Category Archives: Dubai

The Wrap: Egypt Wheat Stocks Politicised, Libya Allies Gather To Plug Oil Gap

  • EGYPT 

Unemployment: Arab Spring Not Springing Back – NPR 

An interesting podcast from NPR on the problem of unemployment in the Arab Spring, particularly among young Arabs.

The Wall Street Journal economics reporter Sudeep Reddy and Shadi Hamid, director of research at the Brookings Doha Center, discuss why jobless rates are so high in the Arab world, particularly in Tunisia and Egypt, and why political will is so crucial to alleviating unemployment pressures.

I’ve written extensively on this topic and the reasons why Arab youth can’t (and sometimes won’t) find employment. 

Wheat stocks sufficient until February: Supply Minister – Daily News Egypt 

Another never ending conundrum for Egypt is how to keep up with demand for wheat, especially as dwindling foreign reserves and a falling currency has made imports more costly.

It’s also a topic that is highly politicised. In an attempt to put any concerns about supply to rest, Egypt’s supply minister, Mohamed Abu Shadi, has insisted that the country has enough wheat stocks to last until midway through February 2014. 

The country was forced to import 80,000 tons of wheat to make up for shortages that the interim government say were exacerbated during Mohammed Morsi’s tenure, Abu Shadi said. At the time of Morsi’s ouster, interim officials blamed the Islamist president for mismanaging wheat imports and stopping supplies.

(In reality, Egypt has a long history of addiction to bread subsidies, and one year under Morsi wasn’t going to make the situation much worse than it already was).

Yet, despite the government’s confidence, Egypt is said to still be looking to receive offers of French, Russian, Ukrainian wheatBloomberg has reported.

Ezz Steel Jumps as Egypt Mulls Punishing Turkish Steel – Bloomberg 

Did you ever expect, in the “New” Egypt, for a senior official in Mubarak’s National Democratic Party to be acquitted of financial crimes after very little investigation? Ahmed Ezz, steel tycoon and head of the Ezz Steel company, was in June acquitted after being charged with monopolising the country’s steel market.

Despite his conflict of interest, and his dodgy links to the old guard, Ezz is back to business and being protected by the interim government. Egyptian officials are considering taking actions against an increase in Turkish imports at low prices to protect local industry. By local industry, I mean Ezz Steel.

Shares in the steel company rose the most in two months and no doubt company officials are delighted.

A new gas producer in Egypt – Daily News Egypt 

At a time of uncertainty, it is reassuring to find a new company willing to enter the oil and gas industry.

RWE Dea, an international oil and gas company headquartered in Germany, will launch gas production in Egypt, Daily News Egypt reported. The project includes the development of seven gas fields in the Egyptian Nile Delta.

  • LIBYA 

Saudi, US, Iraq step in to plug Libya oil gap – Wall Street Journal 

Countries around the globe are gathering to protect the oil price at any cost. The WSJ reports:

Saudi Arabia has been pumping oil at its highest level in decades to offset a global shortfall fueled by another hot spot besides Syria: Libya, where unrest has slashed output.

A tumble in Libyan production to depths not seen since a civil war toppled the Gadhafi regime in 2011, combined with fears of a possible U.S.-led military strike against Syria, have sent oil prices sharply higher in recent weeks.

To counter this, soaring Saudi Arabian, US and Iraqi output is helping cushion the blow, OPEC has said. Libya, which holds Africa’s largest oil reserves, has suffered from strikes by armed guards, shutting down most of the country’s terminals.

Output fell to a post-revolution low of 150,000 barrels a day last week.

But while Saudi Arabia is pumping the highest level of oil into the market for decades to offset a global shortfall, the Kingdom is consuming more of its own oil every year and a reliance on costly energy subsidies is making it’s budget more vulnerable.

Still, that niggling worry is not enough for Saudi officials to reduce output, so for now Libya will see its allies rally around it.

Security update – Libya Business news 

For those interested in the minutiae of Libya’s security situation, Libya Business News has a useful weekly update and map of incidents highlighting risk:

[caption id="attachment_1970" align="aligncenter" width="593"]Libya Business News Libya Business News[/caption]


Making the Most of Gulf Aid to Egypt

[caption id="attachment_1953" align="aligncenter" width="450"]Egypt's interim President Adly Mansour meets with UAE's National Security Adviser Sheikh Hazza bin Zayed Al Nahyan: REUTERS Egypt’s interim President Adly Mansour meets with UAE’s National Security Adviser Sheikh Hazza bin Zayed Al Nahyan: REUTERS[/caption]

We may not like it, but Egypt desperately needs Gulf money.

