Thursday, April 10, 2014

Home far off for flood of Syrian refugees

The Global Times
Op-Ed -
By Paul Cochrane

The Middle East is experiencing its worst refugee crisis since 1948 when the state of Israel was created, which led to the expulsion and dispossession of some 3.2 million Palestinians throughout the region. 

Recently the UN registered the millionth Syrian refugee in Lebanon. Every minute another refugee is registered, yet the number of Syrians in Lebanon is way higher than officially acknowledged, given the porous borders and the tens of thousands of Syrians that were already working in the country and could not go back.

The exodus of Syrians since the conflict broke out three years ago means roughly one in four people in Lebanon are now Syrian.

They are everywhere, from mountain villages to makeshift tents in the Bekaa Valley, to extended families sharing a single room in Beirut.

Lebanon is bearing the brunt of the refugee crisis, but there are a further 1.5 million refugees in Jordan, Turkey and Iraq's Kurdistan region, and 6 million internally displaced within Syria.

In addition to Syrian refugees, there are 500,000 Palestinian refugees that have been in Syria since 1948, and are being forced to become strangers in another land once again.

The same is true for Iraqis that fled to Syria following the US-led invasion in 2003, with the number of refugees reaching 1.2 million by 2007, and as of 2013, had dropped to 480,000 refugees, according to the UN High Commissioner for Refugees (UNHCR). Iraqi refugees are stuck between a rock and a hard place, with Syria a war zone and Iraq beset by terrorism and violence.

As for Lebanon, there are 280,000 Palestinian refugees living in 12 camps. Lebanon has become a home for the dispossessed, and it is taking its toll, with an estimated $7.5 billion in cumulative economic losses due to the Syrian conflict and mounting socioeconomic instability.

Lebanon is unwilling to allow refugee camps for the Syrians, unlike Jordan and Turkey, as it does not want a repeat of the Palestinian camps that have been here since 1948.

The Lebanese authorities are concerned that Syrians will settle in camps and not return home, even if the conflict ends.

This stance is driven by fear, and it overlooks the fact that Palestinian refugees cannot return home even if they wanted to, whereas at some point, Syrians will be able to. It's when they can go home that's the question, not whether.

More to the point, with Syrians dotted throughout the country, it is proving a logistical nightmare to get aid to refugees; aid that is needed to help alleviate the refugees' plight, while also lessening the socioeconomic impact on Lebanese society.

Refugee camps should be strongly considered as part of the solution, as the Lebanese government will have to adopt a more pragmatic approach to deal with a crisis that is expected to only worsen.

Some 30 percent of the UNHCR staff are now focused on Syria. But that is not enough, especially when pledged donor funds are not honored, nor are all the aid organizations and NGOs working to address the burgeoning humanitarian crisis.

The UNHCR is already making plans to handle potentially up to 2.5 million Syrian refugees in Lebanon.

"We need to know how to react if there is a further inflow of people if the situation in Syria deteriorates further, and what to do if the situation in Lebanon deteriorates," said Shaden Khallaf at the UNHCR in Beirut.

The situation is deteriorating in both countries, especially Syria, and the only real solution is an end to the conflict. But multilateral talks in Geneva have not proved successful, and the conflict has become a proxy war between global and regional players.

Conflicts with major external actors tend to last longer as they provide the materiel to keep the war going, while making it harder to get around the negotiation table.

Add in multiple internal actors, and an end to hostilities seems far off. In Syria's case, there are estimated to be as many as 1,000 armed opposition groups comprising some 100,000 fighters.

While a third round of talks in Geneva are planned, the region is bracing itself for whatever comes next.

And that means somehow dealing effectively with the multiple waves of refugees, Palestinian, Iraqi and Syrian, who seem a long way from returning home

Friday, March 07, 2014

Crime may thrive after Turkish crackdown on police

Commercial Crime International

Istanbul (Ben Morlok)
Law enforcement and the judiciary are under threat in Turkey amid political wrangling and corruption probes. Thousands of police officers have been reassigned, the deputy of a financial crime unit has been dismissed, and the independence of the judiciary has been brought into question. Crime, smuggling and corruption are all likely to increase unless the political situation improves. Paul Cochrane reports.

Turkey, like much of the Middle East, is experiencing political turbulence and uncertainty. In early 2013, massive demonstrations erupted in Istanbul, ostensibly over the redevelopment of Taksim Gezi Park into a shopping mall, but expanded into protests against the government of the ruling Justice & Development (AKP) Party, which has been headed by Prime Minister Recep Erdoğan for 11 years.
Following the Istanbul protests, the political temperature rose further in December, 2013, when police financial crime units arrested some 50 people for graft, including the sons of three cabinet ministers, the mayor of Istanbul's Fatih district, a construction mogul, the general manager of partly state- owned Halkbank, and Iranian- Turkish businessman Reza Zerrab.
All those arrested had links to the ruling party. Erdoğan claimed the crackdown was a “dirty operation” to smear his administration, and dismissed members of the police force, the head of Istanbul police, and the chiefs of the financial crimes, anti-smuggling, cybercrime and organised crime units. “Nearly 5,000 police officers of different ranks were assigned different duties, and police chiefs of big cities were replaced,” said a Turkish criminologist who wanted anonymity.
Critics accuse Erdoğan of taking advantage of legitimate investigations to install pro-AKP supporters in the police and judiciary. “The rule of law is under threat, and the separation of powers is under threat as the government wants to keep legislative power, especially, under its control,” added the source.
In January however, the Speaker of Parliament Cemil Çiçek claimed there was no independent judicial review of Turkish legislation, while the government passed a law restructuring the Supreme Board of Judges and Prosecutors (HSYK) in February. “Everything is on ice right now due to the current (fraud) controversy. Erdoğan is decimating the judiciary, and there is a lot of collateral damage, with many careers and businesses up-ended if they are suspected of being an ally [of the US-based opposition movement led by cleric Fethullah Gülen]. It's all about power and who runs the AKP and subsequently Turkey,” said Atilla Yesilada, an Istanbul-based analyst at Global Source Partners Inc.
Three elections are to take place over the next two years, starting with local elections in March, but the outcome for judicial independence does not look optimistic given the tensions on both sides of the political divide. “If the Gülen movement wins, many innocents will be put in prison because of corruption accusations, and if the AKP wins, the corruption cases will be dropped,” added Yesilada.

Crime on the rise

With an undermined police force and judiciary, crime looks set to increase. “It is difficult to estimate crime and the sources of new crime that we will come across in Turkey, but definitely it will increase, as will white collar crime and corruption,” said the criminologist.
Of particular concern is that the deputy of the Financial Crimes Investigation Board (Mali Suçları Araştırma Kurulu or MASAK) was replaced in December. “Normally people can inform MASAK of financial crimes but as the root of these financial corruption probes goes back to information provided to MASAK, which is supposed to be independent, this is now under threat with the government interfering in bureaucratic operations. Confidence within the police and public confidence in the police is decreasing,” said the criminologist.

