Category Archives: United Arab Emirates

Bank of ISIS: How to Bankrupt It

When you think of ISIS, forget the image of balaclava-clad men, with kalashnikovs screaming “Allahu Akbar”. Think of a carefully managed startup that has, like other successful companies, lured international investors, diversified its income and widened its outreach. Just like any startup runs on equity and investment, this terrorist organisation also obtained funds to organise its structure and plan operations.

If ISIS Inc. was headquartered in Silicon Valley, it would be considered one of the top private companies in America. Based on even conservative estimates, last year the group controlled assets in excess of $2 trillion, with an annual income amounting to $2.9 billion, according to Thomson Reuters. That’s more revenue than the retailer J Crew and the household appliance corporation, Conair, earn a year.


Yet, in defeating ISIS, it’s important to dispel short-term solutions, particularly those that fall under the sway of “retribution” such as mass bombing. Sanctions and intense warfare alone won’t work, because ISIS thrives on the failure of Middle Eastern governments. To beat ISIS, governments must first address President Bashar al-Assad’s government in Syria as part of the problem. This is a mess born of the Iraq war and the Syrian civil war, the brutality and sectarianism of which has become a recruiting tool for the Islamic State. “Assad is not a sideshow,” says Emile Hokayem in this report. “He is at the center of this massive dilemma.”

Take ISIS’s authority over oil, for starters. It is by far the most lucrative commodity for the group. It is the “black gold that funds Isis’ black flag” and not only fuels the war machine, but also provides electricity and gives the jihadis critical leverage against their neighbours. Yet, blindly bombing ISIS’s oil reserves could actually help it more than it could hurt it by disrupting the livelihood of those who relied on oil trade. As Hassan Hassan, Chatham House associate fellow, writes:

Airstrikes disrupted this wartime economy and many families, who continued to buy oil from its new owners, ISIS, increasingly found it difficult to find alternative means to survive. This pushed some families to send their sons to join ISIS as the only way to generate a monthly income, according to several individuals living under ISIS.

The depletion of Syria’s ageing oilfields are, alone, containing ISIS to some degree. The group’s need for fuel for military operations also means there’s less to sell in the market.

It’s too late to expect that freezing the assets and halting the sale of weapons to those countries that have supported ISIS will stunt the organisation’s power. The jihadist group has already become immune to international sanctions.

Not only has it infiltrated every aspect of the economy, including the banking system (for example, more than 20 Syrian financial institutions continue to operate in ISIS-held territory, according to Matthew Levitt, director of the Stein Counterterrorism program), it has also been making millions for years simply through a string of illegal activities (think: extortion through illegal taxes, and kidnap and ransom payments, selling sex slaves and plundering of antiquities excavated from ancient palaces and archaeological sites).

So any optimism that ISIS will have financial oversight is short-lived. In fact, “blocking the assets that fill ISIS’ coffers would mean rethinking the world’s economy,” says Italian journalist Roberto Saviano, an impossible feat considering the group has already exploited the underbelly of the financial system.

So how do we bankrupt ISIS, considering all the above?

Forget the strategy that addresses the symptoms not the disease. Indeed, as Emad Mostaque, strategist at Ecstrat tells Rebel Economy:

Our governments guarantee us safety from political violence, so when political violence is introduced into public life, governments typically over react and expend valuable resources fighting a small, hard-to-hit enemy.

This is why the war on terror has been a resounding failure, spending $2 trillion, killing 2 million civilians and seeing the number of enemy recruits going from under 1,000 to over 100,000 in 14 years.

Instead, there should be more focus on a long-term option that addresses grave unemployment (remember, ISIS thrives on the Arab world’s failures to provide to the people and relies on unemployed youths for new recruits). This means providing people with opportunities to enter competitive, labour intensive jobs, within blue-collar industries and prevent the draw to radicalism. It is a strategy for economic reform that critically channels most of the gains to the bottom 80%. The summary of this five-fold plan, by Middle East analyst Nathan Field, is necessary reading for understanding why ISIS continues to recruit and grow stronger.

