank), which is due to start operations in the first half of 2007 – already are joint venture banks. This is the case for Amman-based Arab Bank’s 40% stake in Arab National Bank, just as French Calyon Corporate and Investment Bank owns 31% in Banque Saudi Fransi and UK-based HSBC Bank Middle East owns 40% in SABB.

Of current interest is Saudi Hollandi Bank, in which Dutch bank ABN Amro has a 40% stake which it is intending to sell. Rumors of the sell-off plans have been circulating for weeks in Saudi banking circles, making analysts question why ABN Amro might want to divest.

“If ABN Amro is not seeing its growth plans fulfilled through Saudi Hollandi Bank, then the best time to exit is now because of the reasonable attractive valuation of ABN Amro’s 40% stake in Saudi Hollandi Bank and the high liquidity in the market,” Loannis Karapatakis, managing director of global investment banking advisory at HSBC Saudi Arabia, told Executive.

Some European analysts opined that ABN Amro might want to concentrate its resources in developed markets closer to home, such as Italy, where it had made a $9.9 billion acquisition, Banca Antonveneta, earlier in 2006.

Several Mideast-based economists, however, reasoned that ABN Amro’s decision could be based on an interest to expand in Saudi Arabia by establishing a separate foreign bank 100% under its ownership. This was the view of Saad Benani, a vice president of global markets at Merrill Lynch, who told Executive that ABN Amro could be interested in establishing a wholly-owned subsidiary in Saudi Arabia.

Whatever ABN Amro’s intentions, regional and international banks were quick and eager in looking to buy the 40% stake in Saudi Hollandi that is allegedly up for grabs. These foreign suitors included the National Bank of Kuwait, Britain’s Standard Chartered, and the Audi Saradar Group, which already has a new subsidiary in the kingdom, Audi Saudi Arabia.

The example of leading banks in Lebanon and Egypt – like Audi and EFG-Hermes – which were awarded full fledged licenses to operate in Saudi Arabia, has triggered other regional banks to do the same. Kuwait-based Global Investment House, for example, is also interested in setting a foothold on the Saudi banking soil and it translated its interest by applying in November to SAMA for a license to operate in Saudi Arabia.

The wave of new licenses to operate either as full financial and investment firm or as partial ones raged in 2006 whereby the Saudi Capital Market Authority, the government body that regulates the stock market, issued 36 licenses for Arab, international and local firms to offer brokerage, asset management, financial advisory and corporate finance services in Saudi Arabia.

After SAMA’s decision, this trend will likely culminate giving way to other firms to study carefully the market and see whether their venture into the Saudi financial market is still viable or not.

 

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Banking & Finance

Planning ahead – IFQ venture

by Executive Staff
written by Executive Staff

In December, Bahrain became the latest country to offer the Islamic Financial Qualification (IFQ), which was launched two months earlier in London as a joint venture between the British Securities and Investment Institute (SII) and the Ecole Supérieures Des Affaires in Beirut (ESA).

With religious feelings on the rise in the Arab world and the recent oil boom, Islamic banking services are being increasingly seen, as a natural alternative to traditional banking, and the IFQ reflects the growing interest in this particular field.

Initiated by the Banque Du Liban, the IFQ is already available in London through SII, in Beirut through ESA and in Bahrain through ESA Gulf. “The IFQ is an important development,” said London’s Lord Mayor, Sir Alderman David Brewer. “It is the world’s first ever global benchmark qualification to cover Islamic finance from both a technical production knowledge and a Shari’a aspect.”

According to Dr. Ahmad Jachi, vice governor at the Banque Du Liban, the Lebanese central bank, there are more than 250 Islamic financial institutions worldwide with a market capitalization in excess of $13 billion, total assets estimated at $300 billion and financial investments at $400 billion.

Increasing awareness

In 2002, $3.2 billion constituted the paid capital of Islamic Banks and financial institutions operating in the GCC area, according to the Lebanese central bank. Their total deposits, excluding restricted investment accounts, added up to $54.1 billion backed by $2.35 billion in reserves, representing 4.3% of total deposits. Total investments reached $35.5 billion, of which 58% represented investment in real estate.

