Wednesday, December 22, 2010

From BRIC to BIC? Is Russia worth the emerging market status?

It took me a while to get back behind my desk and write for this blog. Too many projects have diverted some of my attention elsewhere although the topics over which to share my humble views are a lot.

Numerous times over the past few weeks I had the opportunity to share with clients, investors and friends alike my negative opinion about Russia's future economic outlook.
I went back to substantiate some of my qualitative comments with data gathered from the recent World Economic Forum report.
The data from the report is not encouraging, following is a summary that I have provided in an earlier post:

Russia: 63th position, same as last year. After the significant slide of the previous year, Russia maintains its position. While infrastructure, health, education and technology improves significantly other components of the index suffer. The major area of concern highlighted in the report are market competitiveness and efficiency of the goods markets. Competition is hindered by inefficient anti monopoly laws and restrictions on trade and foreign ownership. One of the main issue highlighted further in the report remains the weak institutions that translate in weak property rights (126th rank) and weak corporate governance standards (119th rank).

In spite of the large amount of natural resources available for development the country doesn't seem to be able to attract large amount of foreign capital due to poor market efficiency and regulatory frameworks able to give proper guarantees to foreign investors. 

Further to the contingent stagnant situation I believe there are some more fundamental weaknesses of the system that is worth outlining:
  • very negative demographic trends;
  • limited communication skills in the international arena as most of the business people tend not to be able to speak basic English.
  • weak and non competitive SME sector
The first is the most worrisome of the trends. It has been recognized by the local government as a serious problem and some measures have been taken to stimulate the natality rate.
Low birth rates and abnormally high death rates caused Russia's population to decline at a 0.5% annual rate, or about 750,000 to 800,000 people per year from the mid 90s to the mid 00s.
The population peaked in 1991 with 148,689,000 and it is now at 141,927,000 as of January 1, 2010.

The language aspect is more difficult to quantify in its impact but in my opinion remains an important one. While the Indian subcontinent for example presents clear difficulties in regulatory frameworks and infrastructure among others remains a lot more dynamic and integrated with the global economy due to the pervasive use of the English language among the average business person.
On the other hand Russia remains insulated as most of the business people, even of young age, are barely able to speak basic business English.
Russians have developed their own set of social network website separate from the rest of the world: Vkontakte ( and they are trying to develop their own set of domain names in cyrillic: Russian domain names
In a world where being connected and communication is the underlying basis for all business it is hard to imagine how big is the cost of this type of "isolation".

The SME sector is undersized for this nation as the entrepreneurial class has only a very brief history. During the entire Soviet Union time there was a systematic dismantling of the entrepreneurial spirit and only after the break up and the savage deregulation following SMEs have found a reason to exist. 
In both emerging markets and developed countries SMEs often tend to be the most resilient during an economic downturn as well as a consistent source of innovation. Without such developed strata of companies combined with some of the difficulties outlined above the Russia economy appears lacking a necessary component to long term prosperity. Please note that to support the claim above according to the latest World Bank's survey (Doing Business, 2009) Russia ranks 120 out of 181 economies in 'ease of doing business'.

Overall, my position remains that given the existing economic issues and moreover due to the long term demographic trends currently in place Russia no longer belongs to the emerging market economies in spite of the large natural resources available on the territory.

Too many changes are to be applied at the same time to reverse the situation. It would be at least necessary to create a more favorable set of predictable rules to favor and regulate foreign investment in the country such to develop and modernize further the natural resources industries.
Swift and deep additional efforts are to be made to integrate additional foreign workers in the country to be able to reverse some of the underlying demographic trends and more importantly collect the related taxes.

As many friends and clients come from this beautiful country I hope to assist to a swift reversal of such trends.

Wednesday, September 29, 2010

World Economic Forum, competitiveness report. A BRIC and GCC perspective.

This year report has confirmed global trends that we clearly discussed in this blog a few times before.
While this report doesn't provide enough predictive detail for the long period provides an interesting historical insight for the progress made by countries in relationship to 12 variables selected to identify "competitiveness". 

The Gulf Countries make interesting progress in the rankings and offer interesting opportunities for investors that are looking to establish a presence in the emerging markets.
The data further substantiate one fact that I tend to emphasize consistently: the progress of the Gulf countries with regards to infrastructure, goods market and financial markets efficiency tend to further strengthen their position as effective gateways INTO emerging markets economies like African and Indo-China. In fact it is more and more common that companies set up their headquarters in the GCC to then reach out to Indo-China taking advantage of favorable tax laws as well as infrastructure.