In the end, there’s many things to be done:

  • Focus on resolving the Syria crisis as a whole and life after the Assad regime

  • Get the region to think differently about jobs for youths to help stem the flow of disenfranchised young people to ISIS

  • Targeted attacks against ISIS to limit their growth, and other sanctions

  • Cyber war on the ISIS propaganda machine to mitigate their message

There’s also a radical option, more in line with the rebel fighters of Libya. Train Syrian refugees in Turkey and other parts of Europe in the art of sabotage and send them back in as the Resistance. The most embarrassing problem for ISIS is their own “people” striking back at them. Bankrupting ISIS, a terror group which has further reach than any group before it, can only happen if the entire structure collapses, and that starts from within.

How One Bomb Affects Egypt’s Economy

In the midst of the worst recession in America since 1929, Ben Bernanke, the former head of the Fed was asked simply, ‘When will this end?’.

This was his response:

The lesson of history is that you do not get a sustained economic recovery as long as the financial system is in crisis.

Sounds logical. Especially coming from the man who was considered the most powerful person in the U.S. working to save the economy, and eventually he did.

Yet, apply this logic to Egypt, which has for so long languished in its political mess, and you see it doesn’t fit. Policies have been made and then broken, currency devaluations have been enforced, slowed and then prevented, and interest rates have been held and occasionally cut, and still reserves are pretty much where they were four years ago – sitting at just over $16 billion, enough to cover about three months of imports—the minimum the IMF considers advisable. 

Up till now, Egyptian tourism has survived big setbacks. If there was any trouble in the desert or along the Red Sea, it was small, and tourists were not the targets (at least, under Sisi.) Yet, memories of an Islamist uprising in the 1990s that took years for then President Hosni Mubarak to crush have been aroused of late. In September, Egyptian security forces mistakenly bombed a convoy of Mexican tourists in the western desert while pursuing militants. Last year, the bombing of a tourist bus in Sinai killed two South Koreans and an Egyptian.

The problem now is that Egypt’s economy is much weaker and cannot sustain a drop in foreign currency. Foreign direct investment (FDI) amounted to $6.4 billion in the last fiscal year (from the financial year running July until June), and the government is hoping (unrealistically) for $10 billion this year. Unemployment has hovered at a record high of over 12 percent since the beginning of 2011 and the biggest issue, the current-account deficit, is still high. That’s because Egypt is still spending a lot more (on oil, wheat, cars, metal and other goods totaling roughly $60.8 billion) than it is exporting (just $22 billion last year.) And that’s been happening for more than ten years.

Unlike the 1990s, Egypt’s economy is in a much more precarious position.

Take these graphs, from Capital Economics, on the number of tourists flying to Egypt and the foreign currency reserve level: 

Tourism and FX - Egypt copy

According to estimates from Jason Tuvey, a Middle East economist at Capital Economics, export revenues (because tourist receipts are counted as a service export) could fall by as much as $3.5 billion, or a massive 1.3 percent of GDP, over the next year. That is a huge chunk out of the tourism industry, which accounts for 6 percent of Egypt’s GDP already and 1.3 million jobs. It’s especially bad because the Red Sea resort towns of Sharm El Sheikh and Hurghada were among the most successful tourist sites, even more so than the desert destinations. Daily occupancy rates reach more than 70 percent here at the start of June. It even prompted the tourism minister, Hisham Zaazou to tell Reuters this in September:

“I will focus on the bulk of tourist movement. While desert tourism is important, the highest figure for it was 350 thousand (people a year). Sharm El Sheikh, on the other hand, received more than 4 million tourists at some point, on its own,” he said.

“I am going to work on everything related to those areas, from securing them and all else.”

Good job securing that…

The country is back to square one having barely recovered from the ‘second’ revolution of 2013, let alone the ‘Arab Spring’ uprising of 2011. And, somewhat more unsettling is the risk to the neighboring Suez Canal, the fastest shipping route between Europe and Asia and one of the country’s main sources of foreign currency.