Over the past decade, the average annual growth rate of the Islamic banking industry ranged between 15% and 20%. In Lebanon, the situation is different, as the industry is still in a nascent stage. “As of June 2006, there were four Islamic banks in Lebanon – namely, the Arab Finance House, Al Baraka, the Lebanese Islamic Bank and Blom Development bank. Boasting a 73% share, Murabaha is the most commonly used mode of financing,” said Jachi.

With those figures and the fast growth of the sector in mind, the IFQ is timely. It is aimed at those already working in Islamic finance or in the banking industry and prepares candidates for key positions in the areas of Islamic finance and Islamic insurance or Takaful. In Jachi’s view, financial specialists with such a qualification in hand will be able to better understand Shari’a principles applied to Islamic banking commercially, as well as to financial instruments, contracts and other transactions. “The candidate will also acquire practical insight into designing and setting up financial instruments such as Murabaha, Mudaraba, Sukuk, Musharakah, Salam, Istisna, Islamic funds and Takaful, as well as understanding and applying AAOIFI [Accounting and Auditing Organization for Islamic Financial Institutions standards],” he pointed out.

The specialization, which is delivered through several training sessions, delivered either in English or in Arabic, requires between 80 to 100 hours of personal study hours, before the candidate can sit for a computer based test called CBT. However, students can choose to work alone on the test, using a syllabus and a workbook (the first publication on practical Islamic Finance is available for order).

Training future experts

According to SII and ESA, public training for the qualification was held in November 2006 in London and Beirut simultaneously, with the IFQ becoming available worldwide via CBT starting March 2007. The technology also allows candidates to receive their results instantaneously. IFQ will meet level three qualifications on the UK classified National Qualification Framework (NFQ) and other levels within the qualification will be eventually developed.

Finally, the IFQ project originates from Al Multaqa, an international foundation for research in the field of Islamic Finance, existing under the ESA umbrella. The foundation is currently planning a database for Islamic finance as well as training sessions and lectures in the same field. This endeavor is carried out in collaboration with financial companies, banks, regulators and professional experts in the field of finance.

 

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Capitalist Culture

Battling Over Beirut

by Michael Young
written by Michael Young

The nature of the crisis between the government and opposition that began in early December was recognizable thanks to the nature of the battlefield: Beirut’s downtown area, the jewel in the crown of the late Rafik Hariri’s reconstruction program, and premier symbol of the capital’s conceit to be a cosmopolitan business center for the region.

In descending on the city center, managed by the Solidere company, the opposition, led by Hizbullah, sent several messages. For the mainly poor Shiites forming the bulk of the effort to bring down the government of Prime Minister Fouad Seniora, it was partly a class thing: Solidere is as much ours as anybody else’s, the demonstrators seemed to be saying, whether we are poor or not. But the tactic also included a hefty dose of blackmail, with demonstrators warning Seniora that the downtown area, so central to his and Hariri’s efforts to attract capital to Lebanon, was a ready hostage to the country’s political divisions. But the massive sit-in was also, lest we forget, an opportunity for demonstrators to do what everyone else does in the downtown area: enjoy themselves, (for the young men) ogle girls, and be part, if only for a moment, of what Beirut is all about – regardless of the maximalist rhetoric employed by political leaders.

Area of conflict

Recent events were hardly the first fight over the downtown area. When the destroyed old city center was being rebuilt in the early 1990s, publicists and academics were already flicking drying concrete at each other over what the resurrected downtown area should represent. The Hariri vision was not especially subtle, but it was effective: the area was to become a centerpiece for Beirut’s once again becoming the Middle East’s financial crossroads, a luxurious hook to draw in foreign capital and capitalists. The area’s physical attractiveness would project an image of modernity appealing to money-makers all over. At the core of the new city’s efforts would be high-end commerce, banking, but also real estate.

The critics quickly cried foul. What kind of city center was this that disqualified part of the society? Here was an opportunity to use the area as a vector of integration, and instead it was being turned into an exemplar of exclusion. Writing in The Beirut Review in 1992, a notable critic of Hariri’s reconstruction plan, sociologist Nabil Beyhum, lamented: “If the objective of reconstruction is to transcend the Lebanese war, then it must reverse the profound sociological changes caused by the war at the level of service, public transportation, road networks, and cultural and economic activities…. Reconstruction must act to regenerate urban society, serving as an example for society as a whole.” Beyhum had no doubt that Hariri’s ambitions, by blocking out many Lebanese, was failing as a “regenerative” experiment, and as one of conciliation.

