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.

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: http://www.un.org/News/Press/docs/2010/sc9948.doc.htm

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.

Bunkering

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

Headquarters

Makin

Omran Sahel

Oriental Oil Kish

Rah Sahel

Rahab Engineering Institute

Sahel Consultant Engineers

Sepanir

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.

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.

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.

News from Ras Al Khaimah - Free Spirit Issue: March/April

Hello everybody,

I would like to share the latest news from the Emirate of Ras Al Khaimah published on the magazine of the Ras Al Khaimah free trade zone, Free Spirit.

http://www.rakftz.com/en/media/get/20100302_free-spirit-10-03-final-optimized2.pdf

This is for everybody that is interested in finding out more about life and opportunities in the emirate located in the far north of the United Arab Emirates. This emirate shares with Iran and Oman the Strait of Ormuz and it is therefore one of the first ports upon entering the Arabian Gulf.

Emerging markets - SME confidence higher than in developed economies

Emerging markets have been making headlines in all publications globally. The global recovery is led by emerging economies and this is a fundamental fact bound to stay long term.


I receive an average of 3-4 business delegations a month here in Ras Al Khaimah. Delegations come from all corner of the worlds since our free zone has investors from 120 different countries. While meeting businessmen part of a delegation may not be a statistically viable sample to determine the trends in a specific country, it is nonetheless a good viewpoint to develop a perspective about so many different economies. Over time, over many delegations, consistent trends tend to set in.


I was therefore very happy when on February 2nd, HSBC has published the results of the its most recent research on SME Confidence (20 markets were surveyed). The primary data was gathered last October and November 2009.
I have now the statistical confirmation of the trends I have been collecting over the past year: not only emerging markets are leading the economic recovery but SMEs are going to play a leading role in the recovery.

The report also confirmed a wide differential in confidence levels between the so called highly industrialized economies (G7++) and the emerging markets.
Emerging markets are significantly more confident than developed markets. With an index of 100 as neutral emerging markets have scored an aggregate of 121 and developed markets an aggregate of 106 (France registers below 100 at 96).


Nicholas Levitt, Regional Head of Business Banking at HSBC said: "Confidence levels appear to be back to pre-financial crisis level. The Middle East outlook correlates strongly to the global emerging market outlook, and as a major international trading hub, the region is well-placed for future growth."


From the survey we learn that the Middle East is the second most optimistic area after India.
I can related personally to this finding since every month I receive one or two business delegations from India. During my presentation on emerging markets with them I always ask: "How is business during these challenging times?", invariably I receive feedback about how the impact goes from mild to negligible.


In the Middle East the SME survey confirms:

• 47% plans to increase capital expenditures;
• 41% commits to current levels of capital expense;
• 11% are planning capital expense reductions;
• 36% is committed to increase staffing;
• 58% will keep the same staffing levels;

SMEs were also asked about their propensity to engage more in international business and the survey has confirmed the role of the Middle East as an international trading hub.

• 72% of the SMEs in Qatar planned to grow their business internationally within the next 2 years;
• 28% in Egypt;
• 19% in Saudi Arabia;

The top international locations for business for the Middle East are China, South East Asia and Europe.

While this research presents gaps[1] in its approach to define the geographical footprint, it highlights something that is at the core of the economic global shift currently underway. 

In order to validate the aspirations for internationalization of many SMEs both in the Middle East and other emerging markets it is necessary for local governments to support the development of a solid and more sophisticated banking system specifically tailored to support trade and investment.
As Dr. Butcha, vice president and managing director at A.T. Kearney Middle East, said in a recent article “A.T. Kearney has worked with governments across the world to improve the SME sector. SMEs are the backbone of any successful and sustainable economy, they are the blood cells behind successfully diversified economies and large corporations. Successful long term economic growth plans for the GCC can only succeed with strong support to SMEs...”. A.T. Kearney research in emerging markets shows that successful SMEs create jobs at a rate which is four times faster than the rate of larger corporations and create revenues and GDP at a rate which is six times faster than large corporations. This is largely due to the fact that successful SMEs tend to grow more exponentially than large blue chip and established business (more at: http://www.eyeofdubai.com/v1/news/newsdetail-38845.htm)

It is because of the essential role of SMEs in the global economy that we at Ras Al Khaimah Free Trade Zone have created a business environment specically designed to facilitate SME business. Especially the newly created "valued added services" for RAK FTZ clients are focused on reducing the "incubation" period of new companies and to put them in the condition to generate successful business in the region in the fastest and most cost effective way.