Despite security efforts, there have been multiple attacks on the Suez Canal. In 2013, an Islamist terrorist group called Al-Furqan took responsibility for hitting merchant vessels passing through the Canal with rocket propelled grenades. This is a clear video of the attack, which happened in broad daylight:

It was the second attack in just under three days (the first was allegedly under the cover of darkness), and demonstrates one example of how Egyptian security forces have taken a reactive approach to military threats, rather than mitigating the risk. According to Stephen Starr, a journalist that wrote a summary of the security risks to the Canal, “the threat of serious attacks by militants—operations that could sink a major vessel and thus block the canal—is a real one.” 

President Sisi has his eye on a mega $8-billion expansion of the canal that aims to double daily traffic by 2023 and increase annual revenues to more than $13 billion by 2023, from just over $5 billion in 2014. Yet, none of this is meaningful if the government continues to resist structural reform which has left the economy floundering for years. It is also resisting the simple fact that there was likely a bomb on flight.

Egypt will certainly need international support once again as foreign direct investment dries up, but officials are alienating themselves by mismanaging the crash inquiry. It is no secret that European countries are among the heavyweight influencers on the IMF board, a organization that has had on-and-off talks with Egypt for years. So, if Egypt really wants to dispel concerns from its donors, in the hope of sourcing funds, transparent investigations are required.

Egypt The Mirage

A collection of “inspiring” quotes from some of Egypt’s biggest international investors have been making the rounds on social media:

“Advice: Stop whining. The future will come down to the private sector. … This is a democracy with an enormous amount of legitimacy. I know what an illegitimate government looks like and smells like.” —Timothy Collins, CEO, Ripplewood Advisors

“You don’t commit to a $12 billion investment unless you believe in what is going on in the country.” —Bob Dudley, Group CEO, BP

“Everyone decides on which risks he’ll bite into, and in Egypt, I’ll bite into any risk, any day.” —Emaar Chairman Mohamed Alabbar

“I wish we had as many opportunities in Europe as we have in Egypt” —Joe Kaeser, President and CEO, Siemens

Rebel Economy cannot verify whether these are real quotes or made-up by people who got a bit too much sun in Sharm.

It is an impressive display of support and a vote of confidence for Egypt, the “democracy.” But as Egypt basks in the financial and political support of the world, as deal after deal is signed, and $138 billion dollars of investment is secured for the country in just a couple of days, the truth behind this high-profile economic conference in Sharm El Sheikh is a little harder to swallow.

The floor-to-ceiling glossy signage declaring, somewhat ambiguously, “Egypt the Future”, ignores the fact that Egypt needs to do a lot more than ask for investment. The tourism industry, which at one point contributed over 10% of GDP, is in a pathetic state: the number of visitors last year was a third below the level of 2010.

But more critically, it is the bones of the country that are creaking. Egypt needs power, proper roads, better and more schools, hospitals and housing. Jobs are scarce and the ones available are low quality and pay below what is considered an internationally acceptable minimum wage.

The population is predicted to grow to 116 million by 2030. Egypt’s president, Abdel Fatah El Sisi, wants to ditch the 1000-year-old Cairo, for a brand-spanking new $45 billion, Dubai-style capital in the desert. But we all know that’s pie in the sky.

So what about all these deals? The Gulf has promised $12 billion to Egypt. The reality is that the country has spent $12 billion several times over in the last three to four years. What is another $12 billion going to do but keep Egypt operating weakly at a unsatisfactory level.

But most importantly, most of the companies investing are ones already in the country (BP, Siemens, ENI, etc), and all these Gulf companies (Masdar, Emaar etc) are merely doing as their government’s tell them – “Keep the Brotherhood out.’

Officials, business people and Egyptians are genuinely excited for the future, there’s no denying judging by the inordinate number of Sisi Selfies, and exclamation marks punctuating lofty ideals about the country. But the multi-billion dollar PR push to showcase the North African nation as a place worth pumping money into betrays the truth, not just because of the country’s inescapable human rights atrocities but because Egypt is lacking the bread (literally) and butter infrastructure it needs to survive.