In retrospect, Beyhum’s judgment was too severe. The downtown area undoubtedly helped the Lebanese “transcend” their war (even if its recent use has threatened to reverse this). It is indeed a playground mainly for the middle class and the wealthy, a pristine area that has offered much less class diversity than the prewar old city. But oddly enough, this stern benchmark for social integration – that all Lebanese should somehow aspire to feel equally at ease in all areas of the capital – while laudable, is also mildly absurd for anyone who knows how cities function.

Downtown showdown

Social stratification is something all cities face, even those that are quite successfully integrated. Far from being an unfortunate phenomenon, the rise of wealthy areas is a necessary component of any city’s economic and social regeneration. It’s happening in Harlem today, and is what transformed London’s Docklands. As Hariri instinctively realized, a prosperous neighborhood appeals to those who are prosperous, and that’s where investment comes from. It’s also true that Solidere’s plans, while they were haltingly developed, leading to the destruction of attractive buildings eminently salvageable, brought residents back to the downtown area. Before 1975, the old city had become a charming but deteriorating 8:00 am to 6:00 pm hub, where few people lived. Its integration only took place in the daytime, as it does today. After dark, its appeal dissipated.

The real challenge for any city is not bringing wealthier areas down to the level of its poorer inhabitants in the name of doubtful integration; it’s making sure that poorer areas can be brought closer to the standards in higher-income areas. That’s why many demonstrators’ antipathy for the downtown area in December was so paradoxical. Protestors showed their displeasure with what the area represented, but delighted in being able to get their message across amid its posh confines.

Michael Young

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Smooth as silk

by Riad Al-Khouri
written by Riad Al-Khouri

The world economy was until recently a cozy club of the countries of the Organization of Economic Co-operation and Development (OECD – a grouping of 30 of the world’s biggest and more prosperous states) and of the multilateral organizations that they largely finance and control, including the World Bank. However, that coziness could now be disappearing, as the role of non-OECD countries in aid, foreign investment, and trade has been expanding over the past few years, with Chinese activity especially notable.

Aid to Africa is a case in point. Total official development assistance (ODA) from the rich European, North American, and Pacific countries that make up the OECD Development Assistance Committee (DAC) to sub-Saharan Africa was about $23 billion in 2005. (Estimates are that 2006 figures will be the same or slightly lower.) Such largesse is of course welcome, but problems sometimes arise when these OECD donors go to Africa and say “do such and such, or else….” Though such ‘advice’ is sometimes reasonable, when political or economic conditions are imposed, the countries receiving assistance comply with difficulty, or at least go through elaborate games pretending to tow the line; otherwise, precious aid could be lost.

Donors from Western and other developed economies abide by certain, more or less, stringent rules and guidelines set by the OECD DAC. Not so non-OECD members, including the Chinese, let Africans take money without accepting any excess baggage in thorny areas such as governance.

Africa’s Silk Road, a book just published by the World Bank on Asia’s new African economic frontier, sums up this new situation by stating that: “China’s economic support to Africa has recently exploded.” In 2002, China officially gave just under $2 billion in development aid to African countries. Since then, official reporting of such figures has ceased, but preliminary estimates from the World Bank suggest that much of China’s official economic aid to Africa to support development of infrastructure is in the form of China Export-Import Bank loan financing and amounted to close to $13 billion in 2003 to 2006 – mainly, in the power, telecom, transport, water and sewerage sectors. At the same time, China is using debt relief to assist Africa, effectively turning loans into grants. The new World Bank book stated: “Since 2000, Beijing has taken significant steps to cancel the debt of 31 African countries. That year, China wrote off $1.2 billion in African debt; in 2003, it forgave another $750 million.” More recently, China’s Africa policy white paper, released in early 2006, foresees additional multi-billion dollar debt relief as part of the country’s economic assistance strategy to Africa, a point it underlined when hosting 48 African countries in Beijing last November at a conference promoting closer co-operation and trade.

The policies of China at home, social stability, industrial investment, and national unity, are more vital to Beijing than political liberalization or the rule of law, so it is unsurprising that the latter aims are downplayed in dealings with Africa. China has cultivated close ties with countries that provide it with commodities and raw materials, regardless of their political records. Recent examples include Sudan and Zimbabwe, which both trounced the threat of international sanctions in part because of Chinese action.