Smuggling concerns

Such enforcement concerns could play into the hands of smugglers, with Turkey a major crossroads between Europe and Asia in the narcotics and human trafficking trades, as well as counterfeit goods, while the country has porous borders with conflict-riven Syria, a turbulent Iraq, and Iran, which remains under heavy international sanctions. Indeed, the Office of the US Trade Representative (USTR) in its 2013 annual review placed Turkey on its 'watch list' for ineffective and inadequate protection of intellectual property rights. “US rights holders continue to raise serious concerns regarding the export from, and trans-shipment through, Turkey of counterfeit and pirated products,” the report stated. Turkey has also regressed in Transparency International's Corruption Perceptions Index 2013, dropping from 49th position in 2012, to 53rd out of 177 jurisdictions. “The commercial crime that is most frequently investigated and therefore that occurs most frequently is bribery, followed by bid rigging, malversation and malfeasance,” said Ms Olgu Kama, a Partner at law firm ELIG in Istanbul.
To address such concerns, in July 2012, Turkey criminalised private- to-private bribery and broadened the scope of both domestic and foreign bribery offences in its legislation to abide by the OECD’s Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.
However, the OECD's Phase 3 anti-bribery review of Turkey, which is to occur this month, may be affected by the ongoing corruption scandal. “The implications of these allegations may be reflected in the report, as Turkey is currently undergoing Phase 3 examinations,” added Kama.

Corporates take care

Away from the current fraud scandal, Kama said that multinational companies (MNCs) are “extremely careful” about their actions in Turkey, primarily due to the need to be compliant with multinational treaties such as the UK Bribery Act.
Assuming the independence of the judiciary and law enforcement survives the current political crisis, Kama said a key reform that would help legitimate businesses work in Turkey is protection for whistle-blowers. And companies can take steps themselves. “MNCs merely using global corporate compliance policy is not enough. Adaptation to the local context should be made. To that end, we advise companies to retain local counsels who are familiar with the Turkish culture,” she argued. Notably, any whistle- blower protection system lacking anonymity “may not work in Turkey, simply because other employees may regard the employee who blew the whistle as a snitch.” As a result, setting up anonymous telephone hotlines for whistleblowers “would be good idea,” said Kama.
However, whistleblowing and journalists investigating commercial crime could be thwarted by government interference in the media. Some 100 journalists have been fired or reassigned since December, while Erdoğan admitted in January that he had made a call to a media outlet to change headlines.
Furthermore, a draft internet bill has been proposed that critics say will censor journalism and social media. "This bill is all the more disturbing for seeming to be an integral component of a series of draconian statements and initiatives by the authorities in recent months,” said Reporters Without Borders in a January statement, while ranking Turkey 154 out of 179 jurisdictions in its Press Freedom Index 2013.

Tuesday, March 04, 2014

Syria’s Civil War Stagnates Oil Production

Oil tanks in the hotly contested city of Deir Ez Zour, with murals of President Bashar Assad (centre), his late brother Bassel Assad (left) and his father and former President Hafez Assad (right). Source: Richard Messenger

Petroleum Review

As peace talks finally got underway in Geneva, aimed at ending Syria’s bloody civil war, one economically devastating consequence is all too clear – Syria’s energy sector has come to a near standstill. The government has lost control of key oil producing areas to the rebels, international oil companies have left the country, and the regime has had to resort to roundabout methods to secure energy imports to offset production losses. Paul Cochrane reports.

In May 2013, Syrian Oil Minister Suleiman Abbas told the parliament that output was down 95% from the 380,000 b/d produced prior to the start of the uprising in March 2011, to 20,000 b/d, and that gas production had halved to 15mn cm. In November, Abbas gave the parliament worse figures for the
sector, with output at 772,540 tonnes (105,374 barrels) in 1Q2013, down 37.1% from 1,299,100 tonnes (177,197 barrels) in 4Q2012, according to a report in Syrian daily Tishreen. This would be a steep fall to just over 1,000 b/d for oil in government-controlled areas.
Natural gas output – which is still held largely in government hands – had declined from 2,020,800 cm to 1,558,760 cm during the same period, a drop of 22.9%. OPEC’s December 2013 monthly oil report was more upbeat, estimating Syria’s output to average 90,000 b/d in 2013. This almost certainly has to include rebel-controlled area production, although OPEC did not clarify this and added a health warning: ‘The lack of production data from Syria due to the ongoing political situation might bring a large revision once the numbers become available.’
Indeed, knowledge of what is happening inside Syria’s oil sector is scant. One prominent international energy consultancy firm turned down an inter-view with Petroleum Review, stating: ‘The situation is still unclear and it’s very difficult to assess the impact on oil and gas infrastructure. We do not provide speculative commentary.’
Estimating damages to infrastructure is clearly difficult to quantify, although the regime has estimated it at some $70mn. Damage to the country’s 6,000 km of pipeline has been minimal, how- ever. ‘There are clearly losses in terms of production, and determinate costs on what it will cost to re-start production, as to whether damage to facilities is due to the conflict or because it was not maintained or used. There is no idea what the scale is,’ says David Butter, Associate Fellow at the Middle East and North Africa Programme at Chatham House.

Losing oil control

What is clear is that Syria’s energy sector is in bad shape. Abbas stated to the Syrian parliament that 40,000 barrels of oil were being stolen every day from across the country, losing the industry $1.4bn directly and $17.7bn indirectly up to the end of 3Q2013. Meanwhile, $500mn was being spent monthly on imports of oil and derivatives to meet demand.
While the government of President Bashar al-Assad blames sanctions imposed on Syria in late 2011 by the US and the European Union (EU) for the loss of oil revenues, the reality is that the regime has lost control of the key oil producing areas. ‘While the regime is regaining important areas in the west and north-west of Syria, it has not achieved much in the desert close to the fields of eastern Syria, which has a large presence of the [rebel movement] Islamic State of Iraq and al-Sham (ISIS), some of the most capable fighters. I don’t think the regime will create a new front with ISIS to control the fields because it cannot concentrate on these areas for logistical constraints, as focusing on the east would compromise the western front, which is already fragile,’ comments Ayham Kamel, a senior Middle East analyst at the Eurasia Group. ‘So the oil sector will suffer for a prolonged period of time, mainly because fields are in areas under the control of rebels, and they’re unlikely to lose control for the foreseeable future,’ he adds.
With international oil companies having left Syria (Chinese companies pulled out in 2013) and oil sector workers having fled production areas, the rebels have been forced to extract oil as best they can, utilising very basic methods to refine the country’s heavy crude oil. According to a report in the regional Arabic-language daily Al-Hayat, in the area around Deir Ez Zour in the north-east, rebels are operating some 3,000 small-scale refineries. ‘Anecdotal evidence suggests small amounts are produced and exported to Turkey, and refined in a rudimentary way, probably tens of thousands of barrels a day only,’ says Butter.
Kamel, however, thinks production is just in the thousands of barrels per day, which has been a stumbling block to the April 2013 EU plan of lifting sanctions on oil exports from rebel-controlled areas to help bolster the opposition. ‘It’s been a big fiasco. The plan was unrealistic, to export some of that oil to outside markets and create a sustainable revenue stream for, at that time, the Syrian National Council. It was mainly a tool to boost morale among the opposition, as implementing it was very difficult – the regime has an air force and could attack significant deliveries, and the opposition was always divided. If the opposition had made a coherent front and controlled fields, they could have had volumes in the tens of thousands of barrels – but again, vulnerable to regime attacks,’ says Kamel. ‘Now, many opposition groups control the fields, follow no political authority and they have little or zero experience in operating the fields. It is hard for the fields to be monetised in any significant way, as such small volumes are for local use,’ he adds.