So why not change the way the Gulf lends money to Egypt to make it count. It won’t be just about wasting away cash to address a symptom without resolving the underlying problem.  

Indeed, without Gulf aid, the government would have struggled to pay for vital imports and would have fallen far behind on its supply of fuel, prompting nationwide riots and unrest.  The pound would have depreciated rapidly in the absence of sufficient central bank deposits and would have been worth closer to LE7.5 or LE8 to a dollar instead of LE6.89.

Egypt had no-one else to turn to.

International donors, including the likes of the International Monetary Fund, the World Bank and the African Development Fund, had too many strings attached for far less money to make it worth while for Egypt. These organisations also promised a whole lot of interference (or as they call it “technical expertise) into economic policy-making – another unpopular prospect for the foreign-wary Egyptians.

Meanwhile the Gulf was a perfect lender to Egypt. It has acted more like a generous Uncle, pouring money (and petroleum products) into Egypt’s coffers whenever needed and with few questions asked. As long as the Muslim Brotherhood are out, the Saudis are in. 

But beyond throwing money at the problem, the Gulf has done little in the way of long-term restructuring in Egypt. They’re not interested in reforms and overhauling the tax system, but wielding control in the most populous Arab country and leverage over the Brotherhood.

Though the Gulf can afford to keep playing this game, Egypt can’t.

The government has been given too much free rein with more than $12 billion in cash and oil. None of that has gone towards supporting the budget deficit, or towards reforms that will benefit the lives of millions of Egyptians.

Adly Mansour’s government, or more likely the government that follows after elections, should consider making the most of connections with the Gulf by striking deals in infrastructure and energy.

Rather than just taking money to plug holes that will reappear in a few months time, Egypt would do well to get the same money siphoned off into long-term investment projects.

There are many avenues for joint ventures: Egypt’s factories, the bread and butter of the industrial sector, are shutting down because of difficulty securing loans in the credit market.

Low-income residential projects to house thousands of Egyptians living on-top of one another in Cairo has stalled as contractors struggle to find the funds to keep working.

Labour-intensive infrastructure projects, on roads, railways, water and sewage treatment plants, are in desperate need of investment.

Egypt’s interim government boasted about launching a $3.2 billion “economic stimulus plan” yet very little has been said about reinforcing ties with the Gulf, which is surely the easiest way to implement such a “stimulus plan”. The only mention of Gulf investment is a possible agreement with the United Arab Emirates to finance medical projects and 10 wheat silos.

But that is not enough. There should be a full-scale collaboration with Gulf countries, not only to benefit Egypt, but to show the international community that the money is working hard for the nation.



The Wrap

After several months hiatus (and readers saying they are having sleepless nights without it) the daily wrap is back!

I’ll be linking to a handful of the most important economic stories from the transitioning countries of the Arab world, namely Egypt, Syria and Libya, and to a lesser extent Tunisia, Yemen, Jordan and Morocco. (The Gulf is there in the background too, but only because of its connections to these countries).

1) Energy groups rethink commitment to Egypt Financial Times

This story has become evergreen for Egypt and it seems like every couple of months a new story crops up to remind us that debts to oil companies are not going to disappear anytime soon.

The story repeats much of what has already been reported, mentioning companies owed millions of dollars including BG group, ENI and the Dana Gas. However the premise of the story may be unfounded. Although oil companies may be acting cautiously at the moment, and holding off any expansion plans, it’s very unlikely that these companies will pull out of Egypt altogether. Not only would this prove costly for these companies to pull out their equipment and human resources, but those firms would miss out on costs they are making at the moment. Because, as the FT story says:

Egypt’s oil and gasfields continued to produce as if nothing had happened.

2) Egyptian cabinet approves $3.2 billion economic stimulus plan Reuters

Reading this story made my blood boil.

The government has already introduced some stimulus measures including lowering interest rates (and more controversially printing money, though that’s more rumour than fact). But increasing spending at a time when the budget is reeling from over-expenditure on wasteful subsidies (for both energy and food) masks a difficult truth: the government doesn’t actually want to make any cuts, or raise taxes to keep its own reputation in tact and avoid any public backlash. Essentially, it’s a cowardly move that will mostly benefit the current interim government who has so far been completely ineffective after the killings of hundreds of Egyptians.