In more details some of the highlights of the report for what it concerns emerging markets.
Please note that the rankings are based upon 12 competitive pillars and weighted against 3 different phases of development.
Briefly below about the 3 different development phases and further at the end of the posting the list of all 12 development pillars.

Phase 1: the economy is "factor driven" and countries compete mainly on on their factor endowments: unskilled labor and natural resource.

Phase 2: the economy is moving towards an "efficiency-driven" stage of development whereby production processes are improved. As a country improves and becomes more competitive productivity will increase and wages will rise. At this point,competitiveness is increasingly driven by higher education and training (pillar 5), efficient goods markets (pillar 6), well-functioning labor markets (pillar 7), developed financial markets (pillar 8), the ability to harness the benefits of existing technologies (pillar 9), and a large domestic or foreign market (pillar 10)

Phase 3: Finally, as countries move into the innovation-driven stage, wages will have risen by so much that they are able to sustain those higher wages and the associated standard of living only if their businesses are able to compete with new and unique products. At this stage, companies must compete by producing new and differ- ent goods using the most sophisticated production processes (pillar 11) and through innovation (pillar 12).

List of countries/economies at each stage of development:

One final note before continuing with our analysis: the future development of a country cannot be predicted using this report. This is more of a comprehensive ranking of how well countries have done in the past. We remain convinced that countries in the emerging markets will in the long run consistently outperform the growth of the G7++ group due to the underlying demographic trends, although it will take decades to see some of these countries at the top of this report.
Out of the traditional BRIC lot Russia is the only country out of the emerging economies that we believe will NOT keep up with the long term economic development due to its very unfavorable demographic. 
Further, high competition doesn't equal great opportunities: depending on the business nature, the most business opportunities often remain in areas that developing fast but are not completely regulated. 

So how do the traditional emerging markets fair this year?
Let's take a look at the typical BRIC (Brazil, Russia, India & China) group before going any further.

Brazil: 58th position, down 2 positions from previous survey. The position remains fairly stable with a slight improvement from the previous year. The progress that was made over the last decade has definitely contributed to the country's ability to rebound from the crisis in a sound manner: while the country's GDP slightly contracted in 2009, in 2010 the GDP is expected to grow at an annual healthy rate of 5.5%. In spite of the positives the outlooked remains partially mixed. The pros of: market size, well developed financial market and relatively well functioning higher education are matched by a weak saving rate, high interest rate and a high rate of public sector indebtedness. Goods and labor markets reveal some important rigidity and the quality of institutions remains poor with limited trust into politicians and the rule of law.

Russia: 63th position, same as last year. After the significant slide of the previous year, Russia maintains its position. While infrastructure, health, education and technology improves significantly other components of the index suffer. The major area of concern highlighted in the report are market competitiveness and efficiency of the goods markets. Competition is hindered by inefficient anti monopoly laws and restrictions on trade and foreign ownership. One of the main issue highlighted further in the report remains the weak institutions that translate in weak property rights (126th rank) and weak corporate governance standards (119th rank).

India: 51st position, fell two positions from last year. India's competitive advantage often remains its large market side as well as good development in the financial markets sector (17th rank) and business sophistication (44th rank) and innovation (39th). Unfortunately the country missed the development mark on few of the basic competitiveness drivers: health & primary education (104th rank). Life expectancy remains 10 years less than in China and Brazil. Another significant issue is also its infrastructure that is in need of an upgrade (86th rank), especially with respect to quality of roads, ports, and electricity supply. 

China: 27th place, up two positions from previous year. As you can see from the previous analysis this is the only BRIC country that improves this position this year.
While most of the pillars have remained stable from last year the two point climb in the ranking is almost all due to its better assessment of its financial markets (up 24 places to 57th tank). This is the result of easier access to credit and financing via equity markets, banks and venture capital. ICT is another traditional area of development for China, although the country has moved major steps forward the overall ICT penetration remains underperforming as compared to other economies (78th rank).

Let's now take a look at the Gulf Countries. All countries moved up in the ranking with the exception of the UAE that lost a couple of places due to the crisis that has engulfed mostly its real estate industry and forced the Dubai World conglomerate to restructure its debt.

Qatar: 17th place, moved five place up from last year. This country stays at the top among all GCC countries reaffirming its leadership in the region as the fastest developing country in the world. Its competitiveness rests on a strong combination of factors among which: low corruption, stable macroeconomic environment, high-quality institutional framework and efficient goods markets. It obviously helps that the country sits on the largest liquified gas reserves that have fueled much of the development effectively leaving the country completely untouched by the global economic crises.

