Showing posts with label dubai. Show all posts
Showing posts with label dubai. Show all posts

Saturday, March 28, 2009

Retooling Strategies to Help Dubai Retain its �Sizzle�

BGR Group Managing Director Morris Reid says companies in the Gulf should change their approach and pursue business with smaller US companies

Morris Reid loves his cigar and is a self-confessed watch and cuff-links freak. A big man, when he is not jumping in and out of trans-continental flights to push what he calls commercial diplomacy, Reid can often be found on US television networks commenting on political and economic issues.

As Managing Director of the BGR Group, a large US lobbying firm, Reid mostly works with a full plate � at conferences, seminars, meetings and, as I learned, at lunches too. He worked earlier with the Clinton administration, following which he ran his own public affairs company for several years until it merged with BGR around the time the United States was electing a new president, at the end of last year.

Lobbying, for Reid, is a necessity in the world�s biggest economy. �I think the Catholic Church has a lobbyist too,� he says, tucking into his green salad on a fine March afternoon at the Capital Club (Reid was in town for the CONNECT-World CEO Conference). His mother strictly enforced a vegetables-first policy on the dining table, he tells me, adding that while lobbyists could be found everywhere in the world, the system has been formalised in the United States.

�Lobbying has been around since governments were created. There will always be a situation where people have interests that need to be represented and advocated for. Again, in the world�s biggest economy, there are certain winners and losers, and you certainly want to be able to advocate your position,� Reid tells me, defending lobbyists and power brokers while expanding on his definition of commercial diplomacy.

Reid calls himself a pro-business Democrat and tells me that, in a world that has changed hugely since Barack Obama took over the US presidency in January, he is seeking opportunities to bring together small and medium-sized businesses � the backbone of the US economy � with similar-sized firms in the Gulf region.

�I see my role as a facilitator of business-to-business, business-to-government and government-to-government interaction, but at the end of the day politicians cannot be the only solution. I see my role as being a conduit of bringing parties together from the Gulf and in America to do business,� he tells me.

Deals are important to a man who has worked with high-profile individuals, government officials and corporate executives in solving political and corporate issues for more than 15 years. His best deal, he says, is always the one he�s working on at the moment. �The deals I remember and reflect upon the most are those that had major economic impact and also serve a larger agenda,� he explains, while quickly asking questions about the impact of the global economic downturn on Dubai and the United Arab Emirates.

The world has changed in the past few months, perhaps forever. Uncertainty and a financial collapse have forced most governments to intervene in markets and companies, doling out money to the needy and nearly nationalising private companies. Big government is everywhere, watching, questioning, demanding, and interfering. Is socialism (that dreaded word) taking roots in capitalistic societies, I ask Reid.

�The answer is yes, but a government has to always act in an appropriate way. When the very stability of the global markets is hanging in the balance, the government must step in. And that is what they are doing,� Reid says, adding that a government must also know when to stop.

Is that always possible? �No,� he says. �It is the people who have to be vigilant and make sure the government does not over-step. One thing we always say is that it is hard to get it back once you give it up. That is a real concern now.�

However, the new administration has taken care of the one big concern he had in the past about America�s global image. �It is a whole new game� America is ready to re-engage the world. The good news is that with President Barack Obama, America is a welcoming society again. By and large, people, particularly from this region, felt that they were not welcome. Clearly, under President Obama, the welcome mat is open.� But there are internal issues that America faces as it battles recession and works to extricate itself from its financial mess.

�In the short term, America is looking inward because it is in lot of pain. The reason why we are in pain is because we are not long-term planners. We are short-term planners. We are more of a reactor society than a strategic one. We generally don�t plan for the long term, whereas the Chinese and some of the Asian societies are much better at planning,� Reid says. He cites the example of a ravaged US automobile industry that was once the world leader but lost out due to its lack of innovation. He also blames American entrepreneurs who lacked a global perspective, unlike their counterparts from other parts of the world.

�Long term, America is going to have a more open outlook because we are becoming more diverse. We still have three exports that people of the world want,� he tells me, counting education, health care and entertainment on his fingers.

Obama, according to him, has two and half years to fix things. �In 30 months, if the average American does not feel that we have turned a corner on the economic crisis... that cripples the President�s political posturing. So he has 30 months to turn this page, because if the will of the people [is] not with him, politicians will act differently with Barack Obama. Right now, politicians generally want to give him the benefit of doubt, as he has got public sentiment on his side. In 30 months, these politicians will be fighting for their own survival.�

The Gulf region, Reid says, needs to focus more on the small and medium-sized businesses in America in its attempt to diversify their economies beyond energy. Then he returns to his mother and her vegetables. �In a lot of ways, they (this region) didn�t eat vegetables. They went for the sizzle. The real trick for the region is how to sustain it when oil is below $40� per barrel, he says, urging governments here to engage with different US companies than they have in the past. Instead of trying to do deals with the 1,000 largest companies in the United States, firms in the Gulf should pursue America�s 23 million small businesses, he says, donning his analyst�s hat.

Dubai, he says, needs to identify its core customer to jump quickly out of its crisis. �The core customer is the family that wants to come and have a great experience, maybe look for a second home. There is a super-high end of the market, and there is the middle tier of the market. This is where they need to focus,� he says, giving the example of Las Vegas, which retooled its marketing efforts once it figured out that it needed to send out welcome notes to families and not just gamblers.

Editor Rahul Sharma savours the idea of mixing work with pleasure for this column. You can write to him at rahul@khaleejtimes.com.


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Sunday, March 22, 2009

How is the Middle East poised to ride out the global crises?

Emirates Business discussed the economy, strategies and trends with leading U.S. executives.


How is the Middle East poised to ride out the global crises?

Morris Reid: It's time to invest in different products and services. The Middle East needs to diversify.

Robert Blackwell: It depends on energy prices and their ability to leverage their human capital.

James Reynolds: Very strong. We think the Middle East is much stronger than it has ever been and is poised for more growth.

Joseph Meyer: The Middle East has a long term focus for business and growth.

How will venture capital investing change in 2009?

MR: Expectations are lowered. No one will be trying to find the next Google. People are trying to find opportunities that will grow over time. They're not swinging for the fences.

RB: I believe VC investing will be different in the short-term. People will be more risk averse and diligent in their investigations. I also believe the amount of leverage in the market will be significantly reduced for at least a couple of years.

After that there will be the beginning of some new bubble that we cannot foresee until a few years down the line. The other challenge will be governments competing for investment resources to pay their entitlement obligations.

JR: Venture Capital firms will be managing smaller funds and some firms will go out of business while others thrive.

JM: Valuations will drop significantly, unless you can prove your model.

What is your current business forecast? What level of confidence do you have in this forecast?

MR: Great conflicts in a free market system provide quality and service; customers will be there; it'll be about old fashioned know-how and knowing your customers.

RB: We feel with a little luck we can have modest growth. We feel 60 per cent confident in our ability to achieve modest growth.

JR: We forecast a significant growth of 70 to 100 per cent up this year. We are highly confident in the forecast.

JM: We expect fairly significant growth over last year, over 50 per cent, and are comfortable with this projection.

How are you using the economic downturn to improve your business?

MR: We are consolidating. We will spend more time on research and development, with a greater emphasis on retention.

RB: We are using this time to find better people.

JR: This economic downturn has allowed us to hire talented personnel that compliment our business model.

Additionally, it has allowed us to expand our infrastructure and enter new lines of business.

JM: We will focus on customer satisfaction and are looking to make acquisitions of competitors.

What are you going to spend more money on in 2009 vis a vis 2008?

MR: Research and travel.

RB: More on top quality people, less on trying to develop under performers.

JR: Personnel – Adding significantly but as a percentage of revenue I expect that to be lower.

JM: Advertising and marketing.

Is it better to reduce headcount, go to a four-day work week, or reduce salaries?

MR: Reduce headcount. There is no reason to carry dead weight.

RB: Better to purge the weak performers and invest in the best people.

JM: Reduce headcount.

In addition to headcount reductions, what other expenses are you reducing?

MR: We have cut spending and there is no paid advertising. We are spending more time on the phone and research prior to spending money.

JR: Given the consolidation that has occurred in financial services, it has allowed us to gain new clients and penetrate our current clients more deeply.

JM: Our marketing spend is more focused on proven strategies.

Will you, at any point consider outsourcing?

RB: Yes, for non-strategic operations.

JR: No.

JM: Yes.

When do you predict market conditions will improve?

MR: Second half of 2011.

RB: When everyone is sure the world over.

JR: I expect the first quarter in 2010.

JM: Fall 2009.

How much does executive compensation cost your firm? How effective is it?

MR: Got to pay well to retain the best people, since we need the best.

RB: This is not a huge expense for us.


Joseph Meyer, Chairman, FirstView Financial

Meyer has more than 20 years of successful leadership and management experience. He founded the ACH payment processing company which processed over 1.5 million transactions per month. He's also the founder of Skylight, a debit card company, the former President of BellSouth Products and served as a Major in the US Army.


James Reynolds, CFA – Co-founder, Chairman and Chief Executive Officer, Loop Capital Markets.