And that perception that $12 billion of Gulf money will save Egypt is very naive. That money is not being targeted at the budget. At best it may be used for some investments, but really it will be used to keep the pound afloat and the country’s imports flowing.

Capital Economics, the London-based consultancy elaborates. This is their bottom line:

Egypt’s newly-announced stimulus package stands a chance of boosting the beleaguered economy in the near-term. But with the package being funded by Gulf aid, over the longer-term, it could actually take the country further away from making much-needed reforms to improve the business environment. 

3) Energy stocks rise over SyriaReuters

I will be writing on the economic impacts of US intervention in Syria later but for now, there are some gems hidden in this stock market story. Capital markets have been responding wildly to this. Gulf stock markets suffered record losses. Though it’s not clear that any escalation of the Syrian civil war would have a pronounced effect on Gulf economies, these same countries have been supporting Syrian rebels for some time.

As a result, investor rushed to the safest commodity around (well it was safe until a few months ago when the gold price plunged…). Gold prices rose to three and a half month highs above $1,430 per ounce as Syria tensions raised its appeal as a safe-haven asset.

 



Dubai Carbon Trader’s License to Expire

The license to run an embattled Dubai-based carbon trader Advanced Global Trading is about to expire, Rebel Economy has discovered, casting more doubt over this company’s plans to continue operating.

AGT, which Rebel Economy wrote about last week, has attracted suspicion for being an alleged boiler-room operation, where high pressure tactics such as cold-calling are used to sell a product that is often of little value.

The company, headed by British businessman Charles Stephenson, claims to sell claim to sell carbon credits to individuals with the promise of high returns, even though experts say there is no economic reason to invest in such a product other than to offset your carbon footprint.

Further suspicion was aroused earlier last month, when investors were contacted by AGT and informed that the voluntary credit market which they had invested in was about to crash, but the exit strategy would involve paying an extra $15,000.

But records from Dubai’s Department of Economic Development show that AGT’s license in Dubai will expire on June 4th 2013, which is tomorrow. 

When asked whether the company will renew its license, AGT responded by re-sending this statement, which it produced last week, and is available online for Rebel Economy readers. 

Instead, in the statement, AGT says it “has never changed its corporate name” and “has no plans to close operations.”

However, according to the last story Rebel Economy wrote, corporate records show the company has shut down affiliated companies including AGT “UK & Ireland”, AGT “Europe” and two offices in Abu Dhabi and Zurich in the last two years.

Former employees at the company also say the management, which includes Mr Stephenson and two main directors, Chris Middleton and Danny McGowan, are planning to open an office in the Dubai International Financial Centre under a new name.

According to one former employee who was fired last month but does not want to be identified, around 15 other employees were laid off last month, including the executive director, a Bahraini businessman called Ebrahim AlShaibeh. The company told its employees it was cutting costs and gave no other reason.

AGT is one of a wave of boiler-room scams that legal authorities and regulators are facing around the world.  But in Dubai, which has become a hub for these type of scams, companies are harder to pin down in the absence of tougher rules and regulations.



The Middle East’s Latest Scam: Carbon Credits

Being “green” is a 21st century phenomenon.

We have energy-efficient cars, companies, and even vacuum cleaners. Solar panels and non-smoking zones have become more prevalent, and we are more conscious than ever of our consumption and waste.  There are more vegetarians and vegans in the world and even some people, called freegans, who only eat discarded food.

And as with any new popular movement, there are people ready to exploit.

Now, legal authorities and regulators around the world are facing a wave of “boiler-room” scams that claim to sell carbon credits to individuals with the promise of high returns, even though experts say there is no economic reason to invest in such a product other than to offset your carbon footprint.

The market for carbon credits, which represent the right to emit one tonne of carbon dioxide, started out as a legitimate environmental effort by governments and corporations to cut down on greenhouse gases. It then began making its way to individual customers.

But unlike the regulated market, which was first formalised in the Kyoto Protocol, companies involved in the carbon credit scam buy credits in the voluntary market, which is not regulated by any authority and is much smaller.

Andrew Ager, who works as a consultant to the London Metropolitan Police on these scams, says that from a “from a pragmatic point of view it’s a very successful business model and well thought out”:

“The aim of these companies is to get as much money as possible in the shortest amount of time.