Sissi said so himself in this bizarre interview with the Washington Post’s Lally Weymouth where he talks about himself in the third person (He said, “Sissi reflects the popular will of Egyptians.”).  He tells Weymouth that the country needs $130 million subsidies to support 90 million people:

Where can we get the money to provide for these needs? Who would come to invest in this country if it is not stable? We have an overwhelming unemployment rate of 13 percent.

So what is his response? More money of course. Another $300 billion to be exact. This economic conference is not The Future, it is a mirage that shines the light away from the population’s plight, where thousands are wrongfully imprisoned and thousands more are still hungry, with no access to basic resources and education.

One person asked on Twitter: Does investing in an economy of a potentially unstable and authoritarian regime make business sense? It’s not business anymore. It’s politics when it comes to the Gulf and it’s cautious agreements, with disclaimers as long as scrolls for the companies involved.

Naguib Sawiris’s Fiefdom

Naguib Sawiris wants to plop hundreds and thousands of Syrian refugees on isolated islands for sale off the coast of Italy or Greece, and use this manpower to build a new country that he would own. Almost at the same time as the billionaire philanthropist was giving an interview to CNN, saying he “cannot just sit … and do nothing…and pretend it’s not my problem,” Egyptian security forces gunned down at least 12 tourists and guides in Egypt’s White Desert.  It was an accident, of course.

For a telecoms magnate worth approximately $3 billion, it is hard to dismiss Sawiris, especially as the UN call this the worst global refugee crisis since World War II. But the motive behind this plan is questionable when Sawiris’ agenda in one country – his home in Egypt – does not align with his interests elsewhere.

In Cairo, the Sawiris family, who control the Orascom conglomerate spanning telecommunications, construction, tourism, industries and technology, have turned a blind eye to the ruthless crackdown of their fellow countrymen and women, thousands of whom are political prisoners, in exchange for a favourable business environment, where big corporations are rewarded while small business is plagued by red tape. Egypt still ranks 112th on the World Bank’s ease-of-doing-business index, trailing behind Zambia and Swaziland. But the disappearing of people and the silencing of dissent is not a worthy cause.

Sawiris told CNN (taken from a rough transcript):

I would build temporary housing and temporary school and temporary hospital, you know. And then we will use these people and provide them jobs to build a new city on the island, to build this island, you know. Because this war is not going to end in weeks or in months. It may be years even.

The exodus of millions of Syrians is devastating, and perhaps solutions should be unconventional,  but is Sawiris the right person to be proposing and controlling such a project, when he is politically implicated in Egypt’s own disastrous government? And then there’s this fantastical promise of a haven for Syrians, that in reality, will become a massive refugee camp, lacking in infrastructure, on an island cut off from society. This is a temporary solution, at best, and at worst, it is an over-populated, under-served fiefdom controlled by a telecoms magnate. This is not how cities and societies are built.




Egypt’s Mafia Fund

A private equity fund launched by Gamal Mubarak managed to reel in millions of dollars of investment from Egypt’s elite, revealing the depths to which political and business connections ran as he began rising in stature in the late 1990s.

According to a document obtained by Rebel Economy, Gamal Mubarak’s $54 million Horus I Fund, created in 1997, attracted some of the country’s most controversial businessmen including steel fugitive tycoon and Mubarak-confidante Hussein Salem, steel magnate Ahmed Ezz, who was acquitted in June after being charged with monopolising the country’s steel market, and the ex-CEO of Egyptian investment bank EFG Hermes, Hassan Heikal. Heikal is a defendant in an insider trading case involving both of the Mubarak sons. His former colleague, Yasser El Mallawany, who is still officially an employee of EFG, is another investor in the Horus Fund.

[caption id="attachment_2059" align="aligncenter" width="640"]Full list of investors who committed to Gamal Mubarak's fund Full list of investors who committed to Gamal Mubarak’s fund[/caption]

The fund, which was operated by EFG Hermes and invested in Egyptian projects and companies, attracted millions of dollars of investment from members of Egypt’s old guard, some of whom have been targeted in corruption cases since the fall of Hosni Mubarak in 2011. Although there is no evidence the fund engaged in corrupt activity, the connections between the people named as investors on the account has never been properly investigated by the Egyptian authorities.