Partly as a result of closer ties with China, African economies generally look better, buoyed by strong demand in China for everything from Zambian copper to gold from South Africa and Angolan oil. This helps to explain African exports to China growing by 48% annually in the past half-decade, compared to 14% during the 1990s, with 10% of Sub-Saharan exports now going to China.

African-Chinese FDI is also rising rapidly, but the volume of such flows is more modest than that of trade. As of mid-2006, the stock of China’s FDI to Africa is estimated at $1.2 billion, with Angola, Nigeria, Mozambique, Sudan, and Zimbabwe accounting for over 80% of the total, and flows to the power sector making up about 40% of all commitments.

China has more or less surpassed Japan, Russia, EU states, and India in terms of economic, military, and political power. This leaves Beijing second only to Washington on the world stage, so China will now enjoy the status of a semi-superpower between America and others, with all the privileges and obligations that implies. Among the latter will be aid, which is still badly needed in Africa and other developing regions. However, the question increasingly posed for the rest of the decade will be: aid on what terms? As the Chinese evolve, with greater wealth and power, their assistance to Africa will also develop, possibly in the direction of more conditionality. Meanwhile, Beijing’s seemingly unencumbered largesse has helped it slip smoothly into Africa – a place in which the West is still struggling.
 

Riad Khoury is an economist, director of MEBA Ltd Amman and a Senior Associate at BNI inc New York  

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War is not the answer

by Claude Salhani
written by Claude Salhani

When the current political impasse is resolved and the ongoing restoration of Beirut resumes, the Lebanese government – whichever one ends up being in charge – should turn a cluster of the most distressed remaining buildings from the 1975-1990 civil war into a living museum. To hell with the cost.

Somewhere along the Sodeco-Monot axis would be perfect. It would not require much to get such a project underway. Expropriation and some yellow tape, the kind used by police forces around the world to cordon off crime scenes. Come to think of it, yellow tape with the words “crime scene – do not cross” would be ideal to mark part of what was one of the biggest crimes committed in Lebanon’s brief history.

The Ministry of Education should then make it mandatory for all school children from the earliest grades through to baccalaureate to visit the “Civil War Museum” once every year. These visits should be accompanied by a detailed narrative explaining how the country suffered during a war that left much of Lebanon in a state not very dissimilar to the museum.

The object of such an exercise would be to impound into the minds of the Lebanese from an early age just how senseless the war was – and is – and in so doing hopefully plant the seeds among future generations that, as the song goes, war is not the answer.

But, it’s a message that is finding few takers. First there was last summer’s Israeli-Hizbullah war. In its vapor trail we have seen the rising tensions between the Shiites of Hizbullah and Amal and their Christian allies led by retired General Michel Aoun’s Free Patriotic Movement and the Franjieh-led Northern Alliance on the one hand, and the supporters of former Prime Minister Rafik Hariri – the multi-ethnic March 14 movement – on the other. Lebanon finds itself once again in the midst of a dangerous political crisis, the worst since the end of the 1975 civil war. The assassination of 34 year-old Minister of Industry Pierre Gemayel and the simmering street violence also revives the specter of 1975.

(Memo to the Aounists: I am aware that Aoun is not an “ally” of Hizbullah, and that he only has an MOU – a memorandum of understanding – with the organization. But given the fact that the two groups are united in their opposition to Fouad Seniora’s government, it makes him, well … an ally.)

But war won’t happen. It can’t happen. I, like many Lebanese, was there in 1975. I saw Lebanon destroyed one block at a time, one village at a time. It was the work of a people gone mad, a time when logic was replaced by hatred and fear. It was a time when snipers gunned down innocent men, women and even children simply because they lived on the wrong side of town.

The delicate mosaic that comprises the Lebanese political landscape has much changed since 1975 when the divide was clearly between the mostly Muslim west and the Christians in the east. The global landscape is also different. The cold war is over.

In April 1975 the Christian side was exclusively Christian. The other side, typically referred to as Muslim – but which also included Christians – included leftists, communists, Marxists and Palestinian groups. Today, the schism dividing Lebanese society is more political than sectarian, although traditions are hard to abandon and Lebanese political parties remain mostly ethno-religious. There are Christians and Muslims on both sides, the most notable anomaly is the Christian general (retired.) Aoun, who is MOU-ed to the Shiites of Hizbullah.