In 1997, Reynolds collaborated with Albert Grace to form Loop Capital Markets. He also serves as a board member of The Lincoln Academy of Illinois, Chicago State University, University of Chicago Hospitals, University of Chicago Laboratory School, Chicago Zoological Society, Chicago Historical Society, Scholarship Chicago, and is treasurer for the Chicago Urban League.


Morris Reid, Managing Director, BGR Group

For the past 15 years, Reid has consulted and provided counsel to the leaders of hundreds of Fortune 500 companies. Reid was also director of Vice President Al Gore's office at the 1996 Democratic Convention. As a branding and political consultant and political strategist he has worked with celebrities from Kanye West to Bill Clinton.


Robert Blackwell, Founder and President, Electronic Knowledge Interchange

EKI serves some of the largest companies in the US, as well as the city of Chicago and the state of Illinois. Its president Blackwell has been credited with founding several companies including a real estate development company. He also developed the Enterprise-Wide Spreadsheet Methodology for complex financial applications.



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Friday, December 5, 2008

The GCC States - Opportunities in the Global Financial Crisis

One of the most influential aspects of the global financial crisis, which has taken many forms around the world, is the shrinking and increasingly risk-averse global capital pool. As investors around the world began to experience heavy losses in the wake of, and partially triggered by, the U.S. subprime crisis, capital around the world began to dry up. At the same time, those who retained access to capital became increasingly risk-averse and have, in effect, begun to hoard capital.

For the time being, this means that risky borrowers or capital-intensive projects around the world are desperately in need of loans that are nowhere to be found. The impact in the short term is that major projects -- such as Brazil's development of its massive offshore oil fields -- will have to be postponed. In the long term, this lack of willing investment will mean a slowdown in growth in the areas of the world that are dependent on foreign capital for the development of infrastructure and industry, such as Latin America, emerging Europe and the Balkans.

A secondary impact of the shortage of capital is the devastating effect it can have on banking sectors. As the capital pool shrinks, liquidity becomes a serious problem for banks as they struggle to meet reserve requirements and avoid contagion. Banks all around the world have been hit by a shortage of credit but nowhere harder than in Europe, where the banking sector is so heavily intertwined with its industrial sectors that the entire underpinning of the economy relies on a highly liquid and supportive (critics would say "too supportive") banking industry. The U.S. market, by comparison, relies primarily on securities markets for external financing needs, and the kind of reciprocal, slightly incestuous relationships between banks and industries that characterize Europe do not exist in the United States. Furthermore, the common monetary policies of the eurozone have left many European states with over-stimulated economic sectors -- such as Spain's real estate sector -- that have been pushed forward by extremely low consumer lending rates (relative to what these countries experienced prior to joining the eurozone) backed by the stability and strength of the euro.

Yet another challenge facing world economies is the global slowdown of growth, which means a decline in demand for goods and a resulting decline in manufacturing. This will mean a slowdown in the Asian countries -- particularly China -- that are home to much of the world's manufacturing. The secondary impact will be on commodity-producing states, which provide the basic materials used in the construction of manufactured goods. These states (including most of Latin America) are facing an export crisis as the markets dry up.

Financial Crisis and the GCC

Fortunately for the Persian Gulf states that constitute the Gulf Cooperation Council (GCC) -- Saudi Arabia, the United Arab Emirates (UAE), Kuwait, Bahrain, Qatar and Oman -- these financial challenges are mitigated, or entirely eliminated, by enormous oil wealth and economies that have been carefully managed.

The GCC states are largely insulated from the global credit crunch because they are the proud owners of some of the world's largest oil deposits. Saudi Arabia alone boasts the largest oil reserves in the world, at well over 250 billion barrels, and all of the GCC states -- with the exception of Bahrain -- are ranked in the top 20 of world oil producers, with Saudi Arabia and the UAE leading the pack. Saudi Arabia alone made $194 billion from oil exports in 2007, and $212 billion (in real dollars) between January and October 2008. The GCC states are so capital-rich that their usual financial management strategy involves attempting to soak up as much liquidity as possible in order to contain inflation.

GCC_Financial_Outlook_Map

Indeed, with massive current account surpluses, the six GCC states are creditor nations -- meaning they supply capital to the rest of the world. As net providers of capital, these countries remain much less vulnerable to a shrinking global capital pool than net capital importers, as they can simply let up on the outflows for a bit to recapitalize their systems.

Given that this wealth is controlled for the most part by the GCC monarchies, much of this cash flow goes first into government coffers. This granted every single one of the GCC states a budget surplus, reaching as high as Kuwait's 42 percent of gross domestic product (GDP), in 2007 (this was before the oil price spike of 2008, so while the fall in oil revenue will affect budgets in 2009, the impact will not be as drastic as it would be using 2008 as a baseline). This gives Kuwait a great deal of flexibility in dealing with financial issues as they arise. Qatar, Oman and Bahrain all have surpluses, but they were less than 7 percent of GDP in 2007, so although they do maintain flexibility, they are much more limited than Kuwait.

Despite their budget surpluses and status as net capital exporters, the GCC states do maintain external debt -- used to finance corporate projects and government functions. However, public-sector external debt amounts to less than 30 percent of GDP for most GCC states. The outlying state is Bahrain, which has a public-sector external debt of around 36 percent of GDP. While this is not an insignificant level of debt, it is far outweighed by their sources of wealth. Measures of total external debt paint a different picture, however, and both Bahrain and Qatar have net external debt (which includes both public and private foreign capital borrowing) at between 50 and 60 percent of GDP. Although the UAE does not appear to be in trouble, the Dubai emirate has incurred a massive amount of debt in the process of overheating its real estate sector. The net impact of this high level of borrowing is to put the emirate at a disadvantage when it comes to seeking short-term capital to adjust to the international financial crisis.

Much of this debt has been caused by massive infrastructure and development projects such as Qatar's liquefied natural gas facilities, Dubai's fanciful real estate explosion and Bahrain's attempts to convert itself into a financial mecca. Indeed, the GCC states have used the past several decades of oil wealth to engineer massive development projects and have become, in the process, quite reliant on foreign direct investment (FDI) and the technology and expertise that accompany it. Though Qatar and Kuwait are net exporters of FDI, the other four states are importers of FDI, from Bahrain's modest 0.51 percent of GDP to Oman's more substantial 4.67 percent of GDP.

Offsetting this debt (and just about every other problem they might encounter) are the pools of capital that the GCC states maintain. One of the most important mechanisms for this capital accumulation -- because of its political and financial implications -- is the sovereign wealth fund (SWF). These SWFs are massive investment funds that make strategic investment choices for the GCC states. GCC SWFs maintain holdings that range from Saudi Arabia's relatively modest $5.3 billion to Abu Dhabi's massive $875 billion nest egg (and Abu Dhabi has even more money socked away in other SWFs). These SWFs are invested primarily in the equity markets of developed nations, and some have taken sizable stakes in Western businesses. In addition to the SWFs, the GCC states also maintain large caches of reserves. In Saudi Arabia, the state-owned bank SAMA (in addition to the kingdom's SWF) has $365.2 billion of foreign holdings, and the elite of the al-Saud family has reportedly stashed away somewhere around $1 trillion, though exact figures are difficult to track.

These pools of capital allow the GCC states to exercise great flexibility, especially during credit crunches. Gulf oil is controlled by the monarchies that rule each state, and these strong governments not only can draw on their large reserves but also can run their yearly budgets with substantial built-in surpluses. This gives the governments a great deal of room to intervene in the local markets to compensate for the effects of the financial crisis.

Trouble Spots

There are a couple of notable exceptions to this relatively rosy picture. Saudi Arabia has postponed bids on two major refinery projects until sometime in late 2009. The projects include a $6 billion, 400,000-barrel-per-day (bpd) refinery in the Red Sea port city of Yanbu to be built by Saudi Arabia's state-owned oil company Saudi Arabian Oil Co. (Aramco) and ConocoPhillips and a $12 billion joint venture with French energy company Total for another 400,000-bpd facility in Jubail. But these projects are hardly an issue of economic survival. Instead they are a part of Saudi Arabia's effort to move up the energy supply chain -- from crude production to refined products - - and while these facilities would be nice to have, their delay will not cause any sleepless nights for Saudi Arabia.

A more serious issue for GCC states is that many of them have young banking sectors that have trembled at tightening global liquidity and disappearing capital. Bahrain, an island nation, has capitalized greatly on its location at the heart of the oil-rich Persian Gulf region and has used its proximity to massive capital flows to build a powerful banking sector. This proliferation of banks has been shaken by the financial crisis, but true crisis is not on the horizon because the GCC states have avoided incurring massive amounts of debt.

The impact of the financial crisis on the oil markets is unquestionably a concern for GCC states, and oil prices have fallen to nearly $50 a barrel after reaching highs of over $140 per barrel earlier in 2008. But their cash reserves have given the GCC states a great deal of staying power in the medium term. Saudi Arabia alone raked in more than $1 billion per day when oil prices spiked. With the global slowdown, there will certainly be a decline in the rate of cash flowing in to the GCC states, so they will have to spend what they have wisely. In some respects, this slowdown in cash inflow is a blessing. Until the financial crisis broke, the biggest financial worry for these states was high inflation, and the slowdown in growth will reduce inflationary pressure.