The list of individuals and companies published above raises questions that have so far been left unanswered by Egyptian investigators.

The document, which details how much individuals and companies committed to the fund at the time of launch, also provides a window into the everlasting influence of Mubarak’s old guard and their long-standing ties to Gulf nationals in Saudi Arabia, Kuwait, the United Arab Emirates and Qatar.

It represents the beginning of Gamal Mubarak’s foray into private equity, where his financial interests in the Egyptian economy, from tourism to agriculture to oil, began to grow. The fund was created prior to Gamal’s entry into political life, when he acquired 18% of EFG Hermes Private Equity.

Among the handful of Gulf companies listed is First Arabian Development and Investment Company, run by Hamza al Kholi, a prominent Saudi Arabian businessman, and Yahya Al Yahya, the chief executive director of Gulf International Bank.

The ZAD Global Direct Investments Fund is also a notable appearance on the list. This investment company, founded by Prince Mishaal Al-Saud, second child of the Prince Abdullah bin Turki bin Abdulaziz Al-Saud in Jeddah is a privately controlled investment company, organized, owned, controlled and operated as the investment vehicle for the family of Prince Mishaal  for the purpose of managing the family’s investments.

Some businessmen have used clever ways to hide their investment activity. A company connected to Hussein Salem appears on the document. Clelia Assets Corporation, a Panama registered company, is linked to his name.

Salem fled Egypt in 2011 when he came under fire for tax evasion and his complicity in a corrupt gas deal.

Other controversial names on the list include Mohammed Abou El Enein, the chief executive of Cleopatra Ceramics, a major Middle East ceramics firm that has faced repeated labour strikes.

Abou El Enein, who once called himself “the noblest businessman on Earth”, was at one point under investigation for allegedly violating labour laws. Workers have staged sporadic strikes asking for improved working conditions and higher wages.

The fund is a worrying sign of how little progress Egypt has been made in defeating a tight circle of Egypt’s mafia, some of whom were subject to now forgotten corruption cases.

And now, there is evidence that some of Mubarak-era moguls may make a reappearance on Egypt’s political and business scene. Hussein Salem, who is currently exiled in Spain, has reportedly asked to make a deal with the interim government that would end any court cases against him. He has said he is presenting a new initiative to the interim government which includes funding for the unemployed in the tourism sector, as well as restoration of police stations, churches and mosques.

Hassan Heikal, who resigned from EFG Hermes earlier this year, has indicated that he will be acting in a consultancy basis to the Egyptian government. He has signalled he will offer ideas and launch new initiatives “that offer long-term solutions to Egypt’s fiscal challenges and economic development,” according to a statement he made when he resigned.

But the army has a strategy of its own. It’s interest is in preventing an examination of its own assets and business interests, which not only is likely to affect other investigations but focus on a shift away from Mubarak-era crimes toward the Muslim Brotherhood and the former president Mohammed Morsi.

So as the army continues its assault against the Muslim Brotherhood, journalists and civilians, the more these characters will disappear into the background, leaving them free to operate, uninterrupted.

Why One Foreign Investor Left Egypt

One of the key markers of a thriving economy is whether investors are committed.

For Egypt, attracting investors has remained a point of contention in the last three years – are they or are they not putting money in Egypt?

Marshall Stocker, an American venture capitalist, was among a band of businessmen drawn to Egypt’s transformation from a sleepy Arab socialist country to one that embraced the market.

The 2004 cabinet had cut the top rate of tax, launched a series of special economic zones and encouraged a rush of construction activity. This robust economic expansion plan, led by Hosni Mubarak’s son, Gamal, hit its stride in 2008, when foreign investment reached dizzying heights of $13 billion. Economic growth clocked in at a consistently high 7%.

The global business community applauded Mubarak’s rule as “bold”, “impressive” and “prudent”. On the surface, the country was a haven for investors like Stocker.

But once he had arrived in Cairo to launch his urban redevelopment real estate company, Stocker’s optimism was short-lived and he was forced to shut down his business just a year after it had hit its peak. He subsequently documented his experiences in a memoir published this year, “Don’t Stand Under A Tree When It Rains”


Rebel Economy spoke to him about his experience as a foreign investor during the height of the revolution and why he won’t be investing Egypt again, at least for now.