United Arab Emirates: 25th rank, looses two places from last year. This is the only economy in the region that looses positions from the previous year given the negative impact of the economic crises over the Dubai emirate especially. The country remains a leader for its infrastructure (3rd rank overall), the high penetration of new technologies (14th rank) and the highly efficient goods markets (6th rank). The issue have appeared in the stability of the private institutions such as Dubai World that have raised the issue of the long term development sustainability of the country.

Bahrain: 37th rank, one place up from last year. The position remains stable and further outlines the country ability to provide a stable microeconomic performance (10th rank) and an excellent goods market efficiency (9th rank). Particularly good is also the ranking with regards to the financial market development (20th rank), although the country is obviously penalized by its market size (98th rank) and its ability to innovate (59th).

Saudi Arabia: 21st rank, seven places up from last year. The country has been consistently climbing the ladder over the past few years. In particular: the changes to the institutional framework and a stronger corporate governance have favorably impacted its position. Further, the government has enacted a massive stimulus package focused on improving the infrastructure on the country. While the stimulus package has deteriorated the macroeconomic stability of the country moving into a 'deficit' position the infrastructure project are going to benefit it for long time to come.
In spite of the long list of positives the country still faces significant challenges in critical areas such as health and education where it doesn't meet the standards of other countries at the similar level.

Oman: 34th rank, up 7 places from previous year. The country has made great progress with regards to its institutions (16th rank), overall macroeconomic environment (3rd rank) and goods market efficiency (25th rank). It completely lags, as compared to some of countries in similar overall ranking, for health and primary education (99th rank), higher education and training (63rd rank) and technological readiness (59th rank). The country is also further penalized by its market size only 73rd in the overall rankings. 

About the methodology and the 12 pillars.
From the report (page 17 of 515):
Since 2005, the World Economic Forum has based its competitiveness analysis on the Global Competitiveness Index (GCI), a highly comprehensive index for measuring national competitiveness, which captures the micro- economic and macroeconomic foundations of national competitiveness.2
We define competitiveness as the set of institutions, policies, and factors that determine the level of productivity of a country. The level of productivity, in turn, sets the sus- tainable level of prosperity that can be earned by an economy. In other words, more competitive economies tend to be able to produce higher levels of income for their citizens.The productivity level also determines the rates of return obtained by investments (physical, human, and technological) in an economy. Because the rates of return are the fundamental drivers of the growth rates of the economy, a more competitive econ- omy is one that is likely to grow faster in the medium to long run.
The concept of competitiveness thus involves static and dynamic components: although the productivity of a country clearly determines its ability to sustain a high level of income, it is also one of the central determinants of the returns to investment, which is one of the key factors explaining an economy’s growth potential.

12 pillars of competitiveness:

1. Institutions
2. Infrastructure
3. Macro economic environment
4. Health & primary education
5. Higher education and training
6. Goods market efficiency
7. Labor market efficiency
8. Financial market development
9. Technological readiness
10. Market size
11. Innovation

To download the original World Economic Forum report please follow this link: 

Friday, July 23, 2010

Emerging Markets: the privileged relation between China & Sri Lanka

The 30 years old conflict between the government of Sri Lanka and the LTTE (Liberation Tigers of Tamil Eelam, often simply called Tamil Tigers) ended on May 2009.

Since then the country has been often in the Western newspapers due to the investigations of the alleged abuses committed during the last months of the war.
The investigations over alleged war crimes and the tones of Western diplomats during the last phase of the war have strained the relations with Western countries.
Please refer to this article from the BBC to witness the status of the relationships between the Sri Lankan government during the last phase of the war in 2009 (BBC:

As the West stepped up the amount of conditions for aid, and limited any military support, China stepped in filling the void with a much lower profile set of demands for the Sri Lankan government. With fresh support from the East the Sri Lankan government was able to hold firmer in front of the Western demands.

As a country Sri Lanka holds a strategic geographical position and it is a country that is host of good natural resources waiting for strong partners to be developed, now that the north is under direct control of the government this entire area of the country is in desperate need for basic infrastructure: roads, power plants, railways, etc.