Among the GCC states there are a few with their own unique challenges. In the UAE, for example, there has been a rapid increase in corporate borrowing over the past two years. Most of that borrowing has been to fund massive development projects in the emirate of Dubai. These fantastical projects have included the construction of islands in the shape of palm trees and the continents of the world. Dubai has been planning to build the world's largest suspension bridge across the entire city of Dubai (connecting one suburb to another) that was to be completed in 2012. The real estate sector in Dubai, which sports the world's only seven-star hotel, has reached unprecedented heights of growth.

Its 10-year growth spurt has come to an end, however, as the heavily overheated real estate sector readjusts to something closer to reality and as bank stability is in question, although the UAE has set up a task force to address the problem. According to the head of the task force, Mohammed al-Abbar, state-owned and affiliated companies owe approximately $80 billion in debts, while the government's assets stand at $90 billion, and state-associated companies hold about $260 billion in assets. In addition to across-the-board needs for refinancing, Dubai companies have suffered huge losses in the Dubai Financial Market, which has taken the biggest hit of the GCC-state stock markets so far this year, with losses of up to 66 percent.

Qatari firms have also borrowed some $40 billion over the past two years to finance hydrocarbon projects such as the construction of natural gas liquefaction plants -- though these will certainly pay for themselves as demand for liquefied natural gas rises amid very tight market conditions. A massive outflow of equity investments sent the Doha Securities Market for a spin as it lost 22 percent in the first half of September. Though this serves to tighten Qatar's credit options, it will not have catastrophic consequences.

The massive credit expansion in Qatar and the UAE has put the banking sectors of both countries in a delicate position. Liquidity crises will, as a rule, hit first in the place where commercial banking and lending has exploded the quickest. The relatively young Qatari banking sector has been affected by this phenomenon, and the government intervened in the banking sector by offering a $5.3 billion investment package on Oct. 12. Similarly, the Abu Dhabi Central Bank has intervened with $32.7 billion to ensure the liquidity of UAE banks.

According to reports from Bahrain, the country's Islamic lending facilities appear to be faring better than interest-based lending facilities. The Central Bank of Bahrain is controlling the sector's involvement in the volatile real estate market, as a precaution, and has been adjusting interest rates to maintain liquidity, which appears to be holding. Similar moves have been made in Oman, although the kingdom appears to have weathered the storm with high levels of capitalization.

As these market fluctuations demonstrate, depending on how bad things get, the GCC states may be forced to cut back on programs -- such as Dubai's development projects and Saudi Arabia's refineries. But in the end, the massive reserves they have built up, as well as their relative financial discipline, have made the decline in commodity prices a concern but hardly a crisis. And ongoing hydrocarbon production capacity improvements in Saudi Arabia and other GCC states mean that as soon as the price of oil rises again, these states will once again be positioned to rake in stratospheric levels of oil revenue. In fact, the financial crisis for the GCC states can be viewed as an opportunity for the GCC states to exploit this moment of relative economic power, both internally and on the international stage.

Geopolitical Implications

The strongest player in the region, by far, is Saudi Arabia, and Riyadh uses its massive oil wealth to exert political pressure throughout the region and the world. The kingdom's primary objective in the region is the containment of Iran and Shiite influence as Iran tries to assert dominance over Iraq. The financial crisis has been a huge boon in this endeavor. As a major oil exporter that has failed to achieve the kinds of financial solvency that the GCC states have secured, Iran is staring down the barrel of a gun as oil prices sink. Without a buffer of cash, Iran is very poorly positioned to handle a fall in oil prices.

Though the fall in oil prices threatens Saudi Arabia as well, the Saudi budget is set for an oil price of $45 per barrel, and oil prices have not dropped to levels that would threaten Saudi stability. Saudi Arabia maintains the ability to manipulate oil prices for its own foreign policy objectives and could use them against Iran. (Saudi Arabia is poised to assume an even more powerful position when prices rise again if an ambitious $129 billion project to raise its oil production capacity to 12.5 million bpd comes through as planned in 2009.)

If Saudi Arabia chooses to pursue macro-level adjustments to oil prices in order to target Iran, it will certainly do so cautiously. Though the kingdom has a solid cushion of petrodollars, it still relies on oil for 75 percent of government income. That income is necessary to meet a variety of domestic needs and to counter Iranian moves in the region by bribing political parties and militant groups in places like Iraq and Lebanon.

After Saudi Arabia, Kuwait is perhaps the GCC state best positioned to weather the financial storm. With a SWF of $264 billion, the country is very capital-rich and the government has a huge budget surplus. There has been turmoil in Kuwait's equity markets and banking sector, which has prompted the kingdom to repatriate some $3.66 billion worth of SWF investments, but the government's resources are substantial enough to handily offset these problems. Kuwait stands to gain from the decline of Iranian influence in the region, in terms of limiting both the influence of its own Shiite minorities and Iran's entrenchment in neighboring Iraq. Kuwait's foreign policy goals are thus in line with Saudi Arabia's, and Kuwait will follow the Saudi lead.

Abu Dhabi, the largest emirate of the UAE, is the wealthiest and most tightly run ship in the country. The UAE's problems lie in Dubai and its excessive real estate boom of the past decade. Dubai's financial indiscretions have put it in a position where it will need to be underwritten (to a certain extent) by Abu Dhabi. This presents a strategic opportunity for Abu Dhabi to rein in the political power and excesses of the al-Maktoum family, which rules Dubai and holds the UAE prime ministerial post. Dubai has so far remained staunchly uninterested in Abu Dhabi's offers of aid, declaring that there are no negotiations between the emirates.

Though Qatar has found itself mildly vulnerable to the international financial crisis because of its large debt burden, it is still in a reasonably safe financial position. Qatar's regional and global goals are quite ambitious, as it seeks to increase its holdings overseas and serve as a diplomatic hub for the Middle East. Qatar has already made moves toward acquiring major stakes in companies overseas -- including Citibank -- and these kinds of activities will likely continue. For Qatar, the danger may be in overextending itself in a time of depressed markets and relatively little competition.

For Bahrain and Oman, the smallest of the GCC states, their ability to take advantage of the financial crisis is relatively limited. Bahrain is constrained by domestic political factors as it seeks to balance the needs of active opposition elements with its economic outlook. This will limit Bahrain's ability to use the economic crisis as a stepping-stone toward a larger geopolitical role in the region. Oman, for its part, maintains a very low profile in the region and is very unlikely to make any moves at this time.

For all of the GCC states, the global slowdown offers investment opportunities the world over. On the political stage, the Western states are crying out for capital injections as their economies slow down. In fact, on a tour of the region, Deputy U.S. Treasury Secretary Robert Kimmitt called on the Persian Gulf Arab states to continue investing in the United States to help restore financial stability. This represents an excellent opportunity for GCC states to charge to the rescue -- with hefty expectations for future cooperation, of course.

The United Kingdom has also asked the GCC states to help the International Monetary Fund (IMF) assist countries in desperate need of a bailout. Herein lies an opportunity for the GCC states to engage in long-term financial positioning. By giving money to the IMF, the GCC states could enhance their say in the affairs of the lending institution and, by extension, in the geopolitical arena.

For the moment, however, the GCC states have not responded enthusiastically to these pleas (although Saudi Prince Walid bin Talal did announce that he would boost his stake in Citibank just days before a U.S.-announced government bailout of the company). Countries like Saudi Arabia and Kuwait (which have other options and a variety of needs to balance) see only limited direct political benefit from bailing out the West instead of investing that money at home. This is an outlook that could change once the new U.S. administration is up and running and able to make political deals and security guarantees.

As these openings demonstrate, the GCC states are among few in the world that can view the current crisis and see potential opportunities. While there will certainly be bumps in the road as these relatively young economies settle and shift in the face of a turbulent world economy, responsible management of vast oil wealth has put the GCC states in a position to weather the financial crisis, and weather it well.

Author: John F. Mauldin
johnmauldin@investorsinsight.com


http://sacoinvest.blogspot.com/2008/12/gcc-states-eyeing-opportunities-in.html


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Saturday, November 29, 2008

Dubai builidng despite global financial crisis

He does not know it, but Babu Sassi, a fearless young man from Kerala in southern India, is the cult hero of Dubai’s army of construction workers.

Known as the “Indian on top of the world”, Mr Sassi is the crane operator at the tallest building on earth – the 819m Burj Dubai. Sassi’s office, the cramped crane cab precariously perched on top of the Burj, is also his home – apparently it takes too long to come down to ground level each day to make it worthwhile.

In his absence, stories about his daily dalliance with death are discussed in revered terms by Dubai’s workers. Some say he has been up there for over a year, others whisper that he’s paid 30,000Dh (£5,300) a month compared with the average wage of 800Dh (£140) per month. All agree he’s worth it. One chat room post said: “[Sassi] must be a real expert at cranes or totally insane.”

A similar debate about the boundary between genius and danger is being asked of the reason for the Burj itself and of what it represents, Dubai’s property market and its booming economy.