  • What was your business about? 

A populist government panders to voters by preventing rents from rising. After several years tenants are paying much less rent than they otherwise should and this makes for lost income to the landlord and significantly lessens the value of an apartment building.

We intended to buy 12 large buildings in Cairo, and instead of buying building by building we could buy them all in a week and redevelop them.

Our team started raising money in 2009 for properties that were a particularly illiquid investment with a lock-up of 8 years. But the aftermath of the financial crisis prompted everyone to demand very, very liquid investments.

That meant that even though we solicited lawyers, doctors, colleges – all types of wealthy people,  in the end the people we found to invest were all people we knew and they were all professional investors; people who managed mutual funds, hedge funds, they apparently have a better appreciation of the market liberalisation thesis in Egypt.

We were able to raise money to do that – $50 million of equity – and we started formally in 2010.

  • Why was Egypt a good investment?

I had already advised the President of Yemen and his son on market liberalisation and the positive consequences of liberalising their economy. I always felt that direct investment in this type of liberal environment is where the real excitement is.

Egypt had both boxes checked – a nice liberalisation environment and it had rich opportunities in urban development. Egypt had the single greatest increase in economic freedom in the years leading up to 2008 and 2009, inflation had been brought under control, corporate taxes were halved to 20% and foreigners could own 100% of a business.

What you saw was direct investment increase collectively. And it was relatively easy to set up a business. The General Authority For Investment (GAFI) is a one-stop shop so the whole process of getting a company going was quite easy.

We had another dilemma: whether it is ethical to do business under an autocratic regime and what business are ethical in such environments. Ours was completely voluntary, as in sellers and tenants were free to refuse our offers. That, I thought, was the ultimate measure of ethics.

  • When did the peak come? 

The peak came after the revolution had begun. Post-revolution there were genuine economic stresses and market prices were falling on buildings.

I negotiated inside a building on Mohammed Mahmoud Street that had its windows duct-taped shut.

The cost of the asset was dropping under tenants were under increased economic stress. So paying tenants to leave was easier to do, and redevelopment, another major component of our business, got easier to manage even though imported goods cost were going up as well as labour. The business made sense post-revolution.

  • What was the turning point, when you knew it was time to leave? 

There has been no economic policy post-revolution except to peg the currency. The volatility of the Egyptian foreign currency rate hit an all-time low post-revolution, and that’s absolutely not what should be happening.

In my opinion, economic policy took a backseat. Islamist president Mohammed Morsi had free-market ambitions at the micro level but didn’t show that he understood this at a macro level. So once he was in power, we had started hearing anecdotal evidence that people couldn’t move money out of the country.

GAFI told us this was not the case but we endeavoured to move a modest amount offshore. It took 7 months. 

Luckily, we never had much money onshore but come August 2012, we made the decision that informal capital controls and lack of reliable economic policy meant that we would not be able to continue our business.

The business was still excellent. Profits were higher because asset prices dropped and those are the operational risks we were willing to take, but at the end of the project, if you can’t move your money out of the country, woe is the investor who makes the investment.

  • Would you invest in Egypt again? 

I have no money left in Egypt. Would I pursue a direct investment strategy that has a decreasing level of economic freedom? No, absolutely not. I wouldn’t go back.

  • What do you forecast for Egypt’s economy? 

The government has a blank cheque from a number of Gulf states but there is a credit limit and the risk is that this credit limit is reached before sound economic policy is enunciated and deployed.

And in the absence of policy, I have to believe that the money is going to run out first.

The Egyptian government visiting Gamal Abdel Nasser’s tomb also signals a certain level of respect toward his thinking but also of his socialist economic policies, which I don’t agree with. Those type of activities should not be ignored.

Stocker has published a memoir of his experience in Cairo. “Don’t Stand Under A Tree When It Rains” exposes the dilemmas of investing during the Egyptian uprising and provides advice on working in a foreign country. 