Offsetting losses

To offset domestic losses and keep its military machine running, the Syrian government has had to import fuel. According to Butter, prior to the conflict, Syria was consuming around 320,000 b/d, half of that figure being gas-oil and diesel, while half overall was imported.
‘It is obvious that total consumption is a lot less than it used to be, but there’s no real indication what it may be; perhaps around 150,000 to 200,000 b/d. There are a few indications as to how the regime is meeting its liquid requirements, which appears to be a mix of importing products and crude,’ he says. A key refinery at Homs city in western Syria has ceased operations, or at best is operating at 10% of capacity, notes Butter, leading to most refining happening at Baniyas on the regime- controlled coast, which has a capacity of around 130,000 b/d. International media reported in December 2013 that Syria is being supplied with crude from Iraq and Iran via private traders in Egypt and Lebanon, with shipments routed to Beirut and Baniyas. ‘My reading is Baniyas has four units – two for heavy crude from Iran, and two configured for lighter crudes for Iraqi crudes; but there’s no firm information on it,’ comments Butter.
Indicative of neighbouring Lebanon’s role, mineral (oil, gas and solid minerals) imports have surged, as have exports, going from $3.7bn imports in 2010 and exports of $56mn, to $4.6bn in 2013 and exports reaching $350mn, according to Lebanese customs data. ‘State-owned oil companies are not allowed to sell to Syrians [due to the sanctions], but private traders can,’ notes Lebanon Energy Analyst Roudi Baroudi.

A positive note

While the overall picture for Syria’s energy sector is grim, in December 2013 Damascus inked a 25-year, $100mn concession with Russian firm Soyuzneftegaz to explore for offshore oil and gas.
Although offshore exploration is likely to go ahead because there are no maritime security concerns in Syria, revival of the sector onshore will have to wait for the end of hostilities – assuming the peace talks have any success. ‘The oil industry should be the most important thing to come back on track, as a major aspect of GDP, so it should be up and running very fast [once peace is secured]. It all depends on the EU and US lifting sanctions,’ concludes Baroudi.

Friday, January 31, 2014

China and Islam: The Double Edged Sword

International Link - Hong Kong

China has recently been subject to terrorist attacks by its Uyghur Muslim minority, most notably in Tiananmen Square in October, 2013. International opinion doubts that the attacks were related to Islamic militancy, while Beijing is insistent that Uyghur jihadists are to blame. Is Beijing now facing its own war on terrorism? Or is China putting the Islamic cart before the Uyghur horse? How Beijing handles the Uyghur issue may be key to China's future relations with Islamic states and Muslims worldwide as the spectre of Islamic militancy in China looms larger, Paul Cochrane in Beirut reports.

On 29 October, a Uyghur man, accompanied by his wife and mother, rammed his Jeep through the barriers at Tiananmen Gate, wreaking death and destruction in the symbolic heart of the capital. All three occupants burned to death when the vehicle caught fire.
It was a startling act in one of the most surveilled areas of Beijing, and the authorities were quick to link the attack to the East Turkestan Islamic Movement (ETIM), a shadowy organization that wants independence for the Uyghurs, an ethnic Turkic-speaking people from the autonomous region of Xinjiang. Some two weeks later, 11 people were killed in an attack by armed Uyghurs on a police station in Serikbuya, some 400 km southwest of Urumqi, the capital of the North-Western region.
The incidents have put the Uyghurs under the spotlight as part of the Three Evil Forces” (terrorism, separatism, and extremism) policy to be contained by Beijing, with the Tiananmen incident the most significant involving the Uyghurs since major demonstrations in Urumqi in 2009.
But was the attack in Tiananmen of an Islamic bent, or instead connected to Uyghur grievances over Beijing's policies in Xinjiang? Beijing however has not been forthcoming in laying out the evidence, making it difficult for observers to gauge the truth.
There is significant doubt out there about the claims of the Chinese government, not just from human rights activists, but also from the U.S. State Department and academia,” said Henryk Szadziewski, Senior Researcher of the Uyghur Human Rights Project in Washington D.C. “In relation to the broader claim from the Chinese government that the Uyghurs are moving towards militancy, we need more information than we are getting, and claims surrounding the ETIM have not been corroborated.”
More forthcoming information on the incident and the connection to the ETIM would assuage such doubts internationally, as well as to prove to Uyghurs that the attack did have an Islamic bent and is not being utilized for an unwarranted clampdown on Uyghur Muslims.
You don't put curtains around an incident like in Tiananmen, instead you let the lenses of the world see if it's true and have an independent investigation so there is not so much suspicion on both sides,” said Dru Gladney, an expert on China and Professor of Anthropology at Pomona College, California.
What observers are finding hard to swallow is that the Tiananmen incident was not an individual attack – like many other incidents that have occurred in the country - but an orchestrated operation linked to an organization like the ETIM. “Whats seems un-credible is that it was an organized attack by ETIM. It didn't have any signature of a coordinated attack but rather the hallmark of a psychotic, crazed individual,” said Gladney. “That is what is puzzling about China portraying it as a terrorist threat, as no attacks have the signature of Al Qaeda or the like, as there has been no large infrastructure attacks on airports, power plants or installations.”
Furthermore there are doubts that the ETIM exists at all, which the US took off its list of terrorist organizations in 2008, after listing it in the wake of the 11 September, 2001 attacks. “Terrorist analysts say ETIM did this and did that, but I have never seen primary sources that it exists, and human rights groups say it doesn't either, probably quite rightly,” said Jacob Zenn,
an analyst of Eurasian affairs at the Jamestown Foundation and an expert on Islamic terrorism.
If the group does exist, analysts believe it has limited operational capacity.
From what I see it is not an organized or concerted terror organization of which Uyghurs are a part of. Those attributed to ETIM, if it exists, are very unsophisticated, and don't show any real sign of premeditated or organized attacks. A lot of the grievances or violence this summer were locally based, like land grabs and restrictions on religion, as there is no system where people can air those grievances. The idea that such violence is organized by outside forces is dubious,” said Szadziewski.
This is not to suggest that there is not growing discontent among the Uyghurs that erupts into sporadic violence, as the recent attacks more than highlight. Uyghur demands for greater autonomy and separatism have grown stronger in recent years amid widespread feeling that Xinjiang's ethnic populace is not getting as good a deal as it could from the central authorities. As in many regions around the world, the situation is reflective of a clash of ideas and cultures between urban centers and rural peripheries, where getting economic and social development right has proven fraught, whether in the West, the Muslim world, Russia or indeed China.
In my opinion, there is a genuine movement among Uyghurs, but it is not a single one, there are many. Some are political, others have a more religious nature. Whether there's a terrorist threat or not I can't say, but I don't think there is any imminent threat for China,” said James Frankel, an expert on China and Associate Professor, Department of Religion, at the University of Hawaii at Manoa.
With the Uyghurs not as culturally assimilated into mainstream Han Chinese culture as the Hui Muslims, Uyghurs feel that they are being unfairly singled out as a terrorist threat, and compounded by being Muslim. Such vilification is termed Islamophobia – fear of Muslims as the “other.” But such Islamophobia can cause unintended consequences, as it could feed into the narrative being pushed by radical Islamists that there is a war on Islam. The media in China has largely been responsible for allowing such Islamophobia to manifest in the wake of the Tiananmen attack.
My concern is the way the attack was reported, that the government allowed this hysteria and undocumented accusations to run rampant in the media and social media, as it further marginalizes the Uyghurs and makes the situation worse,” said Gladney.
The situation in Xinjiang is a Catch 22 for China and the Uyghurs, with neither side able to “win” outright. Beijing will not give greater autonomy, yet alone allow a separate, independent state, as that could set the precedent for other problematic regions like Inner Mongolia and Tibet, while Xinjiang is an important source of raw materials and geostrategically crucial as it borders the Central Asia states. But by not addressing core Uyghur grievances risks further attacks, and possibly in the future, more definitive “textbook” Islamic terrorism.