For the past 10 years, Dubai’s implementation of the biggest and most ambitious building programme ever undertaken has stunned the world.

In transforming a forbidding desert into a vibrant city of skyscrapers, Dubai has also bagged several world records: the highest building; the biggest man-made islands, the Palm Jumeirah and the World islands; the biggest shopping mall, the Dubai Mall; the biggest indoor ski area, Ski Dubai; and the greatest number of seven-star hotels. There are more records in the pipeline - the even bigger Universe islands, the 1km-high Nakheel Tower and the QE2, the ocean liner that arrived last week to become a luxury hotel.

All questions about how this growth is being financed have been brushed aside. While the West has suffered, Dubai's extravagance has reached new levels: from its vast Terminal 3 at the international airport, which is due to be redundant when the even bigger Jabel Ali airport is built in 2015, to the $20m launch party of the Atlantis hotel two weeks ago.

But in recent weeks the cracks in Dubai's economy have become undeniable. Property prices have slumped, demand has dried up and, for the first time, the emirate is being forced to consider calling a halt to its expansion. Some analysts are claiming that Dubai could implode, weighed down under a pile of debt and, given that it has relatively small oil reserves, no obvious way of paying for it. One said: "This has been the most spectacular spending mission on Earth. But it's a mirage. If complex debt structures have brought the financial world to its knees, Dubai is the world's biggest toxic timebomb."

The possibility is absorbing Western firms. The Middle East, floating on a magic carpet of vast oil and gas reserves, was supposed to be the oasis in the global financial chaos. The hopes of the financial system, most obviously the banks, have been pinned on securing cash injections from the Middle East, while hundreds of thousands of City workers are looking to the region for new jobs. If Dubai can't pay its debts, much of which is owed to international banks, the emirate could turn from potential saviour to yet another big problem.

Last week, at Dubai International Financial Centre (DIFC) Week, a series of international business conferences, Dubai's authorities scrambled to address the mounting speculation by unveiling for the first time details about its financial position.

Mohammed Ali Alabbar, a member of Dubai's executive council and chairman of Emaar Properties, which owns the Burj Dubai among other landmarks, said the emirate's borrowings amounted to $80bn against assets of about $350bn. He insisted: "The government can and will meet all its obligations."

While admitting for the first time that the Gulf was not immune to the global downturn, Dubai and its oil-rich neighbour Abu Dhabi unveiled a series of initiatives designed to tackle the dangers head-on.

Mr Alabbar announced that a special council had been established to look at each sector of the economy, in particular the crucial property market. The Advisory Council has been tasked with reporting in detail the state of the economy to the Ruler Sheikh Mohammed Bin Rashid Al Maktoum. The council members, who include Dubai's top representatives in "government finance, real estate, banking and equity markets", will also have to make proposals and recommendations on managing "the current and future supply of new projects onto the market".

Mr Alabbar said: "We will formulate recommendations based on our findings, which will then be submitted to the government for action and implementation. We will act in a timely manner, and we will be transparent in those actions."

The most dramatic development was the announcement of the UAE's own bail-out programme. Last Sunday, the government said it would merge the Real Estate Bank of the UAE and the country's two largest home finance providers, Amlak Finance and Tamweel, into a single entity called the Emirates Development Bank.

The new bank will receive a cash injection from the federal government, which is based in Abu Dhabi, and become the largest provider of home loans in the UAE.

Also last week, Abu Dhabi said five of its largest companies had launched a home finance company to fill the void left by the implosion of credit at home and abroad.

The new company, Abu Dhabi Finance, is a joint venture between Mubadala Development, Abu Dhabi Commercial Bank, Aldar Properties, Sorouh Real Estate and the Tourism Development and Investment Company. It has DHR500m (£89m) in paid-up capital. It will start by offering mortgages to buyers of properties from the three developers - which account for two-thirds of Abu Dhabi's projects before expanding.

They were dramatic moves but they did not stem the bad news.

On Thursday, Marwan bin Ghalita, chief executive of the Real Estate Regulatory Authority (Rera), told the Dubai-based The National newspaper that some developers had reported up to 40pc of buyers falling behind on their payments where units were sold off-plan by developers before completion or, in some cases, where construction has yet to even begin.

But Mr Ghalita said defaults could climb to 40pc in the off-plan, secondary market for property "if banks do not provide finance and developers do not change payment plans by the end of the year since payments are due". According to Rera, there are 922 residential and commercial property developments in Dubai, of which 479, accounting for 46,000 units, are under construction.

David Eldon, chairman of the DIFC authority, told delegates at DIFC Week: "Dubai does not lack the financial muscle to cover its debt as some rating agencies have said. Moreover, the reality is that the emirate is not built on debt alone.

"The growth has been led by equity finance, and not debt. There is also the need to distinguish between corporate debt and sovereign debt. Unlike the situation in the US or UK, debt here is channelled in financing infrastructure and public utilities that enhance productivity. Dubai has declared it can cover its debt for the next seven quarters. The infrastructure in Dubai is very good, the regulations are sound and there is openness to business. The city has strong economic fundamentals.

"Dubai is not alone - it has the backing of the UAE with the world's largest sovereign wealth fund and huge oil reserves. We've been seeing a softening in property prices and that may not be bad. The market was overheated and a correction is a sign of a mature economy."

Last week, other pillars of Dubai's boom said they expected a slowdown in the immediate future but dismissed any long-term problems.

Noor Sweid, director of Depa, the world's biggest interior contracting company responsible for decking out luxury hotels, including the Atlantis and Burj Dubai, said: "The slowdown in the property boom was inevitable - no one expected it to continue to grow at 100pc a year forever. But for us, we have clear visibility for the next two years in which we expect at least 40pc growth in revenues from the work we already have both in Dubai and
our international operations."

Tim Clark, president of Emirates, Dubai's national airline, said he expected the global financial problems to impact upon the markets for another 18 months. "While the problems have been flushed out, we will work on consolidating our routes rather than opening too many new ones," he said.

But he dismissed speculation that Emirates would not be able to afford the 58 Airbus A380s it has on order. He said: "We have already placed all the A380s and as soon as the new airport is built in 2015 we will probably want the same number again. Dubai's position means we are perfectly placed to serve all the growing economies from Africa to Russia and Asia and beyond."

Anthony Harris, former British ambassador to the UAE, who now works for the insurance subsidiary of Robert Fleming in Dubai, said: "The thing that is misunderstood about Dubai is that it is not dependent on Western economies in the way of Citigroup or AIG, but instead has developed major trade links with Iran, India and China. The property market might have a wobble but, in the long term, the demand from Asia is huge. There are some strong pillars to Dubai's economy. There is no terminal sickness here, in fact the opposite."

By Louise Armitstead http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3536012/Dubai-vows-to-keep-building-despite-global-crisis.html

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It is oil that protects the Gulf countries from sliding into a worldwide recession

Less than a year ago, the world was scrutinizing and even rejecting investments by the Gulf countries' sovereign wealth funds (SWF) into the West. Last month, by contrast, US and European governments and major companies flirted with sheikhs, emirs and senior officials from the Gulf, in a desperate bid for them to inject more money into their own ailing budgets.

Leaders from the UK to the US have arrived in the Gulf in recent weeks asking oil exporters to pour more cash into their firms and the International Monetary Fund (IMF), which only weeks ago was busy imposing transparency conditions on SWFs. Large investment banks are fishing for opportunities in the region, with Merrill Lynch saying last month it wanted to open an office in Kuwait in addition to its branch in Dubai. Banks such as Morgan Stanley, Deutsche Bank and Credit Suisse are already running or expanding operations in the Gulf. And it doesn't end there. Investment bankers from Wall Street to London are sending their impressive CVs to companies in the Gulf as Western banks make major layoffs to survive the worst financial crisis in 80 years.

This change of heart is justified by the so far oblivious resilience of the oil-rich Gulf economies to the repercussions of the global financial meltdown. But are they really that resilient, and if so, how long can they keep up their stamina? On the face of it, the Gulf countries are better placed than most countries in the world, thanks to the petrodollar surpluses they were able to accumulate through the oil industry's more bullish days. The price of oil skyrocketed to $150 through the year ending July. And knowing that Saudi Arabia, along with the United Arab Emirates, Kuwait and Qatar, account for more than half of OPEC's official production quota of 28.8 million barrels per day (BPD), one can imagine how huge their oil revenues were. However, with oil contributing 80 per cent of their public revenues, the 60 per cent decline in oil prices to reach $55 per barrel earlier this week draws many question marks on the claimed resilience of these economies.

The IMF's quarterly economic Outlook, released at the end of September, expected that most Gulf Cooperation Council (GCC) members would achieve moderate growth next year, with the exception of Qatar with its GDP rising from 16.8 per cent this year to a whooping 21.4 per cent next year, thanks to gas exports. However, these optimistic expectations are outdated as the outlook was prepared before the end of September and is based on an average oil price of $107.25 a barrel for 2008 and $100.5 a barrel for 2009. Oil prices are now moving between $55 and $58. The oil revenues of the six Gulf countries -- namely Saudi Arabia, Kuwait, United Arab of Emirates, Qatar and Bahrain -- reached $700 billion in 2007.