Further, the Indian Ocean is not the largest ocean on this planet but is, by far, the busiest. Countries around the Indian Ocean produce 40% of the world's oil. Seventy percent of the world's oil shipments and 50% the world's container cargo go across this Ocean. One hundred years ago, the US Admiral Alfred Maher rightly said, 'Whoever controls the Indian Ocean, dominates Asia'

The Times said: "Sri Lanka signed a classified $37.6 million deal to buy Chinese ammunition and ordnance for its army and navy ... China gave Sri Lanka — apparently free of charge — six F7 jet fighters last year, according to the Stockholm International Peace Research Institute, after a daring raid by the Tigers' air wing destroyed ten military aircraft in 2007."

It isn't hard to see China's motivation. The Times said: "China is building a $1 billion port that it plans to use as a refueling and docking station for its navy, as it patrols the Indian Ocean and protects China's supplies of Saudi oil.
The Chinese say that Hambantota is a purely commercial venture, but many US and Indian military planners regard it as part of a “string of pearls” strategy under which China is also building or upgrading ports at Gwadar in Pakistan, Chittagong in Bangladesh and Sittwe in Burma.

The strategy was outlined in a paper by Lieutenant-Colonel Christopher J. Pehrson, of the Pentagon’s Air Staff, in 2006, and again in a report by the US Joint Forces Command in November. “For China, Hambantota is a commercial venture, but it’s also an asset for future use in a very strategic location,” Major-General (Retd) Dipankar Banerjee of the Institute of Peace and Conflict Studies in Delhi said.
"Ever since Sri Lanka agreed to the plan, in March 2007, China has given it all the aid, arms and diplomatic support it needs to defeat the Tigers, without worrying about the West."

As the influence of China grows in Asia, its sphere of influence, it is likely going to be harder for Western companies to secure government related projects and tenders unless there is a major realignment of interests in the region. It is clear that India has a much larger role to play to balance the power equation.

Supporting materials:

Thursday, July 15, 2010

Iran sanctions - update, unilateral sanctions from the USA

The Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (“CISADA”).
Cisada is amending the Iran Sactions Act ("ISA") to create additional activities that could subject non-US firms to sanctions.

The additional activities that are now subject to sanctions include those that support the production of refined petroleum products and the one that involve the importation of refined petroleum product into Iran.
Further, in line with the most recent UN sanctions, the new law targets all financial institutions that support Iran's development of its nuclear program and the activities of the Revolutionary Guard Corps.

The implication of this legislation can be far reaching as it now involves the operations of non-US subsidiaries or affiliates  and non US business partners. 

The new amendments targeted investments of US $1M or more or an aggregate market value of US $5M or more in a 12-month period. Prior of this latest amendment the targeted investment were US $20M or more.

Specifically, the Amendments sanction the sale, lease or provision to Iran of:

"goods, services, technology, information, or support that could directly and significantly facilitate the maintenance or expansion of Iran's domestic production of refined petroleum products, including any direct and significant assistance with respect to the construction, modernization, or repair of petroleum refineries"; and

refined petroleum products or "goods, services, technology, information, or support that could directly and significantly contribute to the enhancement of Iran's ability to import refined petroleum products," including activities such as underwriting, insuring, reinsuring, financing, brokering, or providing ships or shipping services.

According to the "ISA" investigations into this matter are initiated by the President upon receipt of credible information.
If the President determines that sanctions must be enacted according to the previous "ISA" directive the President had to impose 2 out of 6 sanctions:
  • Denial of Export-Import Bank loans, credits or guarantees; 
  • Denial of licenses to export military or militarily useful technology;
  • Prohibition on U.S. financial institutions making loans or providing credit of more than US$10 million in any twelve-month period (with minor exceptions);
  • Prohibition on obtaining U.S. Government procurement contracts;
  • Restrictions on imports into the United States; and
  • If the violator is a financial institution, prohibition on being designated as a primary dealer in U.S. Government debit and/or prohibition on acting as an agent for U.S. Government funds.
With the new Amendments the ISA now requires the President to apply 3 out of the 9 sanctions available. 3 additional sanctions have been added and would prohibit:
  • Foreign exchange transactions in the United States; 
  • Transfer of credits or payments by financial institutions in the United States; and 
  • Dealings in property in the United States.
The Amendments also expand the definition of "person" and "petroleum resources":

The definition of "person" now includes: financial institutions, insurers, underwriters, guarantors, and other business organizations. 
The definition of "Petroleum resources" is now defined to include "petroleum, refined petroleum products, oil or liquefied natural gas, natural gas resources, oil or liquefied natural gas tankers, and products used to construct or maintain pipelines used to transport oil or liquefied natural gas."