To Gladney, the Uyghur cause is not an Islamic one and furthermore, Uyghur Islam is not conducive to the kind of extremist Sunni Islam apparent in Afghanistan, Pakistan, Syria or Iraq today, which for instance considers music, dancing and saint worship as un-Islamic. “Many of the hallmarks of Uyghur identity are an anathema to Jihadi groups as they are mainly Sufi or infused with Sufism such as tomb patronage and respect for saints. They also exalt in their own culture, in dance and the epic Muqam songs,” said Gladney.
However, this can change and appears to be happening, similar to how elements of the Kashmiri Muslim community - which had followed a “lighter,” less dogmatic version of Islam - were radicalized in the ongoing dispute between India and Pakistan over the mountainous region.
Gladney added that there been a reported rise in conservatism among Chinese Muslims and Uyghurs in particular, “although that is true globally. The government is clearly worried, with a great deal of fear and anxiety about radical Islam spreading in China.”
Zenn thinks that Uyghur separatist tendencies will take on more of an Islamic tone as nationalism is not as popular a rallying theme in the Islamic world. “It is about Islamo-nationalism, and if an organization says it wants to be separatist and secular, it doesn't have the same appeal. An Islamic state does (have appeal), and I think that is the way the Uyghurs are going,” he said.
China is home to 21.6 million Muslims - 1.6% of the population, and 1.4% of the world's Muslims - according to an official census, while other estimates put the number as high as 100 million. Whatever the exact figure is, it is a significant number. Uyghurs number around 10 million, with the remainder primarily Hui Muslims. The Hui, as noted, are better integrated into mainstream China, and have not posed problems while Beijing has held up the Hui for the world to see as evidence of its benign policies towards Muslims in China. “Some Uyghurs have conformed, and others not, and that is also where tensions come from. China rewards those that conform but similarly China has to have a method to deal with those that “corrupt national unity,” as that often involves curtailing rights,” said Frankel.
The Uyghur issue could be an Achilles heel for Beijing internationally if a perception develops that China is cracking down on Muslims, as happened in 2009. While only Turkey officially spoke out – reflective of China's good relations with Muslim countries in general – there was response from the religious community. “No other country spoke out, but some members of the Iranian religious elite made statements, although not on behalf of the government,” said Frankel.
Furthermore, according to a leaked US Embassy cable, “two Islamist parties in Algeria, the Movement for Society and Peace (MSP - part of the governing coalition) and Ennahda, sent delegations to the Chinese embassy to voice their concern over the treatment of the Muslim Uyghur community in China. This was followed by Algeria's Higher Islamic Council publicly denouncing the 2009 crackdown.”
Analysts suggest that Muslim states are not likely to voice any criticism in the advent of any future clampdown to not jeopardise economic or political bilateral ties - Turkey included which has strengthened relations, including militarily, this past year - but the risk lies with how non-state actors and Muslim public opinion will react.
Now that China is rising to the level of world power, I don't know whether it is ironic or predictable that some of these non-state organizations that claim to represent Muslims see China as another power that subjugates Muslims,” said Frankel.
While there is the argument that radical Islam has decreased in recent years, with the assassination of Osama Bin Laden in 2011 a factor in that, on the other hand arenas like Syria and Iraq show that Islamic extremism is very much alive and kicking. Indeed, the uprisings in the Middle East and North Africa (MENA) has propelled political and militant Islam back into international politics. Yet while China has tried to stay out of the MENA's messy politics and adopt a more neutral stance over the conflict in Syria, Beijing's support for the regime of Bashar Assad has not gone unnoticed.
Indeed, China's support for Syria means, by proxy, that it is against Islamic rebel groups like the Islamic State in Iraq and Syria (ISIS) and the Al Nusra Front. “This has already been brought it up in a Jihadist video,” said Zenn. “I think there will be blow back on the “Arab Street” or “Islamic street” from what China is doing. I wouldn't be surprised if Chinese workers or diplomats come under fire around the Islamic world.”
Earlier this year, a YouTube video surfaced of a Han Chinese convert to Islam – who had fought in Libya and Syria – telling Beijing to end its support for Assad or “all Islamic countries of the world will unite to impose economic sanctions against the Chinese government.” He went on to say that Beijing has destroyed “the traditional friendship between the Chinese and Arab people” because China along with Iran and Russia “sell weapons and provide financial assistance to the Assad government.”

Regional concerns

The ingredients would seem to be there for China to become a target of Islamic groups domestically and internationally. “I think China has the advantage right now of being a spectator, but it can't for too long. There was a period when the US was not aware or bothered by Islam either,” said Frankel.
At this juncture, a question to raise is whether state actors would be willing to utilize Islamic groups against China. If history is anything to go by, the West, its Middle Eastern allies and Pakistan have used Islamic groups for their own ends, from false flag operations to trying to undermine the political status quo.
China however has tight connections with the nations most involved in political and militant Islam, from the two Wahhabi Islamic monarchies of Saudi Arabia and Qatar, to Sudan and Syria, while also having strong relations with the only Islamic republics in the world, Iran, Pakistan, Mauritania and Afghanistan. Given the amount of trade with such countries – with China a major buyer of energy in particular – there would appear little appetite to sour relations by utilizing Islamic groups for leverage.
We know there are Al Qaeda sympathisers still in Saudi Arabia, but what influence they have in deals between Beijing and Riyadh is anybody's guess. I think on a state level, you will not see the Saudis really antagonize Beijing in that way, because the volume of trade is so great,” said Gladney.
Unless relations deteriorate with current allies, the immediate outside risk would appear the US and India. While the US has a history of working covertly with Islamic groups, its current position is to contain China militarily, primarily via Japan and Taiwan, and through strengthening military relations with India. The US has not yet had any cause to seek to undermine China via the Xinjiang arena, but Washington's support for the World Uyghur Congress is a bone of contention, which Beijing considers a terrorist organization that could be used as political leverage.
As for India, its external intelligence agency, the Research and Analysis Wing (RAW), has been involved for decades in Afghanistan to undermine its nemesis Pakistan. Given India and China's often tense relations (the two did go to war in 1962), leverage could be utilized by RAW against China if relations deteriorated. For instance, according to a 2009 US Embassy Cable quoting Beijing University Islamic Studies Professor Wu Binbin, “Uyghur extremists had previously received training from the India-supported Northern Alliance in Afghanistan.” RAW was also covertly involved in supporting the Liberation Tigers of Tamil Eelam (LTTE) in their separationist war against the Sri Lankan state in the 1980s. This does not suggest that Delhi would use such tactics against China via Islamist groups, but it does demonstrate that India's intelligence service has the capabilities to do so.
Conjecture aside, the primary threat comes from non-state actors in the Middle East, and more closer to home, Central Asia, which shares a 4,300 mile border with China. As veteran Pakistani journalist Ahmed Rashid observes in Descent Into Chaos: “Central Asia, but especially Uzbekistan, remains a powder keg,” and there is a need “to pay much closer and better attention to the region to contain the fallout from any political or social explosion there. Central Asia is the new frontier for Al Qaeda, and at present there is no leadership in Central Asia effective enough to resist it.”
What will play a major factor in how the situation may play out is the future of Afghanistan once the US and NATO roll back their operations in the country in 2014. Indeed, China views relations with Afghanistan and Pakistan through the lens of its concerns about stability in Xinjiang. “I think China is trying to anticipate these issues by stepping up work in the MENA, with Saudi Arabia and Turkey, as well as with Afghanistan and Pakistan,” said Szadziewski. “The withdrawal from Afghanistan is key, how Beijing handles that and its approach to the Islamic world. They are at a cross roads right now as China may have to get more involved in security in unstable areas.”
Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan's membership of the Shanghai Cooperation Agreement has eased concerns of Islamic militants basing themselves in these countries for cross-border attacks. Pakistan however has not always acted as Beijing has wanted.
Pakistan is a big ally of China but at the same time has been unable or unwilling to kick out Uyghur militants. At some point push might come to shove and China will have to try and make Pakistan do something about it or else do it themselves, as in 10 years they may have good drone capabilities,” said Zenn.
Ultimately, it would appear in Beijing's long-terms interests to deal with the Uyghurs in a pragmatic and not antagonistic fashion to avoid providing fertile ground for radical Islam to take hold. An irate Uyghur population is a thorn in China's side, but an irate Uyghur population with a global Islamic cause to rally around would be a knife in China's side. China does not want to become a target for global jihad as its influence expands around the world. 