A less optimistic report was the GCC Economic and Strategy Report for the fourth quarter of 2008, released by leading Islamic investment bank Gulf Finance House. It reads that together with the declining oil prices, foreign capital outflows reached $7 billion since the beginning of 2008 in the case of Dubai -- and a retreat in the demand on industrial and building materials in the construction industry, the second main driver of the economy after oil, will slow down the growth of GCC members.

Simon Williams, head of research for emerging markets department of HSBC Dubai, seconds the report, predicting that the average growth rate of the countries in question would decline to under five per cent in 2009, from seven to 7.2 per cent through 2008, provided that oil prices stay put around $60 per barrel, otherwise the rate will be much lower.

Adding to the gravity of the situation are the steep declines in all bourses since the beginning of the year on the back of the break- up of the subprime crisis. The total value of shares listed on stock markets in the Gulf region plummeted by $250 billion in October as indices sank by an average of 25 per cent amid the global financial meltdown. A mild upturn at the end of the month did little to counteract the earlier rout and markets in the oil-rich states ended October worth $720 billion, an enormous $400 billion less than at the start of the year.

What will help mitigate the impact of the crisis, according to the report, is if governments of the region continue their robust spending. According to a Reuters dispatch on the infrastructure spending in the region, there are more than $2 trillion worth of expansion projects under construction in the world's biggest oil-exporting region.

All in all analysts see the crisis as a mixed blessing. Top economists participating in a Reuters summit held in the first week of November agreed that global financial turmoil "could weed out property and bourse speculators looking for a quick buck and help curb spiralling inflation." Inflation in the region has hit the double digits and property prices in Dubai were red hot before the crisis, with residential property prices soaring by 42 per cent in the first quarter alone.

With most Gulf states maintaining their currency pegged to the US dollar, Gulf states and private investors with cash positions have realized gains from the greenback's recent jumps against major international currencies. However, this will not last long, according to Williams, who believes that the dollar will be losing ground against most currencies soon.

Rich with cash, Gulf investors find in the meltdown an opportunity to make good bargains. For example, Kuwait's Noor Financial Investment is looking into equity buys in Asia and the Middle East to take advantage of lower assets prices and wants to set up a $1 billion opportunity fund or special situations funds, to invest in stocks whose current market prices no longer represent the real value and long-term potential of the firms.

Author: srazek@ahram.org.eg http://weekly.ahram.org.eg/2008/924/ec3.htm

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Wednesday, November 26, 2008

Sovereign wealth funds switch from Western investments

Sovereign wealth funds in the Gulf are switching their focus away from Western stock markets to shore up ailing economies in the Middle East and protect themselves from losses in the City and on Wall Street.

Investment funds in Kuwait, Qatar, Dubai and Abu Dhabi are understood to be changing their investment strategies after losing billions of dollars buying shares in Western companies. Several Gulf-based banks are being propped up with state investment. Local stock markets have collapsed and some funds are shifting their assets into local shares in an attempt to inject confidence.

The Kuwait Investment Authority (KIA) has shifted $4 billion (£2.6 billion) from Western markets into its own bourse and the Qatar Investment Authority has begun a bailout of local banks. Dubai International Capital (DIC) is concentrating on emerging markets and rumours have spread that the Abu Dhabi Investment Authority, a $700 billion oil fund, is retreating to local markets.

Sovereign wealth funds are among the few sources of liquid capital available worldwide and many companies have sought cash injections from the Middle East. However, investments in banks such as Citigroup and Merrill Lynch have cost the funds dearly and regional bankers are said to feel that they were lured into investing before the full extent of the crisis was known. The KIA, which has assets estimated at $250 billion, said two months ago that it had lost $270 million on a $3 billion investment in Citigroup, which was made at the beginning of this year. Citigroup's share price has fallen by two thirds since that announcement and now the bank is being supported by the US Government.

The ruling families of Qatar and Abu Dhabi agreed last month to inject £6 billion into Barclays, giving the Gulf-based investors a 30 per cent stake. However, this sort of bailout may become more difficult as funds are diverted to the Middle East.

A refocusing by the funds on local and emerging markets is worrying for Western politicians. Gordon Brown visited Saudi Arabia, Qatar and Abu Dhabi this month to encourage sovereign funds to invest in British businesses and also support international institutions such as the International Monetary Fund and World Bank in an attempt to limit the economic downturn.

Sameer al-Ansari, chief executive of DIC, said yesterday that he saw opportunities in Western markets in the next couple of years, but admitted he was unlikely to take any big bets soon.

“Timing is going to be absolutely crucial, but I am still not comfortable with the kind of big bets we have taken traditionally,” he said. “Given the crisis that we are in, the governments in the region have to use their money wisely. That means investing in infrastructure and long-term projects good for the region and also to look outside [the region] to diversify, acquire, to buy strategic assets.”

DIC, which owns the Travelodge chain of hotels, is thought to have suffered a fall in the value of its assets from a peak of $13 billion to between $10 billion and $12 billion.

DIC is the investment business of Dubai Holdings, a government-owned conglomerate that includes property companies, ports, banks and hotels. It has large stakes in Sony, EADS, HSBC and Daimler. The fund is said to have effectively ended private equity investments and has ruled out making another approach for Liverpool Football Club, having lost out to the American investors Tom Hicks and George Gillett last year.

Speaking at the Dubai International Financial Centre conference yesterday, Mr al-Ansari said that falling stock prices in the West could provide some Gulf countries with an opportunity to develop their own economies. Investing in technology and manufacturing companies would allow these states to encourage operations to be moved to the Gulf, which would provide jobs for the region's rapidly growing population. “To become the largest shareholders in the ten largest companies in the world would cost about $50 billion at present and that's actually not a lot of money,” he said. “Imagine the power and influence this region would have if we were the shareholders in the ten, twenty, thirty largest companies in the world.”

Author: http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article5233278.ece

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Monday, November 24, 2008

The Axis of Commerce - $3 to $4 billion worth

The biggest business story in the Middle East has a dark side. Christopher S. Stewart investigates how U.S. companies are using Dubai as an illegal conduit into Iran.

The ship’s captain asks if I’m looking to smuggle something. We’re standing alongside a busy stretch of Port Saeed, on Dubai Creek, which is not actually a creek but a mucky Palmolive-green waterway, trash-strewn and oily, that stretches about eight miles through a thicket of shiny skyscrapers before draining into the Persian Gulf. It’s March, the sun is blasting down; the air is redolent of diesel fuel. The captain’s name is Khaled, and he’s headed to Bandar Abbas, Iran—about 100 miles northeast, nine hours by sea. “We’re leaving in a week,” he says.

The question of smuggling isn’t so far-fetched. It comes up a lot as I walk around and talk to the sailors. There are rumors of captains moving weapons, cigarettes, drugs, even nuclear equipment. Khaled, an Iranian former taxi driver with a mashed nose and tobacco-stained teeth, points at his 60-foot dhow. It’s flat-bottomed and has a swooping bow, a glassed-in wheelhouse, and a bashed-up hull that gives it the appearance of having done battle. Dozens of others are moored four and five feet deep, mostly destined for Iran. The scene is chaotic, with swinging cranes, fast-moving cargo trucks, and hundreds of dockworkers handling mountains of boxes and household appliances.

Khaled moves in close and then makes a confession: “I have many American products on my boat,” he says. Of the dozens of boxes rising above the gunwales, he calculates, about half hold American goods—and all are headed to Iran, despite a firm U.S. trade embargo meant to choke the life out of the so-called rogue state.

Dubai chart

Khaled’s cargo, however, is either unmarked or simply reads u.a.e.  His boss had the American goods repackaged when they arrived at the Dubai shipping terminals Jebel Ali and Port Rashid “to keep things quiet.” Other portside captains are less discreet. I see boxes of Carrier air-conditioning units and cartons of Crest toothpaste, and farther down the row are boxes labeled black & decker and coca-cola, along with stacks of Goodyear tires. I also spy a pallet of new Hewlett-Packard All-in-One printers, probably 200 of them, and another of Xerox copiers. When I ask a different Iranian captain about all these things going to America’s enemy, he responds, “It’s business, but please don’t tell your president.”

Despite sanctions aimed at stemming the sales of U.S. products to Iran, the goods are still getting there. U.S. sanctions were first imposed against Iran in 1979, during the hostage crisis. The current embargo dates back to 1987, though it has since been tightened, and U.N. sanctions have been added. U.S. companies are forbidden to sell goods to Iran or knowingly provide them to a company that will sell them to Iran, with a few exceptions, including medical supplies. The rules are enforced by the U.S. Treasury and Commerce Departments, and violations carry civil as well as criminal penalties. Although American companies aren’t allowed to send goods directly to Iran, the U.A.E. does not impose the same limitations on its local distributors. Over time, that loophole has spawned what many agree is a decidedly murky trade, operating mainly under the public’s radar. The business is estimated to be worth billions of dollars annually, much of which goes directly to the bottom line of American companies. Each year, the U.S. sends more goods to Dubai, and Dubai, in turn, sends more goods to Iran. But the scope of the business isn’t really clear without a trip to Iran.