They buy something [of little to no value] and sell it for considerably more than it is worth. There’s no law to stop someone selling something for more than they bought it for but the difficulty for authorities is to prove the investment was misleading.”

One company is now attracting suspicion: Dubai-based Advanced Global Trading, headed by Charles Stephenson, a British salesman who had spent the last decade working for a company specialising in audio-visual digital displays, Balfour Group.

AGT promised investors 30% returns and “for a minimum investment of $25K you too can invest in Carbon and make a difference,” the company said on its website.

But, last week, clients were contacted by AGT and informed that the voluntary credit market was about to crash from $15.85 per credit (AGT’s value) to $3, and that there was an exit strategy to sell all credits to a third party high end investor. In return clients would receive Strategic Earth Metals (SEMs), or Rare Earth Metals which are widely known to also be used by conmen as part of similar scams.

[caption id="attachment_1669" align="aligncenter" width="586"]AGT even offers an iPhone app. Source: redd-monitor.org AGT even offers an iPhone app. Source: redd-monitor.org[/caption]

However to make this deal go through, the clients were asked put in an extra $15,000.

For experienced traders in the carbon credits industry, and other journalists investigating carbon credit scams, soliciting money for these SEMs was highly suspicious.

“Sadly, this situation is all too familiar. We call this the double scam,” said Matthew Gray, an associate at investment banking firm Jefferies & Company, specialising in carbon markets.

“Companies illegally entice individuals to buy carbon and then tell them the market has crashed as a means to get more cash.”

These companies often have an 18 to 24 month exit strategy and when the spotlight falls on them, it is not unusual for a company to suddenly change strategy to garner more investments and keep the company going, or to disappear entirely.

AGT first launched in London around 2010, then set up a trading floor in Dubai a year later.

According to legal records obtained by RebelEconomy, a British company affiliated with AGT has changed its name twice in the last two years, from Business Saints Consultancy Services Ltd, then to Nviro Capital Ltd and finally to AGT.

The company has also shut down affiliated companies including AGT “UK & Ireland”, AGT “Europe” and two offices in Abu Dhabi and Zurich in the last two years.

LinkedIn records show a number of employees have recently left the company recently, including Nick O’Dwyer, formerly a director at AGT, Franklin Connellan, who was head of investments at AGT and Amine Benkaddour, a senior investment consultant and corporate advisor.

AGT’s director, Charles Stephenson, is still associated with the company. He explains AGT’s strategy in this news clip:

In many cases with carbon credit scams, the staff are unaware of the ultimate business they are in, Mr Ager says.

“Usually only a few people know. Many of the staff, particularly the young sales force, and all the way through to senior staff usually don’t know,” he said.

AGT refutes the allegations that it is asking clients to purchase the additional product, and in a statement to RebelEconomy said “no one is being strong armed to take this option”. It also denied allegations that it told clients there was a price crash:

AGT in Dubai has not ceased operations and continues to operate in Dubai out of its headquarters in Emaar Square, Downtown Burj.  The UK company that was shut down has no relationship with any client (contractual or otherwise) of Advanced Global Trading in Dubai. Please note there may be many companies globally using the name “Advanced Global Trading” but the AGT trademark is licensed only to the entity operating in Dubai.  Therefore, there are no additional monies being sought from clients (or otherwise) with the company having been shut down as you suggest.

AGT has instituted a relatively new product (Strategic Earth Metals) which it offers to its interested clients.  Despite what has been blogged [this is a reference to the REDD-MONITOR.org blog coverage], such new products are not being forced onto anyone.  AGT has offered as an option for its carbon clients to trade into the new product upon commercial terms and conditions which are transparently described to any interested client.  All of which shall be pursuant to a sale and purchase agreement between any interested client and AGT.  Thus, no one is being strong armed to take this option.  Any clients that do will be pursuant to their investment decision at their sole discretion.

Regarding the pricing of carbon, there has not been any price crash as suggested in the blogs.  AGT is currently doing a survey amongst its clients who have shown an interest in exiting out of their carbon position to determine what new price, if any, should be assigned to carbon credits.  End of the day, any price for carbon is meaningful if a buyer can be found at such price.  AGT has no plans to unliterally bring the price of carbon down.

We have always done everything we can to protect the interests and investments of our clients and will continue to do so.