Photo by Paul Cochrane, Tiananmen Square. 

Thursday, January 23, 2014

Catching on: Islamic Banking in Sub-Saharan Africa

Accounting and Business magazine

 Tapping into the liquidity of Gulf banks could help boost Islamic financing in Sub Saharan Africa.

 Sub-Saharan Africa’s large Muslim population means Islamic banking is beginning to take off in the region, although the jury is still out on which regulatory model to adopt – if any

Islamic banks are big business in the Middle East and South-East Asia, but not thus far in sub-Saharan Africa. The World Bank’s International Finance Corporation (IFC), however, has taken a US$5m, 15% equity stake in Kenya’s Gulf African Bank (GAB) to support corporate finance and lending to small and medium businesses – its first in the sub-Saharan Islamic bank sector.
The move signals the potential of Islamic banking in sub-Saharan Africa, given the region’s large Muslim population and the appeal of interest- free banking that is compliant with Islamic ethics and principles (known as sharia or Islamic banking). The low rate of banking penetration in the region is a further incentive.
According to a 2012 Gallup poll, just 24% of adults in sub-Saharan Africa have bank accounts; in countries such as the Democratic Republic of the Congo, Guinea and Niger, the figure is 4% or less. Buoyant markets are also encouraging Islamic banks to set up in the region, with 4.9% growth
 forecast in 2013, according to the World Bank. Meanwhile, foreign direct investment is projected to reach record levels over the next three years, up from US$37.7bn in 2012 to US$54bn by 2015.

Financially viable

‘The whole idea of investing in GAB was to support the development of Islamic banking in Kenya,’ says Kariuki Thande, an IFC senior investment officer in Nairobi. ‘Islamic banking is still a very nascent sub-sector in the banking industry, so the IFC is saying, look, there’s something here, and it’s financially viable, and there are significant opportunities to grow it in Kenya and the region.’
Partly owned by Dubai equity company Istithmar World, GAB was Kenya’s first Islamic bank when it launched in 2007 and was soon followed by First Community Bank.
Standard Chartered is launching its Saadiq Islamic banking brand in Kenya, and conventional banks are also set to expand into sharia banking.
‘We are hearing noises about these banks setting up subsidiaries,’ adds Thande. ‘I guess that is likely to happen, and there’s the option to go the whole hog and set up a fully fledged Islamic bank.’
To compete with the better- established commercial banks, GAB is focusing on women, small and medium-sized enterprises (SMEs) and the unbanked non-urban areas, as well as working to develop mobile-phone banking. Sharia mortgages, involving fees rather than interest, are also a key product, appealing to Muslims and non-Muslims alike.
Yet, while GAB has been successful – in 2012 its net profitability rose by 154% over the previous year – Islamic banking has been slow to penetrate sub-Saharan Africa, which has 284 million Muslims, around 30% of the region’s population, according to a US-based Pew Research Centre report released in December 2012.
Tanzania’s first Islamic bank, Amana Bank, opened in 2011, while in 2012 the Central Bank of Uganda proposed amendments to the country’s Financial Institutions Act to set up Islamic banking. Mauritania also has a flourishing Islamic banking sector.
However, Islamic banking in sub- Saharan Africa has not matched the overall growth of the market globally, which is worth US$1.3 trillion and grew on average by 19% a year over the past four years, according to EY’s World Islamic Banking Competitiveness Report 2012–13.
In Nigeria, Islamic banking has been fraught with problems, despite around half its population being Muslim. Early in 2012, the country’s first Islamic bank, Jaiz Bank, was launched, but later in the year the federal high court declared Islamic banks to be illegal.
Commentators attributed the decision to attempts to calm sectarian tensions within Nigeria. Jaiz Bank’s licence has not been revoked and its operations expanded from three branches to 10 by the end of 2013.
Such different market conditions, populations and regulatory concerns are likely to result in mixed growth for Islamic banking. Salman Ahmed, head of Islamic finance Middle East and Africa at law firm Trowers & Hamlins in Bahrain, says: ‘Certain parts of Africa will take off faster than others, and Kenya will be one of them. Development of innovative Islamic financial products tailored to the various legal regimes in sub-Saharan Africa and proper marketing of safe foreign investment in the region is the key to the development of the Islamic finance market. If stability can be maintained in Nigeria, it can be extremely attractive, and has clear potential to be quite a decent jurisdiction for Islamic banking. But there’s a lot of uncertainty in Nigeria.’

Regulatory obstacles

A core issue that has slowed the uptake of Islamic banking is the need to change financial regulations to permit its operation. Thande says: ‘Islamic banking has to work with existing regulations and engage with the regulators, or get them to craft new regulations for Islamic banking, which is what tends to happen.’
The International Islamic Trade Finance Corporation (ITFC), a member of the Saudi Arabia-based Islamic Development Bank Group (IDB) established by the Organisation of Islamic Cooperation, agrees. Lamin JK Sanneh, assistant general manager and head of sub-Saharan Africa at ITFC’s corporate and structured finance department, says: ‘The lack of regulatory clarity has created some obstacles to the development of the Islamic banking market.’
IDB is working to address such regulatory shortcomings with the Central Bank of West African States, which runs the currency used by eight mainly Francophone states, to facilitate the introduction of Islamic banking in west Africa. ‘With the success of these initiatives, it is expected that more countries will introduce Islamic banking as a viable option in their financial market,’ says Sanneh.
The jury is still out on what Islamic banking regulatory model the countries of sub-Saharan Africa should adopt – or indeed whether they should develop their own instead. Malaysia is one possible model, given its success in Islamic finance, as is London.
Mohammed Amin, an Islamic finance consultant and former head of Islamic finance at PwC UK, says: ‘Muslim-majority countries should take the Malaysian approach, and countries where religion is contentious or that have a Muslim minority may want to follow the UK model, as it doesn’t specifically take the sharia approach.’ The UK uses different terminology and does not provide specific tax clauses for Islamic finance as Malaysia does.
For Islamic banking really to take off in sub-Saharan Africa, suitable regulations are clearly required, and need to include Islamic financial products such as insurance (‘takaful’) and bond (‘sukuk’) issues, but also capital, which the Middle East is well poised to do, given the Islamic finance structures in place and liquidity. 

Photo by Paul Cochrane (taken in Doha, Qatar)

Tuesday, January 07, 2014

A tale of two regions: the Middle East's divided cosmetics market

Soap, Perfumery and Cosmetics magazine

The Middle East cosmetics market is one that is divided. The Gulf region is booming, while the Levant continues to struggle, as Paul Cochrane reports

The personal care product market in the Middle East can be divided into two current trends: sales in the affluent Gulf Cooperation Council (GCC) countries, comprising Saudi Arabia, the UAE (United Arab Emirates), Oman, Bahrain, Qatar and Kuwait, are booming, while on the other side of the region, in the Levant, markets are feeling the effects of the Syrian conflict, with the loss of tourists and low consumer confidence impacting bottom lines.
“When I go to regional distributor meetings, those from Saudi Arabia, the UAE and Kuwait are not complaining, but people from Syria, Lebanon and even Jordan are,” says Joanne Chehab, General Manager of Lebanese cosmetics firm Ch. Sarraf & Co. The company is part of the Lebanon based Malia Group, which has its own line of cosmetics, Cosmaline, and distributes for Japanese beauty giant Shiseido and German hair care brand Wella.