The Amendments take effect immediately. The Amendments provide a one-year grace period for the launching of investigations of persons engaging in activities related to the production or importation of refined petroleum products, however. Such persons are subject to investigation only for sanctionable activities that commence on the one-year anniversary date of the Amendment's enactment, or thereafter.

Monday, June 28, 2010

Tariff increase by EU for petrochemicals good from UAE, Pakistan & Iran

As reported by "The National" the EU bloc has applied significant tariffs on to petrochemicals product of UAE, Pakistani and Iranian origin.

The duties imposed are for four to six months and may be extended to five years. They are as high as €142.97 (Dh640.89) a tonne.

Petrochemical subsidies have been a central sticking point in negotiations over a free trade agreement between the EU and GCC. European policymakers argue petrochemical companies in the GCC have an unfair advantage over EU producers because of the lower price of oil, which is the result of government subsidies. They claim this helps to make GCC goods artificially competitive against EU products.

These protectionists moves are just an effect of the worsening economic situation in Europe and doesn't spell good news for some of the manufacturing companies that rely on European demand and will force the latter to find new ways to increase their competitiveness, or perhaps cry for additional oil subsidies.

Full article on The National here.

Friday, June 25, 2010

Iran sanctions - a perspective

Over the past few weeks I have started to become more and more familiar with a topic that has started to receive quite a lot of attention recently: the Iranian sanctions.

Living in the United Arab Emirates makes this topic a hot one. The UAE is in fact a key trade partner of Iran and the relationship between the two countries go well beyond trading since much of the local population in the country is of Persian descent. It makes matter politically more complicated since the two countries are great trading partners but they share a territorial dispute over a group of island located in the Gulf. Now even the way the Gulf is called is cause of controversy since one side calls it the Arabian Gulf and the other call it the Persian Gulf.

I will not pass a judgement on the value of the sanctions per se but I would rather focus my attention on the practical matter behind them.
I have had several conversations with business men in the west that I am afraid have develop knowledge about the sanctions from the media (CNN, Sky News, BBC, etc) and that is cause of concern as sometimes the necessity to create bold news goes beyond its substance.

I recommend all the people interested to download and read the latest sanctions (June 9, 2010 - Resolution 1929) at the following link:

Contrary to what many people think: the sanctions don't preclude commerce of trade with Iran. They regulate trade of specific items listed in the various UN resolutions started with the one of 2006.
My statement doesn't want to minimize the importance and implications of the sanctions but rather put them under the right perspectives.

Other countries or other specific supernational bodies establish unilateral sanctions beyond the one passed by the UN resolutions: specifically, the United States, United Kingdom and the European Union. 
These set of regulations tend to establish more restrictive guidelines than the one established by the UN.
Companies take it upon themselves to develop the range of their action in line with the sanctions. 
It goes without saying that certain companies or financial institutions have taken it upon themselves to go beyond the sanctions and stopped providing services to Iranian companies and/or Iranian nationals.

More specifically with regards to the existing UN sanctions:
  • The Resolution expands existing sanctions on Iran by:
  • identifying additional persons (individuals and entities) subject to an asset freeze; 
  • identifying additional persons subject to a travel ban; 
  • banning the provision of financial services (including insurance and reinsurance) to Iran in certain cases;
  • banning the sale or transfer of specified equipment and related services and technical data; 
  • calling for inspections of cargo to and from Iran where there is a reason to believe the cargo contains prohibited material; 
  • banning bunkering services to vessels owned by or contracted to, Iranian persons, where the vessels are transporting prohibited cargo; and 
  • prohibiting Iran from acquiring any commercial interest in uranium “mining, production or use of nuclear materials” and specified technology.
To monitor UN members’ compliance with this Resolution, the Security Council has also established a panel of up to eight experts. The panel will collect and review reports, due by August 8, from members detailing how they have implemented their obligations under UNSCR 1929.
Meanwhile, the European Union is considering further tightening sanctions against Iran, and the U.S. Congress continues to negotiate with the Obama administration about the scope of additional sanctions against third- country companies in the Iran Sanctions, Accountability and Divestment bill, currently in a House-Senate conference committee.