The company also says that although the voluntary market is unregulated, it is has developed a self-regulatory and best practices framework, which was developed in conjunction with its legal counsel in Dubai (Anjarwalla Collins & Haidermota) and the United States (Baker McKenzie). Neither firm responded to a request for comment from RebelEconomy.

AGT says it closed its Abu Dhabi office to streamline the business and more effectively serve UAE clients.  It said AGT Europe and AGT (UK & Ireland) were never directly or indirectly part of the AGT group corporate structure. “Both of these entities (in Spain and UK respectively) were our efforts to establish joint ventures with others to expand the AGT business in Europe. Both of these ventures did not break ground in any significant way and we decided to not proceed as planned,” the company said in its statement.

The company adds that “AGT in Dubai has never changed its name.  The mentioned companies have nothing to do with us.  These are corporate names of the UK company that was dissolved in 2012”.



Why the EFG Hermes, QInvest Deal Fell Apart

When the deal between Egyptian investment bank EFG Hermes and Qatar’s QInvest fell apart yesterday, some in the banking industry were not surprised blaming Egypt’s stagnant business environment.

“Since when did the regulator approve anything after the revolution?” lamented one banker.

The Cairo and Doha-based banks said a planned joint venture had ended after they reached a 12-month deadline without approval from the Egyptian regulator, the Egyptian Financial Services Authority. The two sides had received approval from countries including Saudi Arabia, the United Arab Emirates, Qatar, and Jordan.

It was seen as the latest casualty of Egypt’s struggling economy after January 2011.  But there is more to the story than meets the eye.

EFG Hermes’ top two executives, Hassan Heikal and Yasser El Mallawany are under investigation for alleged insider trading. They are among nine, including the two sons of former president Hosni Mubarak, alleged to have made an illegal profit of more than 2 billion Egyptian pounds ($331 million) through corrupt stock exchange transactions last May.

EFG’s CEOs and the other defendants deny the charges. The case is ongoing.

EFG spokespeople insisted there was no link between the delays in approving the joint venture and the investigations into the CEOs. But this is very difficult to believe when history shows that if any company is hit with any allegations of financial misconduct the heads of the company are usually the first to go.

The fact that Mr Heikal and Mr El Mallawany did not resign, despite investigations into a previous transaction, is likely to have put a dampener on the deal.

The CEOs reputation was no longer intact, innocent or not. Both are rumoured to have had close relationships to the former regime, especially Gamal Mubarak, within and outside the bank.

For some countries, this would be enough to prompt a resignation.

In Spain, for example, a rule of “professional virtue” is used as a prerequisite for those working in the banking industry and can be lost by anyone faced with a criminal record.

If the deal had gone through it would have paved the way for QInvest to buyout 60% of EFG, plug another $250 million into the banking business and give the CEOs a free ride out of their mess and responsibilities for the bank.

Was the head of Egypt’s regulator, Ashraf El Sharkawy, prepared to take this responsibility, knowing it would give the men a free pass?

It’s unlikely.

The Financial Times alludes to this too:

According to a person familiar with the deal: “It fell through because no one in Egypt now wants to make a decision or affix their signatures to a piece of paper.”

Businessmen in Egypt have complained that, since the 2011 revolution which ousted Hosni Mubarak as president, officials have shied away from making big decisions because of fears over possible allegations of corruption.

What now?

EFG has turned to Plan B. It will sell “non-core” assets and return most of the cash to shareholders to cut costs by 35%.

In light of the deal falling apart, and another lost business opportunity, perhaps it’s time for Mr Heikal and Mr El Mallawany to do the right thing and step down, taking responsibility for their case until it is resolved.



Egypt’s Islamist Groupies

There are few Egypt’s president can rely on more in these economic hard times than his band of Islamist brothers.

Key financial supporters from Islamist-led governments have come through with cash injections at times of extreme economic hardship, when Mohammed Morsi faced a spike in inflation and subsequent social unrest.

Egypt’s Islamist groupies, including Qatar, Turkey, Saudi Arabia and Libya have all together offered the country $10 billion, partly to boost the Central Bank’s coffers, partly to help with energy imports.

Donor

Aid

Purpose

Qatar

$5 billion

The Gulf state has doubled financial aid to the Egyptian government with an additional $2.5 billion, on top of a previous $2.5 billion in deposits. While the Qatari finance minister has dampened any prospects of further aid in the short-term, this should not be mistaken for the Gulf state backing away from assistance to Egypt. Qatar has put its money where its mouth is, and to shift its focus away from Cairo now after pouring billions of dollars into the country would undermine the Gulf state’s investment decision.