Three days later, I’m in Tehran. Much of the time, the metropolis is shrouded in a steely haze produced by the horrendous and perpetual traffic jams that snarl the streets. One of my first stops is the Capital Computer Complex, in the affluent northern part of the city. The seven-floor mall is a warren of stores with wall-to-wall electronics, everything up-to-the-minute. Some of the products are from Japanese and Chinese manufacturers, but a lot of them are American: Dell laptops; Apple iPods, MacBooks, and iPhones; H.P. handhelds; Palm Pilots; Kodak cameras; Microsoft software; and Western Digital hard drives.

In other parts of the city are Black & Decker stores with signs in both English and Farsi and shops selling the same H.P. printers I saw in Dubai. There are pharmacies stocked with Head & Shoulders, the newest Gillette Fusion razor, and more flavors of Crest than I have seen in my neighborhood store in New York City.

What I learn in a week in Iran can be summed up in a conversation I have with an older man in a store selling H.P. printers.

“We like America,” the man tells me, “just not American politics.”

“But where does all this American stuff come from?” I ask.

“It comes from Dubai,” he says. “Everything.”

“But how does it get here?”

“Are you C.I.A.?”

Dubai, one of seven emirates, sits in a particularly fractious part of the Middle Eastern sandbox, with Iran, Iraq, and Saudi Arabia nearby. But when you’re in Dubai, it doesn’t feel at all like you’re in one of the world’s most dangerous regions. That’s part of the reason for its success. In a few short decades, the rulers of the sheikdom—the Maktoum family, now led by Sheik Mohammed bin Rashid al-Maktoum, who is both ruler of Dubai and prime minister of the United Arab Emirates—have transformed what was essentially a vast, windswept desert into a major commercial entrepôt and financial hub that the world can’t stop talking about.

The older part of the city, with its narrow streets and sun-beaten buildings, radiates out from the creek. The futuristic, slightly theme-parkish newer section rises from Sheik Zayed Road, a busy 12-lane highway, along which a line of unusually shaped glass skyscrapers, many still under construction, stand like a single row of toothpicks stuck in the sand.

Some of the grander places in Dubai have come to reflect the emirate’s outsize ambitions. The tallest building in the world (158 floors and still counting) is being built next door to the world’s largest mall (1,200 stores), and it has the world’s first self-described seven-star hotel (room rates start at $1,300), the world’s biggest amusement park (twice the size of Disney World), and the world’s largest man-made archipelago.

Dubai is a place of transients, having grown from a mostly indigenous population of about 275,000 in the late ’70s to
1.5 million today; the vast majority of those people are not natives. Many are here for business (there are no income taxes), while others come to see the sparkling city and enjoy the abundant sun. Along the streets are advertisements with slogans like discover life in a whole new light and buy me, change your life forever. These could just as well be the mantras of Dubai.

The emirate is modern, fast-moving, and thoroughly capitalistic, and it operates accordingly. Though its people are predominantly Muslim, Dubai is less interested in propagating radical Islam than in making loads of cash. The U.A.E. is also one of America’s most important allies: Dubai is home to a major U.S. naval port and is a source of regional intelligence. “Dubai is motivated by self-interest and business opportunities,” says David Stockwell, a partner in the law firm Bracewell & Giuliani. “Dubai is prepared to do business with fierce abandon—not weighed down by ideologies or past grievances. It is the best hope of the Arab world, something other than conflict and strife.”

There is, however, a dark side to this desert triumph. Laborers from the developing world, some of whom live 10 to a room in concrete camps, are, for the most part, building the city. Russian and Indian mobsters are said to fly in regularly with bags of cash. And the sex trade—its workers trafficked from places like sub-Saharan Africa, Eastern Europe, and Southeast Asia—is tolerated in high-end hotel bars, even though prostitution is illegal.

But the most astonishing secret, the one that Dubai would most like to keep under wraps, is how the emirate has transformed itself into the chief transit point for American goods entering Iran, allowing some of America’s best-known companies to skirt the U.S. embargo by routing their goods through the emirate’s ports.
Take a look at Dubai’s docks and the shelves in Iran, and it is relatively easy to figure out which American companies are bending the rules, either knowingly or unknowingly.

As far back as 1994, trade officials estimated that more than a quarter of the $1 billion worth of American goods entering Dubai were then shipped to Iran. During the past few years, despite growing tensions in the Middle East, something strange happened: The flow of American contraband on its way to Iran didn’t slow down—it surged.

Last year, the U.S. shipped almost $11.6 billion worth of goods to the U.A.E., the bulk of which went to Dubai. That’s a 230 percent increase over the past five years. Experts estimate that between 30 and 40 percent of those goods—$3 billion to $5 billion worth—are then exported, though there are no official numbers. Iran, meanwhile, has become the U.A.E.’s No. 1 trading partner.

Underlying the entire operation is an informal “Don’t ask, don’t tell” philosophy, focused on maximizing profits no matter what. Thanks to an almost perfect convergence of American and local business interests, this approach has essentially turned the emirate into a global center for sanctions-busting. Some exports are innocuous, like refrigerators and stoves; others, such as high-speed computer chips, military hardware, and nuclear components, are more ominous.

“I have to say the U.A.E.—and Dubai in particular—has become a significant hub that allows U.S. companies to circumvent or mitigate sanctions,” says Victor Comras, a retired U.S. diplomat and consultant on sanctions and terrorism financing.

“It is a huge hole,” says Mary O’Brien, a former special agent for the Commerce Department, who investigated Dubai’s commercial netherworld. She adds, “Some of what is going on is clearly illegal.”

Earlier this year, the Government Accountability Office released “Iran Sanctions: Impact in Furthering U.S. Objectives Is Unclear and Should Be Reviewed,” a report that spotlighted transshipment in the U.A.E. as a “considerable problem.” President Bush later flew to Abu Dhabi and Dubai with a request that the U.A.E. reconsider its business dealings with Iran. While Bush issued a subtle warning, Stuart Levey, the U.S. Treasury undersecretary for terrorism and financial intelligence, was more direct. In Dubai last year, he told a group of bankers and executives, “Those who are tempted to deal with targeted high-risk actors are put on notice.”

But will Dubai actually change? The game is making the sheikdom rich and powerful. “They’re reluctant to go too far, in part out of fear of antagonizing Iran, but mainly because of the bottom line,” says Michael Jacobson, a former Treasury Department official who is now a senior fellow at the Washington Institute’s Stein Program on Counterterrorism and Intelligence. “This is the way they are making their money, and this is how they are putting themselves on the map.”

It is difficult to separate the rise of Dubai from the fall of Iran. In 1980, not long after the emirate began opening its ports, Iran entered a war with Iraq; seven years later, the U.S.—worried about Iran’s burgeoning nuclear program and its soft spot for terrorists—leveled its first trade embargo. Dubai began to blossom. With its secure and open business environment and the U.A.E.’s impressive oil reserves, the emirate attracted tens of thousands of Iranian entrepreneurs. As legitimate trade increased, so did smuggling. Much of the U.S. merchandise that had once gone directly to Iran was suddenly being rerouted through Dubai. Iranian traders bought what they needed in the emirate and then sent it home.

Jebel Ali became the best-known terminal. Its inner basin is about two miles long, with 71 berths for cargo ships and tankers. It was probably Dubai’s first expression of its grand ambitions. After completing the terminal, the sheiks built a free-trade zone around it in the desert and dubbed it the Jebel Ali Free Zone, or Jafza; the zone was unique in the region at the time. Free-trade zones operate under special conditions meant to facilitate trade: Tariffs are waived, taxes are nonexistent, and regulatory oversight is minimal. In other words, it’s a world of exceptions that exists outside of the ordinary stream of commerce.
The arrangement was especially well suited to businesses that wanted minimal bureaucratic hassle, but it was also perfect for the growing number of shifty operators angling to transport such goods as cigarettes, hard drugs, and counterfeit pharmaceuticals without being detected. (The European Commission insists that the U.A.E. is one of the major suppliers of fake drugs being smuggled into E.U. countries.)

By the late ’90s, however, Dubai was thriving, with shipping money being quickly reinvested in building a better trading infrastructure. Jafza expanded from 25 to 35,000 acres, becoming so sprawling that it requires its own map. When I visit one afternoon, I get lost for a half-hour, driving on roads that look identical and anonymous.

The sheiks made shipping an art form: A container could be unloaded and the goods flown out in less than four hours, an incredibly quick turnaround time. Along with tourism, traditional shipping was boosted as part of a plan to move the emirate away from a dependence on oil for its income. International companies, seeing a modern center between East and West, began to arrive, and more free-trade zones were created. Today, 19 are in operation and 10 more are in the works.

It didn’t take long for sanctions-busting to go mainstream. As more Americans moved to Dubai and took advantage of Jebel Ali, their goods followed, and the amount of U.S. cargo being reshipped to Iran expanded. Politically, it was an odd time for this to be happening. When Bill Clinton was in office, the general American attitude toward Iran was softer; the global war on terrorism had not yet begun, and stealth arrangements with our enemies were less of an issue. But all that changed when the twin towers came down and, to a greater degree, after President Bush declared Iran part of the “axis of evil.”