Asset Freeze
UNSCR 1929 calls on States to freeze the funds, financial assets and economic resources of:
  • Persons designated in Annex I (see below) to the Resolution because of their involvement in Iran’s nuclear or ballistic missile activities;
  • The Islamic Revolutionary Guard Corps; 
  • Persons acting for, or at the direction of, persons identified in Annex I (see below) to the Resolution or the Islamic Revolutionary Guard Corps; 
  • Any persons the Council identifies as having assisted designated persons in evading or violating Resolutions 1737 (2006), 1747 (2007), 1803 (2008) or 1929 (2010); and First East Export Bank, P.L.C., (designated a subsidiary of Bank Mellat) Irano Hind Shipping Company, IRISL Benelux NV and South Shipping Line Iran (SSL) (designated subsidiaries of IRISL).

Travel Ban
UNSCR 1929 also imposes a travel ban on persons identified in Annexes I and II (see below) of the Resolution and in Resolutions 1737 (2006), 1747 (2007) and 1803 (2008), given concern over participation by these persons in Iran’s nuclear or ballistic missile programs.

Financial Services Ban
UNSCR 1929 restricts Iran’s use of the international financial system to fund proliferation and nuclear activities. Specifically, it calls upon States to:
  • Prevent the provision of financial services (including insurance or re-insurance) or the transfer to, through, or from their territory, or to or by their nationals or entities organized under their laws (including branches abroad) of any financial or other assets or resources, including by freezing any financial or other assets or resources in their territories or that come within their territories;
  • Prohibit Iranian banks from establishing new joint ventures, taking an ownership interest in or establishing or maintaining correspondent relationships with banks in their jurisdiction; and
  • Prohibit financial institutions within their territories from opening representative offices or subsidiaries or banking accounts in Iran.
  • All these prohibitions, however, are conditioned upon reasonable grounds for believing that the targeted activity could contribute to Iran’s proliferation-sensitive nuclear activities.

Export ban: equipment and related services and technical data

As an expansion of the export ban established in Resolution 1737 (2006) (which called on States to prevent the supply, sale or transfer to Iran of goods and technology that would contribute to enrichment-related, reprocessing or heavy water-related activities and the development of nuclear weapon delivery systems) the new Resolution calls on Member States to prevent:
  • The sale or transfer to Iran of battle tanks, armored combat vehicles, large caliber artillery systems, combat aircraft, attack helicopters, warships, missiles or missile systems;
  • The sale or transfer to Iran of material related to the above, including spare parts; 
  • The transfer to Iran of technical training, financial resources or services, advice, other services or assistance related to the supply, sale, transfer, provision, manufacture, maintenance or use of such arms or related materiel; and 
  • The transfer to Iran of technology or technical assistance related to ballistic missiles capable of delivering nuclear weapons.
Inspections of Cargo

To enforce the export restrictions listed above, UNSCR 1929 calls for the inspection of cargo to and from Iran where States have information that provides reasonable grounds to believe the cargo contains items prohibited by Resolutions 1737, 1747 or 1803.Such items include those which relate to Iran’s enrichment-related reprocessing or heavy water-related activities, and the development of nuclear weapon delivery systems, arms and related material, or nuclear related dual-use material.
The Resolution also authorizes States to seize and dispose of prohibited cargo identified during authorized inspections.

To further enforce the export ban, UNSCR 1929 calls on States to prohibit the provision of bunkering services by their nationals or from their territory, including the provision of fuel or supplies, or other servicing of vessels, to Iranian-owned or Iranian–contracted vessels, including chartered vessels, where there is reason to believe that the cargo is prohibited by specified sections of Resolutions 1737, 1747 or 1803.

Interests in Uranium Mining or Production or Use of Nuclear Materials
UNSCR 1929 also calls on States to prohibit any Iranian investment (Iranian investment includes investment by Iran, Iranian nationals, entities incorporated in Iran or subject to its jurisdiction, persons or entities acting on their behalf or at their direction, or entities owned or controlled by any of the above) within their jurisdictions relating to uranium mining, production or use of nuclear materials and technology, including uranium-enrichment and reprocessing activities, all heavy-water activities or technology related to ballistic missiles capable of delivering nuclear weapons.