The hefty Palestinian resistance as a serious military and political force has also disappeared. Many argue that they have been replaced by Hizbullah as the nation’s catalyst for war, but hopes that Hizbullah’s much vaunted discipline will prevail.

Finally, the Christian militias, who called on both Syria and Israel for assistance when outnumbered and out-gunned by the Muslim-leftist alliance, can no longer call on either country.

One would hope that the Lebanese who were there have no stomach for a second round. We now that know there were no winners then, just as we understand there can be no winners now.
Claude Salhani is an international editor and political analyst at United Press International (UPI)

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Hariri’s legacy continues

by Nicholas Blanford
written by Nicholas Blanford

There were few more poignant and telling indicators of the impasse that has befallen Lebanon in the past two years since Rafik Hariri’s assassination than the shuttered shops, restaurants and cafés and empty cobble-stoned streets of the downtown district during this holiday season.

The Solidere-run city center was regarded as the jewel in Hariri’s reconstruction crown, the fulfillment of the former prime minister’s long-standing ambition to restore Beirut’s pre-civil war image as a financial and services entrepot for the Middle East.

But, the legacy Hariri unintentionally bequeathed the nation through his untimely death is not one of a flourishing economy based on tourism and services, but to turn Beirut into the nexus of an ongoing tussle for control of the Middle East, pitting Iran and its allies against the West and its regional partners.

It was clear within hours of the St Valentine’s Day truck bomb that killed Hariri and 22 others in 2005, that Lebanon had been struck by a political earthquake, the shockwaves of which would linger and travel far. His death triggered the mass rallies of the Beirut spring, a cathartic eruption of anger and outrage that led to Syria’s disengagement two months later. The demise of Pax Syriana also meant that Lebanon’s quarreling politicians could no longer resort to the Damascene arbiter, but would have to resolve their own differences.

That inevitably led to deadlock over key issues such as disarming Hizbullah or removing President Emile Lahoud from office. With the Syrians gone, foreign and domestic opponents of Hizbullah redoubled their efforts to have the party disarmed. But, Hizbullah dug in its heels and the party’s new found ally, Nabih Berri, initiated a series of largely futile national dialogue sessions, while Lebanese society became increasingly polarized along sectarian lines.

In the months before his death, Hariri had worked hard on securing a compromise with Sayyed Hassan Nasrallah, Hizbullah’s leader, over the group’s weapons. As long as there was no peace with Israel, Hariri would deflect international pressure to disarm Hizbullah, and in exchange Nasrallah would forego any rash actions that could drag Lebanon into a war with Israel. Hariri understood that Hizbullah was strong enough to resist disarming by force or political persuasion. But he hoped that over time as Hizbullah became more firmly enmeshed in Lebanese politics, it would find that its priority lay with the interests of its Shiite constituents and would no longer heed the siren call of Iran’s clerical rulers.

Hariri’s murder shattered that compromise, however, and although his son Saad attempted to kindle the same warm relationship that his father had enjoyed with Nasrallah, high stakes politics intervened.

While the fate of Hizbullah’s arms was of direct interest to Iran, the United Nations commission tracking Hariri’s killers appeared to pose an existential threat to Syria’s rulers. The commission – the first set up by the UN to investigate a political murder – owes its existence chiefly to the US recognizing that the probe had the potential to bring about a regime change in Damascus with nary a protest from the international community.

The initial progress reports suggested that high-level Syrian officials and their Lebanese allies were behind Hariri’s murder and subsequent reports, although less forthcoming, have indicated no significant change of direction.

The stakes are high. The commission’s mandate expires in June and last month the chief investigator said that the probe was reaching a “sensitive stage”. If indictments are issued against senior Syrian figures it could spell the end of the Assad regime. The administration of US President George W. Bush, contending with disaster in Iraq and uninterested in pushing Israel to resume the Middle East peace process, appears to have recognized the importance of Lebanon in shaping the future direction of the region. The Iraq Survey Group’s recommendation to engage with Iran and Syria is being ignored by the White House. Bush appears to be betting on the UN commission accusing senior Syrian officials to help cripple the recalcitrant regime in Damascus, thus saving him the ignominy of having to approach Assad to help sort out Iraq.

If Assad’s top security lieutenants are indicted and the regime falls as a result, with a new Western-friendly administration taking over, it will have serious repercussions for Iran and Hizbullah, Syria’s principal allies in the anti-Western alliance. Syria plays a crucial role as Iran’s only Arab ally and as the geo-strategic linchpin connecting Iran to its Lebanese protégé, Hizbullah.