Yet the more severe our approach toward Iran has become, the more we seem to be doing business with the enemy. The first hints of the problem came when the U.S. Commerce Department dispatched O’Brien, an almost 20-year veteran of the agency, to the U.A.E. in December 2002. The world she uncovered was “mind-boggling,” she says. “Everyone knew things were going in and out, but after I’d been there not very long, I realized that the scope of the problem was beyond what we realized was going on. The kinds of things I saw were amazing.”

Although her focus was on items requiring export licenses to leave the U.S.—goods with potential military or high-tech applications—her probes painted a vivid picture of what she described as “embargo-busting.” Her job involved visiting local storefronts, factories, and offices in the free-trade zones and elsewhere around the emirates, asking to see the U.S. cargo that they’d received. She prodded traders, trying to understand the game. Some confessed that merchandise was being shipped to Iran. “This was where it was headed much of the time,” O’Brien says.

It was bewildering, layered work. Sometimes, incoming cargo hardly touched ground before being flown, shipped, or trucked back out. “Swing a dead cat, find a diversion,” O’Brien joked with colleagues.

As the months passed, O’Brien gradually came to see an industry built around embargo-busting, an intricate ecosystem of middlemen who massaged and enhanced the gray market and then profited from it, which in turn helped build Dubai. In addition to commercial goods, some dual-use products that could be used for military purposes were also slipping through the cracks. Many of the traders were Iranian. Occasionally, it was obvious that some worked directly with Americans; in one case, an Iranian business in the free-trade zone was buying medical supplies that didn’t qualify for exemption from the sanctions from a U.S. company a few doors down.

At the center of Iranian business in Dubai was—and is—Nasser Hashem­pour, a solidly built man with stiff black hair, who, in addition to running a trading firm, is deputy president of the Iranian Business Council in Dubai.

I sit down with Hashempour at his office one afternoon. He tells me about the importance of Iran to Dubai. “Iranians have a very big role here, and Dubai knows it.” Iranians have partnerships in about 9,500 businesses in the emirates, according to Hashempour, the bulk of which are involved in exporting. Some are connected to the Iranian government and military. There are 450,000 to 500,000 Iranians living in the U.A.E., with three-quarters of them in Dubai. The number of Iranians in Dubai has almost doubled in the past five years, and they account for about a quarter of the city’s total population. Iranians here also have a lot of money—estimates run as high as $300 billion in assets. Many Iranians would not be in Dubai, Hashempour says, if it weren’t for American policy.
By the time O’Brien made her last trip to Dubai, a two-week special-inspection project in the spring of 2006, imports from the U.S. had increased by billions of dollars, as had the stream of gray-market goods continuing on to Iran. When I tell O’Brien I heard that about 40 percent of U.S. cargo is being there, she says that figure represents “just what we can account for.”

Today, many share O’Brien’s belief that some American companies are intentionally using Dubai as a conduit into Iran. “They would have to be extremely stupid not to know that their products are going to Iran,” says Rochdi Younsi, the Middle Eastern analyst for the Eurasia Group ­in Washington. “They do know.”

“I think a majority of these companies are well plugged-in in Washington,” he continues. “In D.C., they are given mixed signals, but they have more reason to believe that the U.S. is not going to take any action against them. So they go ahead and do it.”

There are dozens of American companies involved in the gray market with Iran. In both Dubai and Iran, I see Apple, Black & Decker, Dell, Hewlett-Packard, Procter & Gamble, and Xerox. With the exception of Apple, all have offices in Dubai’s free-trade zones.

The website of H.P., the U.S. technology brand I find most often in Iran, lists U.A.E. “partners” from whom locals may buy its products. Although Anette Nachbar, an H.P. spokeswoman, says that the company “does not have operations­ in Iran” and complies fully with U.S. export laws, H.P. has partners in Dubai who are eager to do business with Iran.

I call a number of these U.A.E. partners of H.P. and ask if they ship printers to Iran. The first three are ready to make deals. Another company, Jumbo Electronics, says it can offer H.P. laptops and notes that if anything needs to be fixed that falls under warranty, there are many authorized H.P. service providers in Tehran. In Dubai, one distributor on the creek promises that he can get 200 All-in-One printers in two hours and ship them to Iran. “If anyone asks, I’m the end user,” he says, using the language of the U.S. sanctions. When I ask H.P. if the company knows this is going on, Nachbar responds, “We’re just not in a position to disclose more information.”

Dell also indicates that it doesn’t sell to Iran, but like H.P., the computer maker seems to be turning a blind eye when it comes to its distributors. Even though Metra Computers, one of a handful of local distributors listed on Dell’s website, says it can handle bulk orders to Iran, its contracts with distributors ban reselling to Iran. A Metra salesman says that the company can’t ship directly to Iran, but he knows of “many” third parties that “do that consistently.” He adds, “My objective is to make new customers. We are big-time into Dell.”

Black & Decker’s approach is slightly different. I find at least a half-dozen stores in Tehran selling the company’s tools. Some feature big billboards advertising the company as well as its latest drills and handsaws. In addition, Black & Decker’s website actually lists a store in Tehran. When I talk to Roger Young, a company spokesman, he explains that the Tehran store is unrelated to the parent company in the U.S. and that any business between Iran and Dubai, or anywhere else, goes through its “non-U.S. subsidiary”—another loophole in U.S. rules that allows companies to deal with a sanctioned country as long as there is no American oversight. So instead of moving through middlemen, Black & Decker products are sold in Iran through an unaffiliated foreign subsidiary.

When I press Young for more information about Black & Decker’s business in Iran, he says that the Middle East represents less than 2 percent of the company’s business.

Procter & Gamble is another corporation using non-U.S. subsidiaries for dealings with Iran. Rotha Penn, a company spokeswoman, explains, “Were we to stop this legitimate activity, it is likely that inferior, counterfeit products would be sold to consumers instead of the genuine brands.”

Recent U.S. Securities and Exchange Commission filings for both Procter & Gamble and Black & Decker make no reference to Iran.
Meanwhile, in a footnote to its most recent annual report, Xerox states that it terminated business ties with Iran in 2006 but still maintains local “legacy obligations.” The profits from the business, while declining, are robust—$7.7 million in 2007, down from $9.6 million the year before.

American firms, even those using proxies, don’t want to talk or even speculate about how their products traveled from Dubai to Iran, but the merchants I meet in Tehran are more open. At the Capital Computer Complex, a man who sells only Dell laptops and whose store has Dell boxes piled on the floor and stuffed onto shelves, admits that he ordered everything from Dell’s distributor in Dubai. Another man selling almost exclusively H.P. products tells me he did business through an office in Jebel Ali, while a man selling Apple iPhones, MacBooks, and iPods will say only that he has “relationships” in Dubai. (An Apple spokesperson says the company obeys U.S. laws.)

For the most part, American goods in Tehran are 20 to 40 percent more expensive than they are in America. An 8-gigabyte first-generation iPhone, for example, cost $400 in New York; at the Capital Computer Complex, after some haggling, it can be had for $700. A new Dell XPS 1M330 sells for $1,800, about $300 more than in the U.S.

The Iranian merchants say that most U.S. products land in Iran either at Tehran’s Imam Khomeini International Airport or at Bandar Abbas, the biggest port city in southern Iran and the destination of many of the creek dhows. Bandar Abbas is a hot, flat, salty place that wouldn’t be much if it weren’t for the port and the Iranian naval base. From a boat in the Strait of Hormuz, I watch the dhows and tankers streaming in and out. At one point, I meet a captain whose ship, just in from Dubai, carries a half-dozen new American vehicles, including two Chevy Blazers.

It isn’t the volume of boats or the number of boxes piled on their decks that surprises me. It is the visible Iranian military presence. The port, tucked away in an inlet, is fortresslike, bristling with defenses. Double-engine speedboats buzz back and forth constantly, and armed men patrol the port entrance. We stare at the port for only a couple of minutes before our captain tells us we are being watched. “It’s time to go,” he says. “We are much too close.”

Although a shared culture and history connect the U.A.E. to Iran, the two countries are not natural partners. While Iran is Persian and its religion is primarily Shia Islam, the U.A.E. is predominantly Arab and Sunni and is closer in outlook to Saudi Arabia. In addition, Iran has a long-running dispute with the U.A.E. over three islands that Iran occupies.

The ruling sheiks of the U.A.E. are allies of both Iran and the U.S. They have said publicly that they support peace in the Middle East, but not everyone I speak to in Iran really believes that the sheiks want to end the contretemps, let alone seriously lobby the White House for U.S.-Iran rapprochement. The strife has been bad for Iran but very good for the emirates.

Yet as O’Brien notes, “The U.A.E. walks a fine line.” For years, it hadn’t had to make much of a political commitment to either country, priding itself on being politically agnostic and strictly focused on business. In the spring of 2006, however, its comfortable middle ground began to be threatened. Discussions between the U.A.E. and U.S. about the emirates’ trade with Iran led to heated public statements and threats of intervention from Washington. As tension between Iran and the U.S. flared in the spring of 2007, the U.A.E. promised to impose its own version of export controls, focused mainly on intercepting sensitive materials. The sheiks instituted the new law in August and, as if to demonstrate its commitment, 40 local companies said to be involved in illegal exports were shuttered and an Iran-bound freighter carrying “hazardous chemicals” was impounded.