How the Arab Spring Shook Up Oil Markets

Among the first reactors to the Arab Spring back in January 2011 were the oil markets. The oil price, already volatile in the aftermath of the global financial crisis, became even more unstable as concerns that the oil supply would be choked off if the political problems of the Middle East affected global oil production.

Now, the world is dependant on a few Gulf countries, namely Saudi Arabia, to fill the supply gap. But should the Arab Spring countries, the majority of whom are not big oil producers, be a primary concern for unstable oil markets? Indeed, sometimes the oil market can be wrong, like it was on Egypt. Sometimes the oil market can prepare for the worst case scenario as it did on Syria.

Rebel Economy asked Justin Dargin, an energy and Middle East scholar at the University of Oxford, to break down the misconceptions we have about the oil market and its relation to Arab countries in transition.


Dargin has advised some of the largest oil companies in the world and worked in the legal department at the Organization of Petroleum Exporting Countries also advising on multilateral initiatives.

  • The oil market has been at one of its most unstable points since World War Two. Many have linked the risks from the countries of the Arab Spring to this tumultuous period. Is this a fair assumption?

There was a chain reaction in the global economy. After the protests began in Tunisia and spread to other MENA countries, for a period of time, investors speculated that the instability would reach the major oil producing Arab countries. The trepidation that the major Arab oil producing countries were at risk for sustained political unrest caused the global oil market to react.

But, what is problematic for the global economy is not elevated oil prices, per se, rather it is that the oil market is much more volatile because of the tenuous political situation in the MENA region. Additionally, the Arab Spring began at an already delicate time for the global economy that was still reeling from the global financial crisis.

Much of the fluctuation in the global oil market is driven by what is known as the “fear premium.”

The fear premium is basically a rise in the price of a commodity, such as oil, that is based on the expectation that a certain event will happen that would significantly impact the market in a negative way. This relates to the Arab Spring as there was a fear that several events could potentially happen. Global investors speculated that in the beginning months of the Arab Spring, there could be oil production disruption in the oil producing Gulf countries.

There was also the fear that perhaps several important sea-lanes and canals, such as the Strait of Hormuz or the Suez Canal, could be blocked. Furthermore, a bit later on during the Arab Spring, terrorism fears grew and it was thought that the regional power vacuum could encourage militant groups to launch attacks on MENA energy infrastructure.

While these fears have largely subsided (although not completely), the international price of oil still remains extremely unstable because of this uncertainty.

So when we examine global energy price instability because of political instability in the MENA region, we must realize that this is “political risk” premium that keeps oil prices artificially high.

The oil market fundamentals are relatively sound at the moment, with increased oil and natural gas production occurring in North America due to the shale oil production boom and increased production in Iraq and other areas around the world.

Nonetheless, when we assess the actual impact of the Arab Spring, the oil producing country of note that had notable disruption was Libya. And, when viewed in context, Libya supplies a minor amount of the global oil supply, while Syria, Egypt, Yemen and other Arab countries that had their own “Arab Springs” are not major oil producers of any note.

The fear premium is based on the fear that the major oil producing Arab countries of Algeria and the Gulf (and perhaps Iraq) will have their production disrupted which would significantly reduce available oil on the market.

  • But the perception that the oil supply could be affected, even if it is incorrect, can still make more impact than real pressures. What is the long-term impact of this on oil markets? 

The oil market is uniquely vulnerable to fluctuation based on fears, whether justifiable or not. This is because most oil exports hail from regions whereby state formation occurred relatively recently and nation-state legitimacy is still being constructed.

Because many of the nation-states in the MENA region are relatively recent creations, political stability is still evolving. The primary perception in most commodity markets especially that of oil, is that the region is prone to wars, coups, terrorism and civil disturbances in ways that can definitively disrupt production of the lifeblood of the global economy.

Ultimately, the long-term impact of investor perception in the oil market, or in other words, the fear premium, is that the oil price will become increasingly divorced from the supply fundamentals thereby leading to a much more volatile market. And, as commodity markets in general become more computerized and investors are able to make split second decisions regarding investments, this problem will be exacerbated.

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

1) Egypt and TurkeyBloomberg 

It’s amazing how fickle Egypt’s government can be when it drops an old friend.