Turkey

$2 billion

Turkey has deposited $1 billion of the $2 billion aid package it pledged last September. It is aimed at helping Egypt finance infrastructure projects and increase its dwindling foreign currency reserves.

Saudi Arabia

$1 billion

Last year, the Kingdom deposited $1 billion into Egypt’s central bank at a time when Egypt’s reserves plunged 60% from pre-revolution levels. The deposit included $500 million to finance high-priority development projects, $250 million for buying petroleum products and a $200 million grant for small and medium-sized projects and industries. Since then, Saudi Arabia has remained on the sidelines. Tensions are running high between the two countries after the arrest and sentencing of an Egyptian human rights lawyer to 5 years in prison and 300 lashes caused an outcry in Cairo.

Libya

$2 billion

Libyan officials this week said they were completing an agreement to deposit $2 billion in Egypt’s Central Bank. The transaction, which has since been denied, is being seen as a quid pro quo agreement involving Egypt’s arrest of several Gaddafi loyalists. What has been confirmed and is worth a similar amount is a transaction that will see Egypt import 900,000 barrels of oil a month from Libya starting in April.

But this generosity, however unwavering, is unsustainable.

As the FT’s Middle East editor Roula Khalaf puts it:

This unconditional assistance has no chance of boosting confidence or putting the economy on a more sustainable track unless accompanied by political commitments.

In fact, propping up the budget this way only serves to artificially cushion the Muslim Brotherhood and allows them to delay an economic reform plan.  

Because after all, what’s the point of importing Libyan oil to feed an addiction to energy subsidies? Why support the Central Bank’s reserve pot when the country has struggled to put forward an economic plan that will safeguard future reserves?

This is why other countries have been wary of pouring money into Egypt, and in so doing, unfairly legitimising the Morsi administration at a time of political divisiveness. 

Without such budgetary support, the Brotherhood would be forced to be more conciliatory toward opposition groups and find compromises. Otherwise, they risk being voted out of office for failing to stop an economic backslide.

It’s important to differentiate between aid to Egypt and budgetary support for Mohammed Morsi and his government. These are not mutually exclusive.

 While Islamist governments such as Qatar and Libya may believe unconditional support will allow the Brotherhood to hold onto power, international donors should not withhold aid to Egypt’s people who are facing the very real possibility of chronic food and fuel shortages.  It is possible for donors to provide support toEgypt (for example by investing in key youth programmes and infrastructure projects) without propping up the Brotherhood. 

What is clear is that instability in Egypt will not bode well for the region, not for donor countries who need economic and political stability in Cairo.



Regime Change at Egypt’s EFG Hermes

The chief executives of Egypt’s biggest investment bank, EFG Hermes, have been quietly replaced as the bank attempts to clean up its image ahead of a potential takeover from Qatari firm Qinvest, three sources close to the matter have said.

Hassan Heikal and Yasser El Mallawany, who were last year charged with alleged insider trading alongside the sons of the former Egyptian President Hosni Mubarak, are still “technically on board but have been removed from the executive function,” said one investment banker close to the bank. Mr Heikal and Mr El Mallawany are still getting a paycheck but remain in their positions only on paper, the banker said.

EFG Hermes denied any changes were made. The changes have not yet been officially announced and Mr Heikal and Mr El Mallawany are still employed as CEOs at EFG Hermes.

[caption id="attachment_1329" align="alignright" width="144"]Yasser El Mallawany Yasser El Mallawany[/caption]

Karim Awad and Kashif Siddiqi, who were last year announced as the new co-CEOs as part of the Qinvest takeover, are now running the bank, a second banker said.  They were head of Investment Banking and head of Asset Management respectively.

Under Qinvest deal, Mr El Mallawany and Mr Heikal were to leave on completion of the transaction that would see Qinvest take control of the bank.  But the deal has stalled because of delays in getting government approval in some Arab countries, according to a statement from EFG in January.

Mr Heikal, who has been living in London for at least a year, is now “pursuing other opportunities” and is “definitely not involved in the running of EFG,” a third source said.