The anti-Western alliance will inevitably collapse into its constituent parts without the glue binding them that is Syria. Hizbullah will find itself isolated and struggling to resist calls to disarm, and Iran’s ability to project itself on the Arab-Israeli conflict will be weakened. Iraq and the Palestinians will also feel the effect of a change of regime in Iraq.

The events of this year may yet prove that in death Hariri will have had a far greater impact on the Middle East than he ever could have had in life.
 

Nicholas Blanford is a Beirut-based journalist and author of Killing Mr Lebanon: The Assassination of Rafik Al Harriri and its Impact on the Middle East

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Learning a thing or two from Qatar

by Norbert Schiller
written by Norbert Schiller

Twenty years ago, I arrived at an airport in the middle of a desert peninsula in the Persian Gulf. The arrival hall was basic, not one to remember, and the duty free consisted of one room with items piled up on the floor. The passport control officers were unfriendly and the customs agents scrutinized every item of luggage. As I remember, there were only one or two decent hotels and little traffic on the road.

Qatar was engaged in a wasteful, low-intensity war with Bahrain over a few patches of sand in the sea. My first thought was why the Qataris can’t learn a thing or two from Dubai, which was in the birth pangs of a historic economic revolution.

Ten years later, I arrived in Qatar again, this time invited by the ministry of tourism to attend the country’s first ever tourism festival. I was met at the airport by a polite representative from the company hired to showcase Qatar’s tourism potential. The streets were new and had been planted with trees to break the monotony of the desert landscape. The group included a German designer with a posse of stunning Polish models. He told me that this is the new frontier in fashion. “I’m here to get into the market before anyone else,” he confided. I was still not convinced.

A decade later, Qatar launched its latest campaign, one that was seen on television stations around the globe: “Proud Sponsors of the 15th Asian Games … The Games of Your Life.” One would have had to be living in a monastery not to have seen it. I was surprised and impressed by Qatar’s aggressive approach. Then came the phone call asking me to cover the games. Qatar and I were hooking up again.

At the end of November, I once again landed in Doha and like everyone involved with the games – athletes, organizers and journalists – was ushered into a private terminal, greeted by a member of the games’ organizing committee. I was given accreditation, put on a bus and shuttled to an apartment complex, which would be my home for the next 15 days. I was also given meal cards, a locker key and a bagful of souvenirs. Buses to the various sporting venues ran like Swiss (or Japanese) watches and as a photographer, my access to each event was planned with precision.

Never in all my 25 years of covering the Middle East and Africa as a photographer had I seen such meticulous organization. The Qatari’s had retained the international know-how of the people who brought us the Sydney Olympics to ensure these games were the best ever.

Twenty years ago, or even ten years for that matter, I would have never imagined that Qatar, built on a peninsula of sand, could have pulled-off such an extravaganza. During the 15 days a total of 13,000 athletes from 39 countries competed in 45 disciplines. There were 1,700 journalists – 400 of whom were photographers – on the ground, covering the games. The Qataris had also hired hundreds of Indian computer engineers to patiently attend to our technical needs. They worked quickly and efficiently and did not get flustered. It was yet another example of the professionalism that underscored this event and proof of what can be done with vision.

Granted, Qatar had the money to blow and will have made a loss (attendance at most venues over the 15 days was far from bulging). But what a loss-leader! Yes, there were rumors that tickets were purchased well in advance by the ruler and given to students (schools were closed during the games) and guests so that the stands would look full for the TV cameras. Nevertheless, there was energy and a will to make these games the catalyst and benchmark for future sporting events. It’s no secret that Qatar wants to host the Summer Olympic Games in 2016 – even though it might be a tad hot.

Lebanon, my erstwhile home, has been given the honor of hosting the 2009 Asian Winter Games. It offers yet another opportunity for Lebanon to take center stage and showcase its own diversity. But for the Winter Games to be successful, Lebanon will have to put away its divisions and learn a thing or two about unity and brotherhood by watching how athletes from different countries with different beliefs can come together in competition.

As for Qatar, well it knew where its priorities lay. The barren peninsula has become an example of what the Middle East can achieve. Qatar had demonstrated it is a global player. It had arrived. It made its choice and is beat the drum of economic progress. It has chosen investment over conflict and growth over blinkered ideological stagnation.