[1] the survey did not include the United Arab Emirates in the emerging markets, developed markets surveyed included only US, Canada, UK & France, results in confidence in the developed economies would have been slightly different if Spain, Greece, Italy would be included.

Dubai & its sustainable advantages

It is during the times of difficulties that companies tend to retrench and focus on their core competencies and missions. The same applies to countries.

Recently I have been reading a lot of negative press with regards to our most famous neighbor: Dubai. The same journalists that just a little more than a year ago where writing long articles about the outstanding vision of HH Sheikh Mohammed ruler of Dubai are now writing articles about the shortcomings of Dubai strategy, the issues related to the hyperinflated real estate market and so on.

I am sure that foreign readers no longer know who to believe. Or at least they find it hard to set on a credible bearing. Caution and analysis are required to better understand complex economic systems.

Dubai like most economies in the world has been hit by the economic downturn due to its reliance on financing. When considering Dubai please note that the emirate is not blessed by the same natural resources as the capital of the country Abu Dhabi: Dubai has no oil.
Its development has been based upon trade and all its infrastructure development has been financed, like most of the businesses, by the international banking community.
In a country where there are no taxes (neither income, nor corporate taxes, nor property taxes) the mechanisms for development tend to be relatively simple: the government has created holding groups and companies that have been operating like a normal private organization. The majority ownership goes back to the government and the ruling family and that explaines the "semi governmental" etiquette that these companies have been receiving. The profits of these operations have been reinvested in the development of the country.

Detractors of Dubai at times forget what was the Emirate only 20 years ago. In addition, sometimes they forget the reality of where they write from. I recently saw an article from a Detroit newspaper criticizing Dubai urban development. For the people familiar with the abandoned downtown Detroit area, like I am, I am sure the critic sounded a bit out of place. In Italy, where I come from, there are dozens of governement funded infrastructure projects that have been financed that have been "IN PROGRESS" for decades: hospitals, highways, acquedots and more.

I will leave the critics to their job while I would like instead to focus my attention on the infrastructure that Dubai has developed and that is here to stay because it represents a clear competitive advantage given the current economic trends:
- Jebel Ali port;
- Dubai Airport;

Such infrastructure in combination with the well developed concept of the Free Trade Zones has created employment and sustainable development.

Jebel Ali Port is the 6th largest container port in the World (2008 data - Containerisation International) and handled around 12 million TEUs in 2008. It is the largest container port outside of Asia and has won the Award for best Middle East seaport for 15 consecutive year.

The 365-metre long Daniela (nominal capacity of 13,800 TEUs) being handled by the port's largest tandem lift gantries, the biggest of their kind in the world. (Image courtesy of DP World corporate presentation).

In tandem with the growth of the sea operations Dubai has been growing steadily its air traffic in spite of the global economic challenges.
As of June 2009, there over 5,600 weekly flights operated by nearly 100 airlines to over 200 destinations across all six continents.
In 2009, the airport was the 17th busiest airport in the world by passenger traffic and 11th busiest by cargo traffic handling 1.927 million tonnes of cargo in 2008.
With the opening of Terminal 3 on October 14 2008 the capacity of the airport has been increased by 43M passengers for a total of an estimated 60M passengers annually.

To understand the progress taking place:

• in 1998 Dubai airport handled 9.73 million passengers, 431,777 tons of freight, had 110 city links and 2,300 weekly flights.
• In 2009: 40.9 million passengers, 1.92 million tons of freight, 210 city links, 4,900 weekly flights.

Dubai has de facto become the gateway connecting Europe to the Middle East and Asia, more importantly it has become the gateway into many African countries by air & sea.
The logistics infrastructure combined with the favorable tax free environment has created important synergies for all companies interested in operating within emerging market economies.
These are facts not bound to be reversed by the current challenges. While emerging markets are leading the way out in economic development Dubai is a reality that is here to stay and its infrastructure is going to facilitate trade across this New Silk Road.