A registry form at the Dubai International Finance Centre in the United Arab Emirates, where EFG Hermes is also registered, lists Mr Awad and Mr Siddiqi as the new directors.  Mr Heikal and Mr El Mallawany are listed as former directors, ending their position in June 06 2013, just 7 days after the case of alleged insider trading was brought against them in Cairo.

In addition, EFG Hermes main website also suggests changes at the helm.  As of February 16, the website title Karim Awad as Co-chief executive of the investment bank, and lists him first in the ranking on the profiles page. But this change was made only a week ago, when the website had described him under the old title of  head of investment banking.

[caption id="attachment_1330" align="alignleft" width="210"]Hassan Heikal Hassan Heikal[/caption]

The change is subtle, but indicates a significant shift in the bank’s executive management.

EFG has seen a sharp drop in its market value since the turmoil of the 2011 uprising in Egypt, partly because of its association with Gamal Mubarak, son of the former Egyptian president who owned a stake in its private equity business.

A further shadow was cast over EFG when its two co-chief executives, Mr Heikal and Mr El Mallawany, were among the nine alleged to have made an illegal profit of more than 2 billion Egyptian pounds ($331 million) through corrupt stock exchange transactions last May. The case is ongoing.



Original Sin: Where Did Arab Economies Go Wrong?

Arab economies have become addicted to “unearned income streams” including fuel exports, foreign aid, and remittances. This fragile social contract has led countries across the Middle East and North Africa to increase subsidies on fuel and food at times of social unrest.

This is their “original sin” and is fast becoming a liability, say economists Adeel Malik and Bassem Awadallah in this important paper for the World Development journal recently made available to the public.

“External revenues—whether derived from oil, aid, or remittances—profoundly shape the region’s political economy” which only serves to “stifle economic and political incentives, turning economies away from production to patronage”.  

So as a result, on a per capita basis, the Middle East and North Africa received the highest overseas development assistance in 2008 ($73 compared to $49 in sub-Saharan Africa), the paper says. North Africa has consistently been the largest recipient of net aid per capita since 1960s (see table). These aid flows are largely driven by geo-political considerations.

graph11

The authors point out that despite the differences in cultures, economies and geographies across the Middle East and North Africa (Algeria to Syria for example), there are “at least five common denominators that cut across commonly recognized conceptual boundaries—for example, whether an Arab state is a monarchy or a republic, labor-scarce or labor abundant, resource-rich or resource-poor”.  One of these is the dependance on exports and aid. They spell out the other connecting factors:

First, all across the Arab world both economic and political power is concentrated in the hands of a few.

Second, the typical Arab state can be characterized as a security state; its coercive apparatus is both fierce and extensive.

Third, the broad contours of demographic change and the resulting youth bulges are fairly common across the region.

Fourth, Arab countries are mostly centralized states with a dominant public sector and, with few exceptions, weak private enterprise.

So what went wrong?

Malik and Awadallah go back to the Ottoman empire where centralized bureaucratic rule worked hard to prevent the emergence of autonomous social groups, and therefore valuable and profitable connections across the region and a strong private sector:

The Arab world has inherited an unfavorable and divisive legacy. The roots of a weak private sector run deep in history. Merchants were politically weak under the Ottomans.

A robust private sector was more feared than favored. When business thrived, it remained effectively in the hands of foreign merchants and local minorities. This was politically expedient: foreign merchants benefited from the economic privileges granted by rulers, but
seldom challenged their authority.

The break-up of the Ottoman Empire into a multitude of independent states created new political boundaries, but, over time, these became permanent economic boundaries.

The consequence of this divide meant that when globalisation was unavoidable, Arab economies did not integrate with one another but only with global structures of trade and finance.  It’s no surprise then that trade agreements in the Mena region are well below the global average.

graph22

The key concluding questions is: can the region harness its natural geographic strengths to build a future based on trade and production, or does it fall back on the geography of rents and patronage?  Access to the coast, Europe and a large labour force are attractive opportunities that emerging markets would jump at. So why has the Arab world failed to integrate?

Revolutions across the region are an “apt reminder that the prevailing model has reach its expiry date”, they say.

“This model built on oil and aid fortunes—and a leviathan state—is fast becoming a liability.”



The Arabian Dream: Abu Dhabi’s Mercenaries

Late one night in November 2010, a plane carrying dozens of Colombian men touched down in this glittering seaside capital [Abu Dhabi]. Whisked through customs by an Emirati intelligence officer, the group boarded an unmarked bus and drove roughly 20 miles to a windswept military complex in the desert sand.