Demand for personal care products has dried up in Syria as the conflict has dragged on since it erupted in March 2011, with only essentials such as shampoo still selling. Manufacturers and distributors are trying to operate in the country but distribution is complicated by logistical issues and payment collection by the depreciation of the Syrian Pound. The conflict has also caused instability in neighbouring Lebanon, driving away tourism and affecting consumer sentiment, while there are an estimated one million Syrian refugees in the country, adding to domestic woes.
While not a big market, with just under five million consumers, Lebanon is an important regional market, both as a trendsetter because of Lebanese women’s penchant for beauty, and as a launch pad for brands and products. Before the Syrian conflict, affluent Gulf tourists were a key part of the sales mix, picking up on trends and bringing them back to their home markets. Furthermore, the loss of Gulf tourists – GCC countries banned nationals from travelling to Lebanon last year – has hit the market harder than just the loss of sales.
“Lebanon is the shopping window for the region. Arab women look at Lebanese women as someone that knows style and the market is considered professional. A Lebanese hairdresser is rated higher than a hairdresser from elsewhere. And in [beauty] consultancy [too]. It doesn’t mean they are better but there’s that perception,” says Fadi Sawaya, CEO of Beirut based Sawaya Group, which distributes for brands including Orly, US based Gelish, UK based Provoke Cosmetics and others throughout the Middle East. “Lebanese women are not the best clients, but the best consumers. The best client is the Gulf Arab woman, as in general, they have high purchasing power.”
Lebanese celebrities are also involved on a regional level as the faces and names behind brands. Pop singer Myriam Fares, for instance, is the face of Saudi Arabia based cosmetics and fragrance manufacturer Mikyajy, which has 234 stores in the GCC, two in Libya and one in Yemen. Mikyajy is part of the Kamal Osman Jamjoom Group, which manufactures western style fragrances and make-up products.
C&F Cosmetics and Fragrances, part of Fawaz Holding, has six retail stores in Lebanon and is the distributor for male Lebanese pop star Ragheb Alama’s perfume Notes D’amour. The fragrance was launched last year in the Middle East, as well as in France, Australia and the US. “Alama has a big fan base in Lebanon and the Middle East, and that’s where the idea came from,” says Ola Zaatari, C&F’s Operations Manager. “He created the perfume; it is manufactured in Paris, and has oud, jasmine and cedar notes, which relates to Lebanon. There is a new trend towards designers and celebrities having perfumes, like Elie Saab and Reem Acra.” 

Celebrity scents such as Mikyajy’s Censored (left) and the Asian influence in Syed Junaid Alam’s Hanako (right) are popular trends


While the Middle East has followed western companies’ examples of using celebrities to market products, western perfumeries have picked up on the popularity of oud in oriental perfumes. “Over the last two years, international fragrance makers such as Tom Ford and Chopard have been launching new fragrances that have oriental branding and that mention the oud name, which is different from the standard French categories of perfume,” says Hamad Akhtar, Director of Sales and Marketing at Bahrain based perfumery Syed Junaid Alam. “It is interesting to see how these big players see our tastes in perfume as a market to enter. That shows two important factors: firstly, the GCC consumer is a heavy spender on perfume, with per capita spending the highest in the world, and secondly, no matter what the economic situation is in the Middle East, you have the whole spectrum of customers wearing perfumes, from a baggage handler at the airport to the CEO of a bank; it is entrenched in their culture and putting on perfume is a daily routine.”
Indeed, despite the economic downturn in Lebanon, perfume sales are still robust. “No woman or man has only one perfume on their dressing table; there are definitely two to three. On average, women and men buy six perfumes a year,” explains Zaatari.
In the Gulf, sales are even higher, with the premium fragrance market in the UAE alone estimated to be worth around US$174m in 2012, and expected to increase 21% to $211.1m by 2016, according to market research firm Euromonitor International. Akhtar says high end and premium fragrances account for around 15%-20% of GCC sales.
Meanwhile, middle range products account for around 60% of sales and the rest is made up of mass market sales. But while oriental perfumes have retained their popularity in the region, there has been growing demand for international perfumes, which has caused regional producers to adapt to market demand.
“Over the last eight years GCC consumers have shifted towards international brands, so we have to keep up with these changes,” says Akhtar, with Junaid adding 30 new products a year to its portfolio of 250 products. “Earlier in the year, we launched an international perfume, Hanako, with the branding in Japanese and English, and no Arabic at all. Nobody would expect that from an Arab manufacturer but consumers find it attractive as it looks different.
The trend is slowly moving towards a fusion of international and oud fragrances, from the east and west, and this will happen in packaging as well. It will definitely not stay the same,” he explains.
Dubai based Epoc Messe Frankfurt, organiser of the annual Beautyworld Middle East exhibition, has also noticed an uptick in interest in Middle Eastern fragrance and beauty products from outside the region. “We wouldn’t have dreamed of buyers coming from Europe, as it is understood to be a regional show, but that is changing,” explains Michael Dehn, the company’s Group Exhibitions Director. “I think it is changing as, in the fragrance industry, there is a lot of Arabic influence, oud and so on, which is a trend from here that has gone international. Buyers from Europe and the US also want to see what they can get from here as there are different offerings.”
A noticeable difference is in the products themselves. “One difference in development is that customers here are very demanding when it comes to the long lasting aspect of a fragrance and in terms of intensity from the trail,” says Jim Ragsdale, Brand Director for Saudi Arabia’s Mikyajy.
Different requirements also extend to Mikyajy’s make-up line, which accounts for two thirds of the company’s overall sales.
“Products are developed with European suppliers but with the Middle Eastern customer in mind, particularly with regard to very harsh weather conditions, as a foundation product needs to withstand temperatures of up to 50°C, which is not what a French woman needs.” 

Western brands such as Tom Ford and Chopard have been inspired by the Middle Eastern market