Egypt’s new government has made it clear it is not prepared to cooperate with Turkey, an ally and donor of the Muslim Brotherhood. Tensions have grown between the two countries since the army toppled Islamist president Mohammed Morsi and Turkey is suffering for it, with exports dropping as much as 30% since July 3, the day of the coup.

The Federation of the Egyptian Chambers of Commerce this week announced they will suspend all official trade relations with the Turkey after Turkish Prime Minister Recep Tayyip Erdogan described Morsi’s ouster as an “unacceptable military coup”.

But with the volume of trade between the two countries estimated at about $5 billion, excluding tourism and joint investment projects, Egypt will also end up paying a price for its bad diplomacy. 

2) With Brotherhood out, old order shapes Egypt’s future – Reuters 

Not so much an economic story, but one that alludes to the growing influence of Egypt’s “old guard”, symbolically represented by the release of Hosni Mubarak.

The evidence is clear: the army has marshalled support from Egyptians as the country becomes exhausted by two and a half years of turmoil.   Investigations against the January 25 killings and politically corrupt individuals during the Mubarak era have been put on hold. Censorship is back, with propaganda infiltrating most TV channels and even some state-run newspapers calling the January 25 revolution a “setback”.

This story makes very clear that Egypt has turned a worrying corner in the quest for democracy and therefore equality, which is really what the revolution was all about. 

3) Apache – Wall Street Journal 

The oil and gas company, Apache has agreed to sell 33% of its Egypt business to China’s Sinopec Group. It will continue to be an operator on the projects.

Though this story may, on first reading, look like Egypt’s oil sector is vulnerable to asset sales because of increasing debt to oil companies and mismanagement on the part of the Egyptian government, it’s not that simple.

The operations are located in the Western Desert, far from any political unrest that would impact exploration. In fact, this transaction reflects more of Apache’s goal to use the proceeds to reduce debt, buy back shares and fund the company’s capital spending.

What it does highlight is the value of Egypt’s oil and gas sector, which will always be attractive to companies, even despite such political risk. 

4) Egyptian government temporarily halts IMF negotiations – Egypt Independent 

This story is misleading for a number of reasons. Egypt didn’t halt IMF negotiations, rather the IMF stopped communicating with Egypt partly because of the way the Brotherhood have been almost banished from not just the political sphere but from daily life in Egypt. Most Brotherhood members are in hiding now.

The story also refers to the Gulf as a kind of saviour that will tackle the deficit, but none of the $12 billion will be used to cut the deficit. It will be used to keep the pound afloat and imports flowing. In other words, it’s a running tap that is wasting cash that could be used more shrewdly.

What about making a deal with Saudi Arabia to invest in projects in Egypt? Wouldn’t that be more helpful than throwing billions of dollars into the Central Bank to support a currency that many consider is overvalued? 

5) Libya oil – Economist 

One of the biggest issues standing in the way of Libya’s economic success is the government’s control over key sectors, especially oil. Now a port that allows the trade of Libyan oil has been shut off and its closure is representative of the power the state wields over the energy sector.

Basically the state believes that a large amount of oil is being “smuggled” out of Egypt. But the party responsible for the potential sale, the Petroleum Facilities Guard, say it is a valid transaction.

The stand-off is part of a bigger political agenda between various factions in Libya, but as this Economist article concludes, if the state-owned “National Oil Company cannot keep its legal monopoly on oil exports it will be taken as yet another sign of the increasing level of political risk in Libya”. 

5) Economic Challenges and Opportunities in Post-Qaddafi Libya

This report, from the Atlantic Council’s Rafik Hariri Center, evaluates the Libyan economy and progress since popular uprisings in February 2011 and the eventual ouster of the Muammar Qaddafi regime.

On the surface, it appears Libya’s economy is back to pre-revolution levels with oil production and GDP at comfortable levels. But this report sets out how the government has failed to come up with a single economic plan. 

In this useful read, three main priorities are laid out for Libya’s government including diversifying the economy away from oil, reducing youth unemployment and modernising the financial system. 





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.