Annex I to UNSCR 1929 - Individuals and entities involved in nuclear or ballistic missile activities
Amin Industrial Complex
Armament Industries Group
Defense Technology and Science Research Center
Doostan International Company
Farasakht Industries
First East Export Bank
P.L.C Kaveh Cutting Tools Company
M. Babaie Industries
Malek Ashtar University
Ministry of Defense Logistics Export
Mizan Machinery Manufacturing
Modern Industries Technique Company
Nuclear Research Center for Agriculture and Medicine
Pejman Industrial Services Corporation 
Sabalan Company
Sahand Aluminum Parts Industrial Company (SAPICO)
Shahid Karrazi Industries
Shahid Satarri Industries
Shahid Sayyade Shirazi Industries
Special Industries Group
Tiz Pars
Yazd Metallurgy Industries
Javad Rahiqi

Annex II to UNSCR 1929 - Entities owned, controlled, or acting on behalf of the Islamic Revolutionary Guard Corps

Fater (or Faater) Institute
Gharagahe Sazandegi Ghaem 
Ghorb Karbala
Ghorb Nooh
Hara Company
Imensazan Consultant Engineers Institute
Khatam al-Anbiya Construction


Omran Sahel

Oriental Oil Kish

Rah Sahel

Rahab Engineering Institute

Sahel Consultant Engineers


Sepasad Engineering Company

Further US sanctions

Despite the passage of additional UN sanctions, the U.S. Congress appears committed to passing additional Iran- related sanctions legislation later this month. The Obama administration continues to negotiate with the House- Senate conference committee on the pending bill to amend the Iran Sanctions Act.

The legislation under consideration may:

  • Require sanctions on any entity worldwide that provides Iran with refined petroleum resources or engages in an activity that could contribute to Iran's ability to import such resources.

  • Require sanctions on entities worldwide that invest more than a specified amount of money in businesses involved in Iran's petroleum industry.

  • Prohibit efforts to expand or improve Iran's oil production or refinery capacity and any related shipments.

If enacted, certain provisions will be extra territorial in their potential impact. It could catch a London based trader, shipowner, ship broker, financial institution, P & I Club or other insurer/reinsurer. The targeting of ships and related services may also cover ship managers, class societies, ship registries, bunker suppliers and chandlers.

As such, any company or individual worldwide found to have violated these provisions would be unable to lawfully conduct foreign exchange, banking or property transactions with any person required to comply with U.S. law – effectively ending that person’s ability to do business in U.S. dollars.

The European Union
The European Union will discuss imposing sanctions going beyond Resolution 1929 at meetings scheduled to take place earlier this week in Luxembourg and on June 17-18 in Brussels. No binding EU action is expected before July.

Summary of sanctions for Resolution 1929 kindly provided by Nigel Kushner.

Wednesday, June 2, 2010

The Long Sunset of Europe

As we are witnessing a consistent stream of bad economic news from the Eurozone, I am a bit puzzled at the relatively shortsightedness of the analysis of the experts broadcasted across most of TV networks.

The main highlights surrounding Greece, Spain, Portugal and eventually Italy tend to focus around problems of fiscal nature.
In reality, fiscal problems are only an effect and rather not the cause of the matter.
In my modest opinion, the fundamental problem that is shared by many economies in the Eurozone is a fundamental lack of competitiveness. Cost of labor have soared, cost of welfare with it, productivity has decreased and the long term demographic trends, as shared in previous posts, are negative with no possibility of reversal.

The resolution of this matter is further complicated by the limited range of monetary policy options at the country level now that the EURO is in effect.

While in the old days each country made ample use of the monetary policy to boost competitiveness of goods and services, today the government of these countries need to come to terms with the fact that this option is no longer available. The ECB is working on a set of monetary policies that are to address the needs of a wide area of countries at times radically different from each other (look at the spread on the 10 years notes to witness the differences first hand). The end result is in fact a bit of an improbable exercise of equilibrium that tends to lack effectiveness.

Now it is the time in which the Eurozone needs to come to terms with a fundamental dilemma: one central bank setting monetary policies for all members but no strong political centre with the necessary powers and support to make difficult choices. The problem is therefore one of political nature just as much of economic one.

While Germany has been working very hard over the past 10 years to increase productivity without increasing the cost of labor (successful exercise, data shows), other countries have grappled with a consistent decrease in competitiveness and soaring costs. Moving forward given the fundamentals the differences between the central and periphery of Europe are going to unravel with: Germany/France on one side, the Mediterranean and Eastern Europe on the other.

I guess the concern that I would like to share is with regards to the remedy currently implemented.
From a birds-eye view, the liquidity offered in the forms of various loans by the ECB/IMF to Greece has a cost of 5%, hardly favorable terms. The loans can be activated in various forms upon implementation of structural reforms which are bound to further decrease internal consumption, which are going to drive down production and increase employment as well as decrease money velocity. (internal devaluation)

Aren't we running the risk of prolonging the agony, destabilize a country (people unrest is a real side effect) and arrive again at a point in which new injections of money is required?