When personal care product companies look for robust sales in the Middle East, they are certainly looking to the GCC countries, which have largely been immune to the ‘Arab Spring’ that has caused major instability in much of the region. Combined with high purchasing power, personal care sales remain strong in the Gulf.
The UAE’s beauty and personal care market is valued at $1.1bn this year, says Epoc Messe Frankfurt, while the premium cosmetics market was valued at $570.8m in 2012, and predicted to rise to $684m by 2016, according to Euromonitor figures.
The region’s biggest market, Saudi Arabia, has witnessed growth in mass cosmetics of some 5% between 2011 and 2012, while the premium cosmetics sector grew 8.5% during the same period. Overall sales of beauty and personal care are forecast to rise by 6% per year from 2012 to 2017. Indicative of the growth in the sector, the number of exhibitors attending Beautyworld Middle East grew 23% year on year in 2012, and this year’s event had a 32% increase in exhibitor numbers.
On the retail side, Mikyajy has had double digit growth for the past three years, and is forecasting strong growth ahead. “The Middle East is a very dynamic market and the outlook is very positive,” says Ragsdale.
In fact, sales are strong across the board. “One of the trends happening in the Middle East is there is this assumption that there is a luxury customer, the medium customer and the mass market buyer, but in reality customers are buying all of those products, so all products are potentially competitors,” explains Ragsdale. “A sharp shopper today is occasionally making a dream buy, but also daily purchases of a near equivalent quality. When we speak with customers about purchases, you get the large luxury brand names verbatim, but they also have mass market products and everything in- between.”
Further driving sales is the region’s young demographic, with the UN reporting that an estimated 50% of the population in the Middle East and North Africa (MENA) region is under 30 years old. Markets are also increasingly mature, with new malls and retail spaces springing up. “Retail space has been growing to quite staggering heights over the last few years, and still growing. The Dubai Mall announced they had 65 million visitors last year, so the business climate is pretty good for the retail sector,” says Dehn.
Increasing consumer awareness has enabled newcomers to enter the market, such as American brand MICA Beauty Cosmetics, which is distributed by Middle East Natural Cosmetics (MENC) in Dubai.
“We wanted to bring to the region natural cosmetics. And clients are looking for this. A few years ago, people didn’t know about nutrition, organic foods, or read the labelling. But there is more awareness now,” says Dr Maha Alnakkash, a health and beauty consultant for MICA Beauty and MENC. “There’s lots of potential in the region, with TV shows and magazines talking about how to take care of skin.”
Indeed, the UAE’s skin care market has grown by 5% over the past three years, and is forecast to reach US$141m by 2015, according to Euromonitor.
While there are clear similarities in GCC market trends, sales do differ from one country to the next. In Kuwait, for instance, Ragsdale says women use heavier make-up than elsewhere. “They like bright colours, bordering upon artistry, and they are not scared to make a colour statement. But in the UAE, with such a large expatriate population, that conditions the way you market, such as for skin tones. And in the UAE Arabic is not necessary, but in other countries you would miss out on sales if no-one [in the store] spoke Arabic.”
Retailers have to consider such issues, particularly in cosmopolitan Dubai. “I have Russian, Filipino and Arab employees, and everyone takes care of the nationality they are closest to,” says Sawaya.
In Saudi Arabia, however, the government caused management problems in cosmetics retail last year when it required lingerie and cosmetics stores to be staffed by women. “The law caused us a lot of change, as Mikyajy went from 400 male employees to 400 female employees, so it was a real human resources revolution. It is an ongoing process,” says Ragsdale.


Elsewhere in the Middle East, personal care sales are mixed. Iraq, for example, is Cosmaline’s largest market, seeing sales double that of Lebanon. “The Iraqi market is doing extremely well, and [experiencing] double digit growth. We are working to double our turnover in Iraq next year,” explains Chehab. “North Africa also has huge potential, but the situation is very shaky in Tunisia and Egypt.”
Mikyajy has two stores in Libya that were closed during the civil war in that country, but have since re opened. “Sales are surprisingly good and business is buoyant, better than expected,” says Ragsdale.
As for the Levant market, tough times may be ahead, certainly in Syria, but Lebanese retailers are optimistic that demand will remain strong, buoyed by the craze for beauty. “In the Middle East, crises are becoming seasonable, it comes and goes. The market will rebound,” Sawaya concludes.

DIVIDED MARKETS: Lebanon's personal care market

Soap, Perfumery and Cosmetics magazine

Lebanon’s C&T sector is struggling as civil war decimates Syria’s personal care market, as Paul Cochrane reports

Lebanon’s personal care product market, estimated by local industry executives to be worth between US$80m and $100m a year, has been struggling over the past two years due to an economic downturn, political instability and a drop in tourists. The war in neighbouring Syria has had a clear impact, while the conflict has resulted in Syria’s personal care market grinding to a halt, with the exception of essentials such as shampoo.

Joanne Chehab, General Manager of Lebanese cosmetics firm Ch. Sarraf & Co., part of the Malia Group, which has its own line of cosmetics, Cosmaline, and distributes for Shiseido and Wella, told SPC: “The fact that the situation is unstable in Lebanon and elsewhere in the region creates pressure on retailers.” 

Manufacturers and traders are suffering “not just because the domestic market is suffering, but also because they export to Syria, Iraq and Egypt [all of which are suffering from a level of instability at present], so they’ve been hit locally and internationally”. Following strong economic growth from 2008 to 2010, Lebanon’s economy started to slow down in 2011, the same year the conflict in Syria started. Barclays forecasts economic growth at just 1.2% this year. 

“In general, the market is not okay. On the retail scene there has been a drop in footfall and there is a lack of tourism, now at the lowest rates ever,” said Chehab. Last year, Gulf countries banned citizens from visiting Lebanon due to the instability. Some 1.3 million tourists visited the Mediterranean country in 2012, down 37% on 2010. In a good year, tourism accounts for around 10% of Lebanon’s GDP, according to Bank Byblos figures. 

While European tourists, at around 25% of total visitors, were good buyers of perfumes and cosmetics due to prices being lower than at home, the loss of Gulf tourists – at around 45% of visitors – has been particularly felt given Gulf Arabs’ high purchasing power. 

“People from the Gulf do spend much more. When we monitor our database and see the drop, we really see that,” said Chehab. “Usually the basket of a Lebanese is lower than a foreigner – the Kuwaiti lady buys five of each, while the Lebanese buys one of this, one of that.” 

Ola Zaatari, Operations Manager for Cosmetics & Fragrances (C&F), part of Fawaz Holding, which has six retail stores in Lebanon, said the situation in Syria had affected consumer sentiment in Lebanon.

However, the influx of Syrians into the country – the government estimates over one million – had bolstered sales, although this did not compensate for the loss of Gulf tourists. 

“We have witnessed a lot of Syrians becoming customers and they’re divided into two segments: those with high purchasing power and those that go for mass affordable products. Those with high purchasing power have made a difference in turnover, going for a lot of high end, big value products,” said Zaatari. 

However, the overall downbeat mood in the market is having an effect on corporate strategy. “We don’t see a solution to the situation in Lebanon, so it creates additional pressure and questions, such as do we invest in new facilities or launch a new brand? I’d say no. I’d say it’s time to consolidate what you have,” said Chehab. 

Companies also complain of the difficulty in retaining good staff, as they are attracted by the higher salaries in the more stable Gulf region. “The situation really affects the mood of people, even the sales people, and us, how motivated we are to spend on marketing. Even suppliers are cutting down on budgets for promotions in stores. Sales and the whole retail activity is affected by instability and reflected directly on activity in stores,” said Zaatari. 

Nevertheless, the Lebanese penchant for being well groomed has ensured that the market is not stagnating. “We consider the beauty business to be not as luxurious as people might think. It is a necessity in Lebanon. Consumer behaviour is towards beauty at all levels – lipstick, nails, hair styling, hair care, slimming and clinics. Many people save to have Botox and fillers, as well as surgery, such as breast implants,” said Fadi Sawaya, CEO of Beirut based Sawaya Group, which distributes for brands such as Orly, Gelish, Nouveau Contour, Provoke Cosmetics and Dermatude throughout the Middle East.

“Purchasing power is decreasing as inflation is growing faster than income adjustments [at 6.5% according to the IMF], but despite this beauty is still a necessity. We also haven’t identified a shift from higher to lower brands – this is typically Lebanese. In fact, we have had growth of 5% every year for the past four years.”

The situation in Syria is unsurprisingly far graver than in Lebanon. “Now no-one is buying as the situation is bad; Syria is no longer a market,” added Sawaya. Syria had opened up to foreign imports in 2006, and was a burgeoning market, but over the past two and a half years, sales have slowed to a halt.