It’s uncertain how much has actually changed. The Commerce Department notes that it is optimistic about the new controls, though it wouldn’t comment about its most recent inspections. Hashem­pour, however, says trading continues as usual. “If people want it, the goods will go to Iran.”
Even if Dubai does focus on sensitive goods, the broader issue remains unresolved. The sheikdom appears to avoid the conversation, and dealing with the question in the future may prove complicated. Some blame the U.S. for not taking a more punitive stance toward its own companies. The Treasury and Commerce Departments have each sent only one inspector to the U.A.E. And while penalties have increased for businesses discovered to be dealing directly or indirectly with Iran—with fines of up to $1 million for companies and potential prison time for individuals—proving guilt is particularly difficult. Which companies have shipped products knowing that they would end up in Iran, and which really have no idea?

It is an especially tough question to answer, with so many levels of middlemen and more than 700 American companies now operating in the emirates.

Between the two agencies, about two dozen cases were successfully prosecuted in the U.S. in 2007, but these certainly don’t appear to have offered a compelling reason for other companies to pull back.

This is Dubai’s conundrum. “If the U.S. is serious about shutting this business down and making sanctions effective,” the Eurasia Group’s Younsi says, it is “going to have to devote a lot more resources to this—not just enforcement and staff—but more diplomatic leverage on the U.A.E., pushing hard to get them to do this.”

Which raises a larger question: Does the U.S. really care about goods going to Iran? Is overlooking this trade a way of repaying Dubai for its friendship?

In February, Sheik Mohammed climbed into his private jet and headed to Iran. After meeting with the emir, Iranian President Mahmoud Ahmadinejad declared that “the U.A.E. prime minister’s visit is proof that U.S. policies will not have any impact in the region,” according to the Asia Times. It was as though the sheik had not yet decided exactly how far the U.A.E. would take its promised reforms when it comes to trade with Iran.

In one of my last days in Dubai, I walk along the creek looking for anything suggesting that life in Dubai has altered, that the middlemen have been scared off, that U.S. companies have slowed shipments, or that anything has curtailed the trade.

I wander around in the sun for a while, hunting for a customs office, trying not to get taken out by trucks and men running around with boxes, some with American brand names and logos on their sides. Boxes are all over the place, mountains of them, and the dhows brim with sailors and workers. The first customs booth is locked and abandoned, but the second has some activity. Two men are washing two white S.U.V.’s, while two other men in immaculate white robes look on. One of the S.U.V.’s has a sticker reading v.i.p. on its rear window.

“It’s a beautiful day,” Ibrahim al-Rubati, the head of the station, observes as the port buzzes behind him. I say that they look busy, and he laughs. We talk about the hundreds of ships that come and go, to Somalia and to Iran. I mention all of the U.S. products flowing northeasterly. He nods, and his associate alerts the car washer to a smudge on a window.

“We make everything easy here,” Rubati says finally. “Things come and go fast.”

I ask if anything has changed as far as policy at the creek in the past year or so. He shakes his head. “Not here.”

It looks chaotic, I say. He nods again. “I don’t understand the political situation with U.S. and Iran. It is a sad time,” he says. “But we just make things easy, and the money comes from that. Whatever is happening outside of this country does not matter to us. This is Dubai.”
http://www.portfolio.com/news-markets/international-news/portfolio/2008/08/13/US-Trades-With-Iran-Via-Dubai

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Sunday, November 23, 2008

Projects worth $800bn under way in the UAE

Despite caution over future projects, $800 billion (Dh2.9 trillion) of projects are currently under construction in the UAE, according to a survey by Proleads, the research partner of The Big 5.

Though the analysis covers all industries, civil construction developments continue to dominate projects under way topped by Jumeirah Gardens, Dubailand, Palm Deira, Yas Island, and White Bay Umm Al Quwain.

Proleads is currently tracking in excess of 5,200 individual projects worth in excess of $4trn across the Middle East.

Its database lists more than 980 projects under some level of construction across all industries in the UAE.

"It is important to say that the $800bn of projects in this survey are all under construction," said Bernard Walsh, Managing Director of The Big 5 organizers dmg world media Dubai. "Despite caution over future projects, it emphasizes yet again that the huge projects under way in the UAE are increasingly at levels unmatched in other parts of the world as the economic slowdown affects markets worldwide."

The survey also ranked the top five owners, contractors, managers, financiers and architects involved in projects in the UAE.

It includes companies from the UAE, Belgium, the Netherlands, the United States, the United Kingdom, India and Australia among the top ranked in terms of the value of projects with which they are associated.

The tables are based on analysis of the active construction projects currently under way in the UAE across the oil and gas, petrochemical, civil construction and, power, water and industrial sectors and contained within the database of Proleads.

"As the region's biggest event for the building and construction industry we are delighted to unveil the biggest companies across the most crucial areas of project development," said Walsh.

In the tables, Dubai's Nakheel tops the big Project owners list; Jan de Nul, a Belgian dredging company is the number one contractor; US companies led by Hill International dominate project managers list; Abu Dhabi Commercial Bank is the leader in terms of project financiers; and Crema Bahramis Giordano, an Australian firm tops project architects with a development in the tiny emirate of Umm Al Quwain.

Meanwhile, local companies have affirmed their commitment to the event to address their niche markets or capture new business.

Anchor Allied's said its participation at the annual trade show comes at a time when the company is looking to expand its market presence and consolidate its leadership position in the region.

Anchor Allied is a subsidiary of M'Sharie and one of the largest manufacturer of adhesive tapes and specialty adhesives in the Middle East.

"Having set itself a revenue target of Dh 250 million within the next three years, Anchor Allied has been looking to strengthen its operations and increase its regional footprint," said Hussain Nalwala, Executive Director of Anchor Allied.

"Ensuring a strong presence at The Big 5 Show will enable us to explore new investment opportunities and pursue strategic alliances. Through our participation at the show, we are primarily seeking to increase awareness in the local and export markets as well as among the contracting community about the technical superiority and usable strengths of our products."

Again, to capitalise on the rising demand for steel structures, Emirates Building Systems (EBS), a subsidiary of Dubai Investments Industries and a regional leading company in the construction of high-rise steel buildings, announced yesterday that it will showcase its services and a wide array of products including hot rolled steel structures for multi-storied buildings and high-rise towers at the event.

Fouad Arwadi, General Manager Sales of Emirates Building Systems, said: "We expect our participation at this year's show to be particularly successful, as the exhibition comes at a time when demand for steel structures is on the rise across the region as a result of a shift in favor of steel structural frames amongst the real estate community. We look forward to establishing new relationships and reinforcing our market presence by capitalising on the opportunities offered by The Big 5 show."

In order to cater to the increased demand for steel structures in the Gulf region, EBS had recently completed the expansion of its factory in the UAE to take the company's annual production capacity to over 75,000 metric tonnes. EBS has also set up additional fabrication facilities in the GCC and the Subcontinent.

DuPont also confirmed that it will showcase innovative products at the event.

"These advanced concepts and materials are of particular interest to Middle East and Gulf where construction and real estate development continue to progress and evolve at a rapid and highly-competitive pace," said Andrew Holdsworth, Director Middle East.

"These materials extend the superior benefits that open new opportunities for architects and designers, and a refreshing experience for consumers in the Middle East and Gulf," said Tony Azzam, Business Manager, Building Innovations and Construction Industry Leader for Turkey, Middle East, Africa and Pakistan.

"The Middle East and Gulf market is gearing up to meet the residential, health, educational and recreational needs of its rapidly growing population. We are currently working on multiple innovative projects to enable customers reach new heights in architecture and construction of homes, healthcare, skyscrapers, airports, industrial buildings and offices."

Meanwhile Mammut Building Systems FZC (MBS), one of the region's largest manufacturers of pre-engineered steel buildings (PEBs), has announced that it will showcase part of a new range of products at exhibition. MBS is a subsidiary of Emaar Industries and Investments (EII).

"This is a perfect opportunity for MBS to demonstrate our product range to the many visitors that will come to The Big 5. We have grown rapidly since our inception in 1997 and the services and products we offer have differentiated us from the competition," said Bob Webster, Managing Director at MBS.

The company will introduce a new long span purlin G-2 (second generation). Unlike conventional purlins that have a maximum span of about eight metres, the new G-2 purlin can extend up to 12 metres or more.

It will also showcase a number of new products as well as some of its existing services.

The Big 5 show, the biggest fair for the construction industry and associated suppliers in the Gulf, opens today and will run until Friday.

Exhibition space has been completely sold out with the event taking up the entire space of the Dubai International Exhibition and Convention Centre.

By
Sona Nambiar Emirates Business 24/7

US EXPORT COUNCIL PROVIDES ASSISTANCE TO US COMPANIES SEEKING ACCESS TO HIGH GROWTH MARKETS OVERSEAS. http://usexportcouncil.com/