It is indeed hard to evaluate other solutions given the existing exposure of German banks for example to both the Greek and Spanish debt. A potential return to the dracma for Greece would signify the failure of the EURO experiment. Nonetheless, sooner or later German & French voters are going to call for a better understanding of what is in it for them to bail out Greece now and who knows tomorrow.

Jean-Claude Trichet, President of the ECB, rightly said: "there is a need for a quantum leap in the governance of the Euro area". The real question is whether there is the political might and willingness of the single countries to make this necessary quantum leap. If I have to give odds to the Euro today, I would bet against its existence over the next five years, but let it be clear: as a European myself, I hope to be proved wrong.

Monday, April 5, 2010

UAE: traditional banking and venture capital in a knowledge based economy

I have been doing some reflecting lately on the economic development choices available to the UAE as a country and further at the emirate level. The necessity for diversification from oil driven economy has been stated multiple times and while it may be true for most of the countries in the GCC including the Abu Dhabi emirate for others like Dubai and all of the Northern Emirates the name of the game has always been trading. Needless to say, diversification remains a fundamental aspect for these economies in spite of the fact that the driver is different.

As recently pointed out in an interview Dr. Fabio Scacciavillani, director of Macroeconomics and Statistics at the Dubai International Financial Centre: “Advanced sectors in the twenty-first century will be based less on the combination of labor and machinery and more on the values of ideas and the business acumen required to translate them into commercially viable operations”.

The UAE has therefore embarked in the development of high value add industries which are knowledge driven other than heavy industries that are driven by availability of raw materials and cheap labor. In the global economy it has become almost impossible to compete with Chinese and Indian manufacturing costs. Some might argue that some of the external costs associated with bureaucracy, language barriers and relatively unfavorable foreign investment laws in these countries create a more even playing field still the ground to cover from cost-structure perspective remains significant.

The development of a knowledge based economy relies on few key ingredients, the most important of which is obviously “knowledge” both created throughout a solid educational system as well as imported via hiring of a highly specialized work force. Further, the legal system needs to provide the necessary framework and certainties to encourage risk taking and entrepreneurship as well as protect the ownership of intellectual property: probably the single most important asset in a typical knowledge based economy.

While “intellectual property” management and the educational systems would certainly deserve their own article and analysis, for this posting I would like to focus my attention on the type of banking system required to support the knowledge based economy of the future. Access to start up capital is a vital component for the development of a strong economy, but traditional lending seems ill equipped to provide the right valuation to knowledge-based start up. In fact traditional lending is still based on the valuation of tangible assets, in fact often times entrepreneurs need to provide collateral unrelated to their business venture to be able to get its appropriate financing. In other words, visionary entrepreneurial attitude doesn’t score high with loan officers and credit committees. The latter focus mainly on calculating risks privileging residual equity in case of bankruptcy instead than calculating project risk based upon a market based analysis and business potential.
In a high risk entrepreneurial environment the rules of traditional lending just don’t match market needs. And that is where government bodies with their regulatory powers, banks and equity funds will need to step in to fill the gap by growing a more sophisticated and structure venture capital industry. Venture capital firms provide much needed equity for innovative start ups, not loans. VC firms compensate for the higher risks by taking an ownership stake in the enterprise and dividing equity rounds based upon project milestones often taking a tangible role in the direction or development of the project.

If GCC banks want to meet the demands of a growing and more specialized knowledge based economy they must outfit themselves with experts with the capabilities and experience to analyze, evaluate and rate business plans in order to maximize returns for the bank and in turn provide entrepreneurs with much needed startup capital. As part of this model financial institutions playing in this field must also formulate clear exit strategies that would allow start ups to transition to traditional, and less onerous, debt upon reaching of their maturity stage and in turn allow the equity providers to cash in after the initial and more risky incubation process is over.

So, while banks and lending institutions face the challenge to modernize and meet the challenges brought about by knowledge based economy, regulatory and government bodies on the other have the difficult task to create the transparency laws and mechanisms required for the markets to operates and flourish, and that includes among others: adoption of shared accounting rules, enforcement of penalties for any wrong doing, creation or enhancement of investor friendly procedures.

The UAE government both at the federal and emirate level has taken significant steps already to meet the challenges on hand. It would be great for many entrepreneurs and visionaries in a variety of industries if the banking systems would quickly follow suit providing the equity partnership that is required by them. Any delay would turn into an opportunity for the many venture capital firms in the US and Europe that could step in matching knowledge and processes with capital existing in the GCC. That would be a lost opportunity for lenders already operating in this region.