“We had to downsize our operations in Syria. Many of our employees left the country and we did not replace them as operating is very difficult,” said Chehab. “Our sales team is essentially there just to get dues from the market. We are trying to operate with best selling items and have shrunk our portfolio to essential items: people have to shower, so shampoos and shower gels, but not make-up. The devaluation of the Syrian pound [from SYP47 to $1 before the conflict to SYP300 today] has put a lot of pressure on cost as well as buying in dollars and euros, so I was fixing the rate on a daily basis.”

Monday, December 02, 2013

Lebanon striving to adhere to U.S. regulations

The Daily Star

BEIRUT: Over the past decade, the U.S. Treasury’s war on terrorist financing, money laundering and tax evasion has shaken up the global financial regulatory environment, and Lebanon is still feeling the reverberations. This year, the Central Bank issued two circulars that have raised operational costs for banks and foreign exchange dealers: Lenders have been required to have a dedicated compliance unit and exchanges’ operational functions have been curtailed.
The circulars have had a profound affect on financial institutions, but those affected are not so much concerned about falling foul of Lebanon’s laws, but rather fear being on the wrong side of the world’s regulatory policeman: the U.S.
“Lebanese banks are market takers, not makers like the U.S. and Europe, so we have no say in the financial world,” said Camille Barkho, chief compliance officer at the Lebanon and Gulf Bank.
“But something funny is taking place today in some countries who have anti-money laundering and counterterrorist financing rules and regulations – they are strictly applying those rules more because of fear of the U.S. and Europe than complying with local regulators.”
Three factors in particular are forcing Lebanese institutions to play ball with the U.S.
First, with over 70 percent of Lebanon’s bank deposits in U.S. dollars, the lira pegged to the greenback, and a dollarized economy, financial institutions need good relations with the U.S.
Second, the U.S.’ Foreign Account Tax Compliance Act, which is to go into effect in 2014 as part of Washington’s new war on tax evasion, requires financial institutions to report on U.S. clients with accounts of over $50,000.
Third, the U.S. Treasury in 2011 designated the Lebanese Canadian Bank as a “prime money-laundering concern” for its alleged involvement in laundering money on behalf of a drug syndicate in South America as well as acting as a financial conduit for Hezbollah, which led to the reputational ruin of the bank and its demise.
“The matter of LCB had an important impact on the banking sector in Lebanon, and how banks have upgraded their compliance standards,” said Chahdan Jebeyli, Bank Audi’s general manager and group head of legal and compliance, and chair of the Compliance Committee at the Association of Banks in Lebanon.
“We very much rely on our relationship with correspondent banks, as Lebanon has a dollarized economy and is part of the international payment system. Preserving correspondent banking is vital ... to the continuity of banks.”
The LCB case was settled earlier this year through a $102 million settlement in New York, but the financial sector is concerned about any repeat of a bank disappearing from the market.
Many in Lebanon feel the case was unfairly handled by Washington, as in several other cases major international banks accused of money laundering were fined by the U.S. – in the hundreds of millions – but kept on operating.
“ Lebanon paid the price of an alleged money-laundering operation in South America, the U.S., Africa and Europe that only had some connotation to Lebanon; it was not right. To use the financial markets for political goals is dangerous and a way to lose friends,” said a senior BDL source who declined to be identified.
The example made of LCB shows the price of noncompliance with international AML regulations and that the U.S., unlike any other regulator, is willing to fine and even cause the closure of a foreign bank.
As a result, compliance has been pushed to the top of agendas at banks as BDL has moved to address 10 shortcomings in legislation, notably over wording of counterterrorist financing, and listing more predicate offenses.
This has come at the same time as heightened sanctions on Iran and Syria, increasing the regulatory risk environment in which Lebanese banks are operating in, particularly with regard to Syria where the state has six affiliate banks.
“We know the reality of doing business in Lebanon and in the region, that is why our level of prudency is high and corresponds to the level of issues and challenges that exist in the market where we operate,” Jebeyli said.
The U.S. has paid Lebanon particular attention, with American Treasury officials visiting Beirut multiple times over the past two years, more than most other places in the Middle East. During the Union of Arab Bankers conference in Beirut in November, Assistant Secretary for Terrorist Financing at the U.S. Treasury Daniel Glaser had a closed-door meeting with compliance officers at Lebanese banks to hammer home the need to comply with sanctions and regulations.
“ Lebanon is overburdened by requests [from overseas] and, at times, pressure,” said the BDL source. “We comply with all regulations but we already had what was needed, as just a few small glitches had to be ironed out, like foreign exchange dealers, which were not subject to control.”
Two foreign exchange dealers were fingered in the LCB designation. One, Elissa, has been cleared, while the Hasan Ayash Exchange is still appealing in New York. Earlier this year, spillover from the LCB case affected two other bureaus, Rmeiti Exchange and Halawi Exchange, which American official designated as “prime money-laundering concerns” for their alleged involvement with Hezbollah, the first time the Treasury has used Section 311 of the U.S. Patriot Act against a nonbank financial institution.
Foreign exchange bureaus have now been barred from carrying out third-party banking and are subject to stricter controls. Staff must also be versed in compliance and have to regularly attend training sessions. Dealers, like banks, have consequently been scrambling to get compliance up to speed.
“Category A dealers have to abide by much stricter regulations and it has become more costly because of the need to have a compliance officer, more auditing and training,” said Omar Kotob, secretary-general of Foreign Exchange Bureaus in Lebanon.
“We hope to organize a conference soon to boost the sector’s compliance levels before it’s too late. The major point is to have a lot of workshops to address these concerns, as it is an ongoing issue. At some point foreign exchanges are going to have to act as police [in terms of asking clients questions and the origins of transfers], which the banks are already doing.”
Getting the financial sector up to par in terms of compliance is impacting institutions’ operating costs. As elsewhere, there is also a genuine lack of qualified personnel.
“The sector is barely coping with the new regulations and employees are a scarce commodity in the compliance sector, as the AML regime has only been around for about a decade, so the banking sector in the region and rest of the world doesn’t have enough professional expertise,” the BDL source said.
FATCA compliance is another area where the region’s banks are scrabbling to be on top of legislation, thankful that the slated start date for the policy was delayed from July this year to 2014 in order to enable more banks and jurisdictions to be compliant.
“The delay to FATCA’s rollout was excellent. When I meet with foreign banks I am finding that, till today, some have not even heard of it,” Barkho said.
Lebanon, however, has been very active, hosting 24 public presentations on the tax act in the past few years.
“Look at FATCA, Lebanon is the leader in the Arab world, and before the government or any official party required it, banks undertook a path of adopting the FATCA principles, that Lebanese banks should not be a shelter for those that decide to hide money and violate tax rules,” said Jebeyli.
FATCA is a unique law in that it puts the onus on foreign financial institutions to check for any U.S. account holders or else face a 30 percent withholding tax for noncompliance and risk being blacklisted. In essence, the U.S. Treasury has outsourced enforcement to banks, which are having to bear the brunt of implementing FATCA, with some estimates putting the cost as high as $10 per client.
As a result, some Lebanese banks have closed accounts with clients holding U.S. passports after weighing up the costs versus the benefits of retaining the client, while some American passport holders have revoked their citizenship altogether.
“For the first time in history, banks have become officers for the U.S. government, and at a cost,” said Barkho.
Just as with anti-money laundering and counterterrorist financing regulations, Lebanon is more than willing to comply with U.S. regulations to stay on its good side, well aware of the impact of falling foul of Washington.
“The main reason to comply is the power behind FATCA, not about the law or the ethics of tax evasion, as everyone is against that,” Barkho said.
“The only other force that could do this is Europe and maybe China, as there are major commercial relations. If India introduced the same type of law, I’d not comply as there’s no force to compel me to do so.” – With