The Colombians had entered the United Arab Emirates posing as construction workers. In fact, they were soldiers for a secret American-led mercenary army being built by Erik Prince, the billionaire founder of Blackwater Worldwide, with $529 million from the oil-soaked sheikdom.

By Mark Mazzetti and Emily B. Hager for The New York Times, Secret Desert Force Set Up by Blackwater, May 2011

For any expatriate who has spent time in the United Arab Emirates, the luxury lifestyle soon gives way to a seedy underworld, which is only a paradise for fugitives on the run.

[caption id="attachment_1280" align="alignright" width="223"]Times News Service Erik Prince[/caption]

The UAE, after all, is “an autocracy with the sheen of a progressive, modern state”, according to the New York Times’ reporters who exposed Erik Prince, the founder of Blackwater, and his secret army.

But for the Colombians he recruited for the battalion intended to beef up the UAE’s military presence, Abu Dhabi is the “Arabian Dream” offering a better quality of life. 

Prince, who had already been a driving force in the boom in wartime contracting that began after the September 11, 2001, attacks, was hired by the crown prince of Abu Dhabi, Sheikh Mohamed bin Zayed al-Nahyan, to put together a squad of foreign troops for the UAE.

He outsourced critical parts of the UAE’s defense to mercenaries from countries including Colombia and South Africa, in a plan said to have been drafted months before the so-called Arab Spring revolts that many experts believe are unlikely to spread to the UAE. But Iran was a particular concern.

The mercenaries live in a training camp, located on an Emirati base called Zayed Military City:

It is hidden behind concrete walls laced with barbed wire. Photographs show rows of identical yellow temporary buildings, used for barracks and mess halls, and a motor pool, which houses Humvees and fuel trucks.

Secret Desert Force Set Up by Blackwater, May 2011

It does not sound like much, but for these imported soldiers, joining the operation was an opportunity to earn a lot of money and see a new part of the world.

This week, Columbia’s daily newspaper EL TIEMPO, gained exclusive access to some of the Colombian paramilitaries who spoke of the “Arabian Dream” in the UAE. 

For the 1,400 Colombian troops in Abu Dhabi, the UAE offers “not just a medal, but a proper paycheck”, according to a translation of the Spanish article.

“Why did we decide to leave? That’s what people ask us. The response is easy: Quality of life,” they [the troops] say.

One officer describes the stark difference in quality of life. In Columbia, he received a bonus of 800,000 pesos ($448.8). In Abu Dhabi, he has a salary of $3,000, receives housing, food and healthcare free. He has also learnt English, and in the evenings, he and his colleagues travel in buses into the city centre, where they can buy food and supplies. They get weekends off.

The long weeks of combat, sleepless nights, patrolling and watching for landmines were left behind, the officers told EL TIEMPO.

[caption id="attachment_1290" align="alignleft" width="580"]UAE training camp where foreign troops are stationed, courtesy of New York Times UAE training camp where foreign troops are stationed, courtesy of New York Times[/caption]

Reflex Responses, a company known as R2 and contracted by the UAE government to train and recruit the troops, spends roughly $9 million per month maintaining the battalion, which includes expenditures for employee salaries, ammunition and wages for dozens of domestic workers who cook meals, wash clothes and clean the camp,  according to the NYT report.

The Colombians “never wanted for anything”, said Calixto Rincón, a 13-year veteran of Colombia’s National Police force who is now back in Colombia after serving as a mercenary in the UAE.

The UAE and American leaders even arranged to have a chef travel from Colombia to make traditional soups.

Unsurprisingly, the secrecy of the project and the clash of cultures between the Catholic Colombians and the Muslim Emiratis has made some things uncomfortable:
“Here, you can’t look at the women like in Colombia, because you can end up in jail,” one officer told EL TIEMPO. “A wrong glance can create offense, which gets reported to the police”.
Meanwhile another told the New York Times: “We didn’t have permission to even look through the door. We were only allowed outside for our morning jog, and all we could see was sand everywhere.”

But even this grievance was addressed by the American trainers.

One evening, the NYT reporters wrote, “after months stationed in the desert, [the troops] boarded an unmarked bus and were driven to hotels in central Dubai. There, some R2 executives had arranged for them to spend the evening with prostitutes.”