And don’t write them off as hosts for a summer Olympics. They will surely find a way around the heat.

Norbert Schiller is a photographer/editor. He covered the 2006 Asian Games for UPI

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Bush’s Middle East mission

by Lee Smith
written by Lee Smith

As every upper level manager knows, you bring the consultants in to buy you some peace and quiet with the shareholders while you’re deciding whether the buy-out clause in your contract turns out to be more lucrative than the year-end bonus. So why did George W. Bush, the Harvard Business School-educated CEO of the United States of America, let the consultants get all the headlines? After the mid-term elections, all anyone could talk about in Washington was the Baker-Hamilton Iraq Study Group.

Leaks from the ISG provided the press with plenty of cannon fodder, as conservative publications went on the offensive against Baker, the man who handed Lebanon over to Damascus, and let Saddam stay in power to become the symbol of anti-Americanism in the region. White House critics on the other hand called it the end of the Neoconservative project in the Middle East, a return to a “mature” Middle East policy, managed by the Bush family’s long-time fixer. Savvy insiders wondered if the formation of the bi-partisan group was some clever plan of the president’s to make the Democrats equally culpable for the meltdown in Iraq. And everyone wanted to know if the study was likely to become the blueprint for American foreign policy.

In the end of course, it was all much ado about nothing, as Bush acted like a proper CEO and tossed the report in the garbage. Jim Baker shouldn’t give up his day job, one White House wag remarked, putting an end to weeks of speculation: the President still makes American foreign policy. And yet after the Democrats won both houses of Congress, and polls show an American public increasingly dissatisfied with Bush’s Iraq strategy, the major question still lingers: what is this president’s foreign policy?

Bush’s legacy rests entirely on Iraq. The problem is that it is precisely this large Arab state that is preventing the White House from seeing how much the ground has shifted during the last four years, partly due to Iraq itself, but largely just because the region is always highly volatile.

After September 11 the Americans were mad at the Sunnis, especially Saudi Arabia. It was Riyadh after all who had provided, unwittingly or not, much of the staffing and financing for the largest terror attack in history. Part of the idea then behind the invasion of Iraq was to rearrange the regional balance, thereby empowering the Shia. But four years after the fall of Saddam’s regime, the US’ major problem in the region is not Sunni jihadism, but the Islamic Republic of Iran. Tehran is at war with the US, and is fighting American allies, interests and troops throughout the region.

The key to understanding this new regional alignment of course is not Iraq, but Lebanon. Israel’s war against Hizbullah drew the lines very clearly, and now Jerusalem is reportedly offering the Saudis a chance to re-affirm the casual alliance contracted during this past summer. Ehud Olmert intends to meet with Saudi officials to kick-start the moribund peace process. Does that mean that a comprehensive peace deal between the Israelis and Palestinians is finally in the offing? Of course not. The point of the exercise is to take the Palestinian file away from Hamas’ Iranian and Syrian sponsors and return it to the Sunnis.

So, if Israel and the traditional Sunni regimes have lined up under Washington’s umbrella, why doesn’t the US know it? Because of Iraq. If the White House sides with the Sunnis, the Shia will make it impossible for US troops there. And thus, the White House is caught in a strange bind – it knows that pro-Sunni policies in the rest of the Middle East will affect its standing in Iraq, but cannot yet admit it is impossible to detach Iraq policy from a larger strategic vision.

And it’s not just the administration that’s stuck; the Baker Study Group is the clearest manifestation of this confusion about the region. James Baker is as close to the Saudis as any other living American and the Saudis obviously do not want the US to engage Syria and Iran. And here he is putting forth advice – withdrawal from Iraq to leave the Sunnis at the mercy of the Shia, while “talking” with Iran and Syria – which would undermine an ally whose vital interests, at least in this case, are perfectly in line with Washington’s: to maintain the position of the US in the Persian Gulf.

The fact is that the Bush administration, its critics and enemies have greatly misunderstood the nature of American power. Remember that Osama Bin Laden said the US was a “paper tiger” because it was flushed out of Vietnam, Beirut, Somalia, etc., and hence Bush says he will not “cut and run.” So what is next? To prove to an obscurantist fanatic like Bin Laden that it is the earth that revolves around the sun and not the other way around?

It is easy to see how the US has failed in Iraq, and it is equally easy to forget the degree of difficulty involved. In a matter of months, the US brought down two troublesome Middle Eastern regimes, and only a country as rich and powerful, capricious and arrogant as America could afford to believe it was in the interest of the world to democratize these places as well. That 150,000 US troops and scores of American diplomats could not bring Jefferson to the land of the two rivers describes the limits of a missionary vocation, not power. So, what is the point in saving Iraq if it costs Washington the world – or worse, American hegemony in the Persian Gulf? 

Lee Smith is Hudson Institute visiting fellow and reporter on Middle East affairs

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Consumer Society

Regional retail boom counting on luxury

by Executive Staff
written by Executive Staff

After several years of sluggish turnover, the global luxury industry roared into life in 2006, with worldwide sales reaching a hefty $150 billion. A testament to the industry’s revival is the number of flagship stores spawning around the globe from such über brands as Louis Vuitton, Chanel, Hermes and Gucci.

By 2010, the Middle East luxury market potential is expected to hit the $100 billion mark as Gucci, Chanel et al make headway into the demand-filled region through local franchisers and retailers. Department stores, including Saks Fifth Avenue and Harvey Nichols, are also opening outlets in the region. In Dubai, Harvey Nichols opened a three storey, 12,500 square-meter store in the Mall of the Emirates, their biggest store outside London. With oil revenues and a growing population, the luxury Arab market has a seemingly insatiable appetite.

Global vision

Enter the Middle East Luxury Group (MELG). Established in 2005, the company is hoping to reap the rewards of this exciting market trend, especially when considering that 40% of all haute couture clients are Arabs. The group, which expects yearly sales of $80 million, believes it is revolutionizing the luxury industry.

“What we are actually providing here is a unified concept in luxury, encompassing everything from clothing to eateries, media and hotel businesses, and we are forcing others to keep up with this trend,” explained Elias Abi Khaled, MELG’s CEO.

The man behind MELG, Bahij Abou Hamzi, who made his name in telecom with his Global and Liban Call services, has so far invested $25 million in Beirut through his company. “The owner’s strong network base gave us contracts with popular brand names,” said Abi Khaled.

MELG’s media arm includes Fashion TV Arabia and Avenue, a fashion magazine that is currently preparing its first issue. The luxury retail activity consists of 13 exclusive brands and multi-brand stores, including Gianfranco Ferre, Vicini, IT, M for Missoni, Exte, and Just Cavalli. The group has also dipped its toes in the hospitality sector with the 109 Café.

“The MELG vision is of a global nature, as we treat the various fashion interrelated activities as one, with complementary functions interacting for the benefit of the whole entity,” explained Abi Khaled, adding that the group intends to expand its line of products and services to eventually include a luxury hotel.

At the moment, MELG employs 150 people and is expected to grow by 100 more within a year, an indication of the group’s aggressive expansion plan. Outlets are scheduled to open in Kuwait, UAE and Bahrain within a year, as well as stores scheduled to open in Qatar, KSA, Egypt and Jordan.

Unique approach

“We avoid franchising for obvious profitability concerns,” says Abi Khaled. “Opening our own points of sales underlines our concern for quality. Each outlet conveys the image of the MELG and we control every aspect of the service.”

Boasting a varied product base within its retail activity, MELG had to face conflicting interests in certain markets, where local exclusivity contracts preempted the company’s representation. As a direct consequence, MELG does not carry a uniformed basket of goods over the region. “Certain brands, including Versace Jeans Couture, Galliano, GF Ferre and Plein Sud, are however available through our multi-brand store,” said Abi Khaled, adding that “within the retail line of activity, outlets are all serviced by the Beirut purchasing platform, as it remains, after all, the fashion capital of the Middle East.”

Abi Khaled believes MELG to be currently among the top five luxury retail companies in the country (the group’s competitors are the El Tayyer group, Villa Moda and Chalhoub) but expects the group to eventually be the only one with an effective regional presence in the Middle East and GCC areas.

“Our goal is to establish a regional identity, which is built through a strong presence in most markets in the Levant and GCC areas,” he said. However, because MELG was first launched in Lebanon, the marketing campaign was kept on hold because of political unrest. “For other countries, one main marketing theme is adopted, which takes into consideration local cultural differences and is adapted to each country individually using TV, print and the group’s monthly fashion magazine, as well as other specialized shows and events.
 

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